With Congressonal democratic majorities ready to advance progressive economic policies, what Atrios labels the "econ 101 trolls" are out in force. You know, the types who believe that any advance over the bleak society described by Charles Dickens is an economic catastrophe.
Economists such as Angry Bear and Ezra Klein have replied, inveighing against the right wing bias of econ 101, while other commenters have assailed neoclassical economics' claim to scientific status in its entirety.
Below the fold, I'll describe some of the recent blistering criticism of University of Chicago-style rightwing economics in the blogosphere, and describe one competing approach to modern economics that may lead to more scientifically sound results, suggesting that it is Economist Robin Hanson's students, and not Professor Hanson himself, who are "reality-based."
Introduction
At the outset, let me say that this diary is not a slam at the profession of economics as a whole. Almost all of the commentators quoted below are economists themselves. In fact, I strongly encourage everyone to read "Progressive movement has put forward three powerful critiques of the Republican, conservative and reactionary era" by Kos emeritus Stirling Newberry, as well as this recent diary by bonddad.
Rather, this diary is a slam at the econ 101 trolls who regurgitate simplistic talking points about economic efficiency as a criticism of any policy or position designed to ameliorate the excesses of laissez faire failed economic states. For example, Economist Robin Hanson has ignited a blogstorm when he complained about how right wing economists fail to inspire the on-genuflected-knee deference reserved for physicists.
Consider how differently the public treats physics and economics. Physicists can say that this week they think the universe has eleven dimensions, three of which are purple, and two of which are twisted clockwise, and reporters will quote them unskeptically, saying "Isn't that cool!" But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story.
I see the same pattern with my students - they'll easily believe physics claims, but are very reluctant to entertain standard economics claims. They come to class with strong incorrect preconceptions about the social world.
Sadly, as has been repeatedly documented, those who eschew free market theology have been largley excluded from the "mainstream" economic debate:
Neoclassical economics ... has become an international elite consensus, one that provides the foundation for the entire global political economy. In the United States, young members of the middle and upper-middle class first learn its precepts in the academy. Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. A 2001 study ... showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public...
For [writers like] Thomas Friedman, people can’t “disagree” with neoclassical economics. They can only fail to understand it....
Neoclassical economics can be summarized as the school of thought that assumes that individuals are armed with perfect knowledge and engage in perfectly rational behavior to maximize "utility", and that this activity can be represented and described by precise mathematical equations, and that these equations can render economic value judgments as measured by Pareto efficiency.
I. Is a Little Economics a Dangerous Thing?
Christopher Hayes recently attended the introductory economics class taught at the University of Chicago and authored a report entitled "Is a little Economics a Dangerous Thing?"
When the Chicago School first emerged in the ’50s, its zealous support of free markets and critique of government intervention were considered reactionary and extreme. ...
Efficiency is the Chicago School’s defining value. The free market economists who came before— most notably Austrian Friedrich Hayek—offered a philosophical critique of the political consequences of state regulation and control of the economy.... Chicago School theories gained popularity when global capitalism hit a major funk in the ’70s—a period of slow growth and high inflation. Friedman argued, plausibly, that it was too much government that had caused the problems.
What may seem a subtle rhetorical shift had major consequences. It transformed what had been conservatism’s moral argument about capitalism bestowing the most benefits on those who worked the hardest—and the inherent injustice of a coercive state forcibly redistributing capital—into a technical argument about the inefficiencies associated with nonfree- market solutions and the perverse incentives that made any social programs destined to fail. ...
Because neoclassical economics always presents itself as a value-neutral description of the world, its ideological commitments can be adopted by those who learn it without any recognition that they are ideological. This is the source of some very spirited debate within the field itself. A growing global movement of “heterodox” economists has criticized the ideological confines and blindspots of the neoclassical approach. As Nobel Laureate Joseph Stiglitz put it, the dominance of the neoclassical model is a “triumph of ideology over science.”
In the popular press, however, such dissent is almost entirely absent.... For Thomas Friedman (and, indeed, Allen Sanderson), people can’t “disagree” with neoclassical economics. They can only fail to understand it. ...
[snip]Right wing neoclassical theorests present themselves as being neutral scholars. One says:
"We are not anti-business; we are not pro-business. We are pro-choice in the ultimate sense of pro-market. Based on empirical work, macro and micro solutions are probably better worked out by private markets than government intervention.”
[W]hen equity and efficiency tradeoffs ... arise, [neoclassical] economists ... are systematically biased in favor of efficiency because that’s what they are experts on. Efficiency they can measure and analyze. Fairness? That’s the turf of philosophers and politicians. This tendency is most pronounced in discussions of economic growth, and how the benefits of that growth should be distributed... Let efficiency trump equity, create wealth, and then you can use the extra wealth you’ve created to alleviate inequality.
This makes a certain amount of sense. But when this rhetoric comes to dominate our politics, the problem of inequality is never addressed. Now is always the time for growing, later is always the time to address concerns about equity. ...
[snip]
In other words, since (neoclassically defined Pareto) "efficiency" is the only thing measurable, it becomes the only thing worthwhile. The implications of this value judgment, and the claim to indisputable scientific truth based on neoclassical mathematical models, are on perfect display in lectures about trade:
Sanderson begins the class by telling us that “in trade, there’s an enormous amount of agreement between economists about what constitutes the truth. The disagreements are between economists and everybody else.” His central contention is that allowing any two given countries to trade their goods freely will necessarily make both countries better off. It’s the same logic, he says, that we use everyday. When you decide to have someone do your dry cleaning or fix your car, you’re deciding to specialize in what you do best, and trade for the other things you need. Specialize and trade: That was Adam Smith’s central insight into the nature of the “wealth of nations,” and, Sanderson says, it remains as true today as it was then.
But when lecturing on trade, Sanderson’s tone is noticeably different. His agenda and ideology are more up front, such that the classes felt for the first time almost—almost—like propaganda. And during these lectures, something incredible happens. The class rebels....
Sanderson argues that liberalized trade creates more jobs than it destroys. “Free trade creates winners and it also creates losers. It turns out that winners are quantitatively larger than the losers.” A student asks, flat out, “Why are we to believe that?” Sanderson restates his point, but the student holds his ground, saying he’s read that there simply doesn’t exist an accurate measure to figure out how many jobs are being created and destroyed. Sanderson concedes that this is true, but insists it “must” be a net positive.
...“These are tough issues,” he says, and the class ends. ...
[The next day,he concludes.]
...Trade works the same way as technological progress: While it might put some people out of work, in the end, it makes everyone better off. The class is nodding, attentive and silent.
... Economic growth does tend to raise all boats.” ..
Notice how, after conceding that free trade is NOT "Pareto optimal" (the "losers" who are "put...out of work"), the ideology nevertheless demands that the real data be waved off ("in the end..."), and the conclusion be accepted as a scientific certainty, because the mathematics and the underlying asumptions about economic behavior?
II. Why right wing economics don't get no respect
To the whining that economists are not accorded the respect given physicists,Kevin Drum replies:
physics has a small number of moving parts and therefore tends to have more precise and unanimous answers on a broad array of topics. Economics is much more difficult and doesn't have the same precision.
How many physicists dispute Galileo's tests of gravity? How many economists agree on anything? A survey of American economists found that they believe that the minimum wage causes unemployment by a margin of 46 to 27. They think should be lower by a margin of 39 to 32. Imagine if a survey showed that physicists believed that the speed of light was a constant by the margin of 46 to 27!!!
A spot on riposte has also been made by economist/blogger Echidne of the Snakes:
Economics, on the other hand, is a social science, a soft science, and one in which Milton Friedman was still quoted right before his death at a very ripe old age. - Shall I tell you what we economists really want? We want you to find our simple models far too difficult mathematically to follow, so difficult, indeed, that you must just accept them without understanding them at all. And we want you to confuse reality with our models or perhaps even prefer our models to reality. A few temples to us would be nice, too.
I sound angry here, and I am, a little, because model envy or physics envy or whatever you want to call it takes a tool and makes it into the thing itself. It's reality we are trying to explain, after all, not some sterile and often stationary world with no uncertainty or informational asymmetries and with assumptions never fulfilled in many real world markets.
Models can be very useful, but they are models. Natural sciences can test the formulas and models in laboratory circumstances. Social sciences don't have that luxury, partly, because even if laboratories were used they would be artificial environments likely to affect the outcomes, not ways of holding external influences constant. This means that social sciences muddle through and actually study something more complicated than some of the physics models do, and it also means that we must view the social science models with a greater deal of scepticism.
Hayes quotes a Ph.D. candidate at the Univeristy of Chicago about the achilles heel of neoclassical economic assumptions:
The simple models have an explanatory power that is thrilling. [but] “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.” ...
A commenter on the blog Unfogged put it more bluntly:
The problem is that people argue we should make policy based on Econ 101. No one is arguing that we should run the space program based on Physics 101.
III. Behavioral Economics: how applying the scientific method from experimental psychology may lead to better, reality-based results
The defects of an exclusively mathematical approach, where simplistic assumptions are substiuted for actual, complex human behavior, which is ignored, ironically was set forth nearly a century ago by another University of Chicago professor, John Maurice Clark:
“The economist may attempt to ignore psychology, but it is sheer impossibility for him to ignore human nature,” Clark wrote in a 1918 Journal of Political Economy. “If the economist borrows his conception of man from the psychologist, his constructive work may have some chance of remaining purely economic in character. But if he does not, he will not thereby avoid psychology. Rather, he will force himself to make his own, and it will be bad psychology.”
Mathematical neoclassical economists refused to even consider reality-based testing. As a commenter on Echidne's blog says:
The neoclassical economists refused to perform even the simplest tests. These aren't really that complicated, pyschologists were running similar tests (though of course focused on physchological theory, not economics) 50+ years ago. The neoclassical economists literally could have walked less than 25 feet in some cases, and learned how to do these experiments in a very short time.
Not only was there not even the most minimal effort to try to test neoclassical micro-economics, the issue had to be forced by folks like Kahneman, Tversky and Thaler, who actually started releasing test results and were promptly considered as nutcases by the economic high priesthood.
When tests started actually being run, very few of the neoclassical principles actually were sustained by the experimental results.
In an article entitled The Marketplace of Perceptions, Harvard Magazine explained how "Behavioral economics" offers a scientifically and experimentally valid counter to the "rational man" Chicago school economic theory. Behavioral economics "typically integrate insights from psychology with neo-classical economic theory", and "apply scientific research on human and social cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources." Brain MRI scans have "also been used to determine which areas of the brain are active during various steps of economic decision making.... Experiments are designed to be incentive compatible, with binding transactions involving real money":
Like all revolutions in thought, this one began with anomalies, strange facts, odd observations that the prevailing wisdom could not explain. ...
perverse facts are a direct affront to the standard model of the human actor—Economic Man—that classical and neoclassical economics have used as a foundation for decades, if not centuries. Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.
When we turn to actual human beings, we find, instead of robot-like logic, all manner of irrational, self-sabotaging, and even altruistic behavior. This is such a routine observation that it has been made for centuries; indeed, Adam Smith “saw psychology as a part of decision-making,” says assistant professor of business administration Nava Ashraf. “He saw a conflict between the passions and the impartial spectator.”
Nonetheless, neoclassical economics sidelined such psychological insights. As recently as 15 years ago, the sub-discipline called behavioral economics—the study of how real people actually make choices, which draws on insights from both psychology and economics—was a marginal, exotic endeavor. Today, behavioral economics is a young, robust, burgeoning sector in mainstream economics, and can claim a Nobel Prize, a critical mass of empirical research, and a history of upending the neoclassical theories that dominated the discipline for so long.
....
Behavioral economics, then, is the hybrid offspring of economics and psychology. “We don’t have much to tell psychologists about how individuals make decisions or process information, but we have a lot to learn from them,” says Glimp professor of economics Edward Glaeser. “We do have a lot to say about how individuals come together in aggregations—markets, firms, political parties.”
...,
“Then, the model of the market is not simply buyers and sellers coming together for mutually beneficial exchange,” Wanner continues. “Instead, the exchange between buyers and sellers has aspects of a zero-sum game. The seller can do even better if he sells you something you don’t need, or gets you to buy more than you need, and pay a higher price for it.” The classical welfare theorem of Vilfredo Pareto was that markets will make everyone as well off as they can be, that the market distribution will be an efficient distribution that maximizes welfare. “But once you introduce framing, all bets are off,” Wanner says. A zero-sum game between buyer and seller clearly does not maximize everyone’s welfare, and hence suggests a different model of the marketplace.
- There are many political implications. We have had 30 years of deregulation in the United States, freeing up markets to work their magic. “Is that generally welfare-enhancing, or not?” Wanner asks. “Framing can call that into question.* Everyone agrees that there’s informational asymmetry—so we have laws that ensure drugs are tested, and truth-in-advertising laws. Still, there are subtle things about framing choices that are deceptive, though not inaccurate. We have the power of markets, but they are places where naive participants lose money. How do we manage markets so that the framing problem can be acknowledged and controlled? It’s an essential question in a time of rising inequality, when the well-educated are doing better and the poorly educated doing worse.”
It’s a question that behavioral economics raises, and, with luck, may also be able to address. The eclipse of hyper-rational Economic Man opens the way for a richer and more realistic model of the human being in the marketplace, where the brain, with all its ancient instincts and vulnerabilities, can be both predator and prey
Even at the University of Chicago itself, Professor Richard Thaler espouses the usefulness of behavioral economics, and specifically its policy implications for what he calls (in Kos-friendly language) "Libertarian paternalism":
Thaler believes it’s high time to put the behavioral findings into action, partly because he sees no distinction between economics and behavioral economics. Here he quotes Herbert Simon in the New Palgrave Dictionary of Economics. Simon argued that “the phrase ‘behavioral economics’ appears to be a pleonasm,” or redundancy: “What non-behavioral economics can we contrast it with? The answer to this question is found in the specific assumptions about human behavior that are made in neoclassical economic theory.”
Thaler’s paper with Cronqvist underscores his belief that psychology affects the market in ways neoclassical theory fails to predict. The paper is also an example of what Thaler calls “libertarian paternalism,” a broad view of policy making that he is mapping out with Cass Sunstein, the Karl N. Llewellyn distinguished service professor of jurisprudence in the Law School, political science, and the College. Their premise is simple: because the average person’s decision making is hampered by bounded rationality, it behooves policy makers to create programs that make it easier for people to maximize their well-being.
They can, for instance, offer attractive, carefully framed default options and not inadvertently discourage people from selecting them by overemphasizing the benefits of making their own choice.
....
Libertarian paternalism does not imply a greater role for government, and because it is libertarian, we insist on retaining free choice. But once you know that every design element has the potential to influence choice, then you either close your eyes and hope for the best, or you take what you know and design programs that are helpful.” ....
The trick, he says, is giving people the best shot to make a good decision. “Our whole agenda is to create forgiving environments.
But the right wing econ 101 trolls will not go away quietly. The following is an exchange from the blog 2blowhards. The first correspondent indicates that he has developed an interest in behavioral economics:
Is behavioral econ a comprehensive challenge to classical theory, a helpful new addition to it, or a meaningless fad? I'd be the last person to know, of course, but I'm certainly finding it a provocative development to read about. Why? Because, enlightening as I've found it to learn the basics of econ, I've also found myself repeatedly slamming on the brakes and saying, *"Hey, now wait just a minute -- people aren't like that!"*
to which the second responds:
I agree that behavioral law + economics (BLE) is v interesting but I have two problems with the general theme of it ...
- They tend to be quite illiberal. They argue that because people are irrational by neoclassical standards the State should step in with paternalistic policies....
On the one hand they argue, probably correctly, that people exhibit all sorts of biases (endowment, availability,hindsight, overoptimism...etc) yet then assume that politicians (or whoever will run these paternalistic programmes) will not suffer from such biases. Public Choice econ should have taught us this will not be the case.
- BLE also tends to underplay the role of the market in providing/correcting for such biases....
So although the research of BLE is v interesting, the policy recommendations of most its exponents are wrong-headed
The data contradicts right wing free market theology. Therefore the data must be wrong!
IV. Conclusion: Right wing econ 101 theory dominates because there are huge, well-funded lobbies who have a vested interest to the tune of $100s of billions to see it drown out all other economic voices. Neoclassical economics in the manner of the Chicago school has served them very well since they came to power 26 years ago. Expect any dissenting voices and opposing economic schools of thought to be opposed with the utmost vigor.
Well, nobody said it was easy being reality-based!