Another telling graph. Since the crisis Britain’s economy has shrunk more than any G7 economy except Italy’s. (from Gavyn Davies in the Financial Times).
We’re all in it… together
Never mind all the fuss about whether Britain’s economy is in technical recession. The much more important point is that the economy is still much smaller than at the start of the crisis four years ago. The contraction is worse than the great depression. From Michael Roberts:
Poor economics
The latest trend to arouse development economists is the randomised controlled trial. Borrowed from biology and healthcare, it’s when a researcher picks two or more different groups according to the roll of a dice, giving each group a different drug or treatment. The scientist can be fairly sure that the best-responding group has been given the intervention that works.
In development economics the researcher tests policies or techniques instead of drugs. One group, randomly chosen, receives the policy to be tested and one doesn’t, with an attempt made to keep all other circumstances equal. This avoids the problem of selection bias: the economist might distort the results by choosing a group which is particularly willing to take part or where she knows a technique will work well. It’s why the results of those pop surveys after you’ve visited a website aren’t to be trusted. The answers only come from the type of person who can be bothered to fill them in.
In a 2007 paper Benjamin Oken tried to measure ways of reducing corruption in Indonesia. He chose 608 villages in Indonesia where roads were to be built, splitting them into groups: ones without audit vs. those with audit; those featuring invitations to accountability meetings vs. those without; and ones with invitations to accountability meetings along with anonymous comment forms. Oken found that less money went missing in the villages with government audits than in the ones featuring grassroots participation in monitoring. The conclusion: audits cut corruption better than the other methods.
Oken works at MIT’s poverty action lab, of which Esther Duflo and Abhijit Banerjee are directors. They’re the authors of a recent bestseller, Poor Economics, which uses experimental evidence to discover what methods best lower poverty. Over years they did more than 240 experiments in 40 countries.
Some of their conclusions run against received wisdom. Political corruption isn’t too bad. Microfinance (tiny loans for poor people) is no magic bullet.
Fans of randomised trials are right that there’s no big answer. Lots of development fads boil down to the researcher’s arbitrary preferences rather than to hard evidence. Development sometimes seems like a Roman arena in which big, shouty men try out different ways of stabbing each other. The actual subjects — poor people — are often forgotten.
Experimentalists are also right to deny that everything’s down to corruption. That’s often just a sloppy byword for blaming the poor for their own problems. If you didn’t tolerate kleptocrats, the argument goes, you’d be richer. But lots of corrupt countries aren’t democracies, and plenty of corrupt countries got rich (China springs to mind). Some reasonably graft-free nations continue to toil.
But i’m a bit wary of these sort of experimental approaches, which amount to tinkering rather than really changing underlying conditions. There’s no understanding of capitalism as a system and very little about the exploitation of labour by the wealthy. You don’t need to be a raving socialist to understand that what’s good for the poor often isn’t good for the rich. We get cheap Iphones because Foxconn holds wages so low.
As this review says, there’s little real understanding of power in development. It’s as if the world is gradually tiptoeing toward a better understanding of poverty, and by carefully applying a few well-founded scientific results we’ll eventually live as one happy tribe. Call me a cynic, but I think power relations play a bigger role than most people admit. It’s actually beneficial to have a multi-million strong pool of underpaid or unemployed people clamouring for jobs because it keeps wages down and lets us have cheap stuff.
Experiments may work in medicine, but they can be methodologically dubious in social science. The gist of philosopher Nancy Cartwright’s presentation at INET is that the sample size needed for a fully objective study can be so enormous as to be impossible. Researchers often draw completely unwarranted conclusions from these studies.As pointed out by Marx and others, ‘empirical facts’ are often distorted by their proponents. One person’s common sense is another’s ideology. I’d imagine that the sorts of questions asked by most middle-class academic Americans aren’t always the same as the sorts of things that many poor people themselves would ask.
Most of these trials also seem to fail to take enough account of context. What works in one culture might not be generalisable elsewhere. Cash incentives don’t work as well in the communitarian cultures of the South Pacific as they do in, say, Kenya. When people have plenty of food and are generally happy, they’re less likely to work hard for more pay.
Because humans are at the same time the architects of their own theories and its subjects, the problem of reflexivity emerges. The results of experiments may be valid in one situation for a short period of time but they can’t really be taken as hard fact for eternity in the same way as findings in natural science can. So most findings are only provisional and context-dependent. Such is the eternal dismalness of social science. This isn’t a body-blow to experimentalism in economics, but it does reduce its importance.
–David Hume, An Enquiry Concerning Human Understanding
Not-so-super models
Jonathan Schlefer’s The Assumptions Economists Make looks interesting:
This book is about what economists do in their secret lives as economists, when they aren’t dashing off op-eds to tell everybody else what to believe, pulling the wool over undergraduates’ eyes in textbooks, or otherwise engaging in public relations.
Schlefer trained in politics not economics. As Aditya Chakrabortty said in Monday’s Guardian, at a time when the dismal discipline has so failed us, non-economists should be stepping in. Schlefer says all the right things, like “political science is not a science like physics.” He slags off neoclassical economics, talking of “the realism of crucial assumptions: assumptions that crucially affect the picture of the economy you are trying to understand.”
I haven’t read the book but I agree with David Ruccio, whose work I admire and who highlights the following passage from the interview. Schlefer says that:
There is a kind of progress in economics. Critics point out flaws in models; supporters revise the models to respond; and the models do become sharper. For example, John Maynard Keynes’s “General Theory” was a brilliant book, but his model was somewhat muddy, if you even grant that he had a model per se. If his model had been clearer, there wouldn’t have arisen so many disputing schools of “Keynesians” (with various prefixes and suffixes to distinguish themselves). But whichever side you’re on in these disputes, the models favored by different sides have become sharper and the bases of disputes clearer.
Keynes was perfectly well aware of the problems with narrowing down his approach in terms of a model, and there’s a copious literature on the purposeful openness of his economics. Ruccio rightly draws attention to:
the modernist conceit in economics: that economic knowledge progresses (Samuelson would add, “funeral by funeral,”) and that modelling is the way to guarantee the continued “march of progress.”
Models aren’t the only way of doing economics, and I have strong doubts that economists are gradually improving their understanding of how the economy works. The global economic crisis certainly doesn’t suggest so, and neither do the wars between various camps: freshwater versus saltwater; neoclassical versus post-Keynesian. The boundaries are muddier, not sharper.
Well-grounded methodological reasons exist for believing that narrow, highly mechanistic models with unrealistic critical assumptions are inappropriate for the social world. I think economics should be much more empiricist and narrative-driven, rooted firmly in the precise circumstances of the country or situation being examined, with theory subject to periodic revision as new evidence arises. There’s also lots to be learnt from disciplines like sociology, anthropology and politics, which have less robot-like ways of doing things.
Breaking the debt habit
Steve Keen’s is the best i’ve seen so far of the videos from the weekend’s Institute for New Economic Thinking (INET) conference in Berlin. Keen summarises some of Minsky’s ideas and explains his own policy proposals for cutting private debt. The first idea is the creation of jubilee shares which would be worthless 50 years after the seventh trade. You’d be stupid to buy the shares just on a bet that they’d rise. The primary market would become much more important than the secondary market. Shares would be just that: ownership of a share of a company, rather than a gamble on prices spiralling ever-upwards.
Keen’s second innovation is the PILL (Property Income Limited Leverage). He’d limit maximum mortgages to something like 10 times the annual rental income of the property. To get a bigger loan you’d have to stump up more savings, breaking the drive toward higher housing debt.
He also argues for a modern debt jubilee in which members of the public were given a pile of cash, much like the big banks are currently being given many billions in the form of quantitative easing. People would be legally required to pay off their debts and those without loans could keep the money. He’s argued elsewhere that we should take the banks under government control.
All these measure would herald the launch of a financial system which made money available for useful investment, not for gambling on house prices or stock markets.
To me this is real new economic thinking. Even if the ideas sound impracticable (and i’ve no doubt many nits will be picked), on the whole they’re truly radical and to my knowledge haven’t cropped up elsewhere; radical in that they’re new, and radical in the sense of going to the roots of the global economic problem, which is an addiction to private debt.
The seemingly most outlandish of ideas have sometimes become routine. It was once considered impracticable to give everyone the vote. The welfare state was radical. William Gibson’s idea in his novel Burning Chrome of connecting the whole word via an ethereal computer world known as cyberspace was received in 1982 as cranky science fiction.
Yet all these things are considered completely normal nowadays, and I don’t see why Keen’s proposals should be any different — in fact they’re even more modest.
Some of the other INET presentations were a bit disappointing. Apparently the students were put in a separate room. None made presentations. As Mark Thoma points out, too many of the presenters were greying. His solution, though well-intentioned, doesn’t go far enough:
So what we also need to do — and I admit that I’m not quite sure how to do this — is to teach the students, as best we can anyway, what a good idea looks like. What makes a new idea more likely to be successful? What makes it more likely to be received by important journals? How can a student know whether to push forward or to back off?
I think the answer is mentorship of the type that exists between a Ph.D. candidate and their advisor, at least a good one. Part of that process is to help the students ask the right questions about their research, how to find the potential holes and fill them, and so on. So all of us who are pushing the profession to investigate new ideas and new directions need to be willing to talk to students about their ideas, ask them the questions they ought to ask themselves, read preliminary drafts that come by email out of the blue, and help in other ways as we can. We need to provide guidance and at the same time not inhibit the search for new and better paths forward, a somewhat delicate task.
I don’t suppose many of the iconoclasts from the history of economics were “taught what a good idea looks like”, or asked for “guidance” from a professor, or bothered much about which journals to publish in. David Hume was cast as a dangerous radical and at first was excluded from academia. Hume didn’t publish his Dialogues Concerning Natural Religion because it was so anti-establishment. His friend Adam Smith failed to see through the task after Hume’s death for fear of stirring up a hostile reaction.
Karl Marx’s ‘ruthless critique of everything existing’ led him to decry virtually the entire canon of political economy.
John Maynard Keynes was notoriously rude about several of his intellectual forebears. Michal Kalecki, the man who beat him to the discovery of the theory of effective demand, was initially completely disconnected from mainstream Anglo-American economic discourse before later moving to Cambridge.
Keen himself is a professor at the Professor of Economics & Finance at the University of Western Sydney, hardly the Ivy League. He’s far outside the mainstream, publishing a book called Debunking Economics: The Naked Emperor of the Social Sciences.
If you subscribe to anything like Thomas Kuhn’s notion of a paradigm shift (the title of the Berlin conference was “Paradigm Lost”), you’ll realise that genuinely new thinking comes from leftfield; that it’s new because it can’t be known in advance. I’d even say that it’s important not to teach students what a “good idea” looks like for fear of tainting them with old ways of thinking. I reckon some of the best new ideas in economics will probably come from unexpected quarters — even outside the academy.
