Nelson Mandela and heterodox economics
The death of Nelson Mandela and heterodox economics don’t have much in common. But I’ve noticed at least one similarity: the relentless focus on the individual. Almost every journalist and politician deifies Mandela, holding him solely accountable for the overthrow of apartheid. It was his 27 years of jail and his dogged pursuit of “justice” which finally did for the apartheid regime.
Not a week goes by without an article or new movement criticising the standard-bearers of mainline economics for their inability to predict the crisis and their continuing silliness. The main targets are academics like Paul Krugman, John Cochrane and Greg Mankiw, who retort that despite its shortcomings mainstream modelling is the best tool we’ve got.
I’d be the first to say that people and ideas matter. Mandela was a hero, and it’s in the nature of his genius that those from across the political spectrum can find something to admire in him – rightwingers, his statesmanship and his ability to forgive; the left, his egalitarianism, perseverance and championing of the dispossessed.
I’ve also been quick to criticise the personalities of standard economics, with their ridiculous assumptions that make their theories so far removed from reality that in many circumstances they are worse than useless. The relentless flood of opposition to these people may help chip away at the edifice, bringing about a more realistic and human form of political economy.
But in both cases individuals and ideas are only responsible for so much; whilst important, at best they’re probably only the conduits through which the flood of history is channelled. Mandela (as many commentators in fairness point out) was the brilliant figurehead of a mass movement which would stop at nothing to dispose of a corrupt, fascistic and brutal regime.
Sooner or later apartheid would have ended, against the backdrop of a hostile global environment and an increasingly unviable economy whose principal beneficiaries could see little hope of long-term prosperity. The white middle and ruling class were not as opposed to democracy as might be supposed. They have benefited most in the ANC era, a time when poverty has remained entrenched and white-black inequality has worsened.
Mandela may be individually more responsible for the success of a social movement than any human being in history, and he may even have single-handedly hastened the end of apartheid, but ultimately he was a man of his time. It’s the interplay of history and personality that make the overthrow of apartheid so interesting – as Marxists and Weberians have long pointed out. Men make history but not in circumstances of their own choosing, you might even say.
Similarly no matter how much the cheerleaders-in-chief for mainstream economics are criticised, their discipline functions to support certain interests. Neoclassical economics isn’t neoliberalism – several leftish economists like Krugman and Simon Wren-Lewis are at pains to point out the anti-austerity credentials of textbook economics – but it does promote a fundamentally individualist, liberal, utilitarian worldview in which people act according to self-interest. This worldview is useful in our existing economic system.
Whatever the heterodox say, the main tenets of finance theory are alive and kicking. I’d even go so far as to say that they “work”, at least within the confines of making short-term money in investment banking if you’re not bothered about the social fallout. As the latest Nobel prize showed, the efficient markets thesis still has currency. It’s pretty much impossible to construct a credit derivative without at least some reference to financial economics. Business schools still teach this stuff because it’s in demand.
Keynes’s general theory was forged in the furnace of the great depression. It was a response to the bankruptcy not just of the banks but of classical economics. Even financiers and industrialists realised that raising effective demand and the possibility of the restoration of full employment were in their interests.
Despite enlightened political economists banging away for decades about the wrong-headedness of the mainstream, and the development of viable alternatives like post-Keynesianism, Modern Monetary Theory and complexity economics, few of these alternatives have made it on to mainstream syllabuses, and they don’t guide policy.
To that extent it’ll probably take a lot more than just criticism of individuals to overthrow mainstream economics, valuable as criticism is. New ideas are also important, and it’s great that certain imaginative political economists are readying them for when the time is right. But their acceptance may depend on which social and economic groups find them useful, and which ideas need replacing. People and ideas make history, but, depressing though it sounds, circumstances matter.
Emergent Economics 
A very perceptive article.
It would seem that old style economics still work because they suit current class divisions that are inherent in Capitalism. You can’t have a new approach to economics that fights for equality and social justice when all the economic forces are against it.
There is a simple label describing the idea that individuals and ideas exist and are the only thing that matters, while history and society are only the direct resultant of their action: it’s called methodological individualism.
Maggie Thatcher put it very clearly: “And, you know, there is no such thing as society. There are individual men and women, and there are families.”
If you think about it, it’s a prosaic way of expressing the ideas of romanticism: if common men and women make society, then great men and great women (think of Napoleon – or Mandela – as a real-life figure; Lohengrin, Siegfried, Rienzi in Wagner’s operas) make history (sadly, I cannot recall any 19th century fictional Wagnerian heroine equivalent to Lohengrin :D)
You’ll also notice that those views lead naturally to moralizing (as in Mandela’s case). Precisely the kind of attitude that Marx criticized:
“I paint the capitalist and the landlord in no sense coleur de rose. (…) My standing point, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them”. (Das Kapital, vol. 1, preface to the 1867 edition).
Yes, a good Marx quote there. I often think that Marxist economists, and especially functionalist Marxists, as part of the supposedly heterodox, should spend more time looking at historical context and maybe a bit less time saying how silly are the ideas of the mainstream. *Of course* it’s methodologically individualist.
“I often think that Marxist economists (…) should spend more time looking at historical context and maybe a bit less time saying how silly are the ideas of the mainstream”.
That’s reasonable: it’s all good and well for Marxist economists to point fingers at mistakes, but that’s not enough.
Indeed, I’d make the same observation extensive to “the supposedly heterodox” economists.
But there’s a point one needs to keep in mind and you may have overlooked: it is not reasonable to assume only economists (Marxist, heterodox or mainstream) embrace these ontological notions. In fact, in Mandela’s example, which you brought forth, we are seeing non-economists advancing these views: great men, single-handedly, make history.
Magpie I agree with you. The superficial “great men making history” line is boringly popular, especially in the mainstream media.
Well, I have a lot of sympathy. But I still think you’ve got it wrong. I can’t remember who it was but one of the major New Classical economists said something like: “We know that our microfounded models are better but private financial institutions still use old fashioned Keynesian models and concepts for projections etc.”. Whoever said that was spot on.
Just look around. The chief economist at Goldman Sachs, Jan Hatzius, is fully in line with SFC modelling and uses the sectoral balances framework. Martin Wolf, arguably the most important economists in the serious tier of the financial markets, is the same — and has said that Krugman has money creation all wrong. I could name many more.
Then what about traders? Well, they basically do trend stuff these days and the intellectual basis for it is Shiller’s work in behavioral economics. While this isn’t heterodox it leads to heterodox outcomes — i.e. most of mainstream economics, from natural rates of interest to somewhat fixed preferences, doesn’t “work” if you accept Shiller’s work.
No, practical people are heterodox in everything but name. It’s the academy and the central banks that resist it. Why? Because contemporary economic institutions are, to be frank, filled with charlatans and unimaginative idiots. It’s a particularly toxic discipline that values groupthink over anything else. And anyone who perpetuates that stuff should be subject to public ridicule, in my opinion. They’re a bunch of flat-earthers.
I’m sympathetic myself to the notion that practical people are heterodox. I also agree that we should ridicule the idiots. But I think there’s mileage in the idea that bits of mainstream theory ‘work’ in a sense, if you define ‘working’ in a specific way — as allowing for the functioning of certain behaviours within financial markets which benefit the purveyors of power and the managers of money. Of course the idea of something ‘working’ is wrought with hidden assumptions and is in effect ideological.
But a certain set of precepts, like the efficient markets hypothesis, Modigliani-Miller and so on helped traders and others within the investment banking community to frame the way markets operated and to build models. Black-Scholes, although it appears now to be wrong, relies as far as i’m aware on the notion of efficient markets. It made a lot of people a huge amount of money for a while. OK, the assumptions were ridiculous and these ideas broke down in the long run, and they also caused all sorts of mayhem in the real economy even before the great recession, but they did perform a certain function.
I know financial people who use this stuff in their jobs. I once knew a guy who constructed and traded credit derivatives and he seemed to think that his MSc in mathematical finance was useful. I worked for a short time in a financial research company early in my career and the analysts used to take the efficient markets hypothesis seriously, believe it or not, at least in its weak form. It helped them feel like they were useful and it allowed them to make sense of markets. In a very narrow sense I suspect that the rationalist, utilitarian, optimising fiction which is economic man may roughly approximate the behaviour of the kind of greedy, self-orientated atmosphere on Wall Street. As such certain parts of mainstream economics amount to a sort of narrow decision theory. They’re useless, even positively dangerous when applied to the rest of the world but they may function in a given environment for a period of time.
I don’t like game theory — but some of its practitioners seem to think it does shed light on strategic behaviour, for instance in wars and whatnot.
This discussion also brings into play the idea that it’s somewhat unhelpful to characterise ‘the mainstream’ as homogeneous (I often make the same mistake myself). It’s not. There are lots of strands, and people will choose what works and what they’ve been taught or conditioned to believe is right. To that extent you’re right; practical people are eclectic.
I agree and I disagree. These ideas ‘work’ as ideology, but no one believes them. Traders say “efficient markets” and then they try to beat the market. It’s bollocks!
My point is that functionality is not our problem. It’s something else. Something much deeper. Much more ingrained. And, frankly, contra Marx, its WAY beyond capitalism or whatever…
” In a very narrow sense I suspect that the rationalist, utilitarian, optimising fiction which is economic man may roughly approximate the behaviour of the kind of greedy, self-orientated atmosphere on Wall Street.”
I can’t agree with this. Homo economicus does not speculate. Unless you buy into this “rational bubble” crap that the Chicago morons have been doing since the bubble. But I think that just perverts the meaning of the word “rational” as it has been used in economics since the rise of marginalism.
“I don’t like game theory — but some of its practitioners seem to think it does shed light on strategic behaviour, for instance in wars and whatnot.”
Yes, that is what they thought. And it led to some very strange strategies that they proposed during the Cold War. JFK ignored them during the missile crisis, thankfully. There is no room for diplomacy in game theory. Everything is about power and perceptions. There is no trust.
No, my point about the mainstream economics version of economic man referred more to the fact that Wall Street financial capitalism is probably more red in tooth and claw than economic behaviour virtually everywhere else in the world. Economists are wrong to think that we’re all self-interested and that humans respond primarily to “incentives”. In many parts of the world gift-giving and selflessness are bigger motivators of economic behaviour, as are all kinds of other impulses. I found what little that I read of the neo-Weberian economic anthropology literature particularly enlightening, as it emphasises cultural influences on markets and the specificity of economic conditions rather than speaking of some sort of universal, singular economic unit with all sorts of unrealistic impulses. Colin Danby’s The Curse of the Modern, and Hefner’s the Political Economy of Mountain Java are good.
And there are games where trust comes into play.
Which game has trust in it? So far as I know game theory only works with preferences and beliefs…
Not saying I agree with them but:
http://philosophy.wisc.edu/hausman/papers/trust.htm
http://en.wikipedia.org/wiki/Dictator_game
As the Wiki article notes, the dictator game is not a proper game.
Sure, but that’s just semantics. It’s near enough.
Not at all. The game was proposed by Kahneman as evidence that the rationality assumptions of game theory are incorrect. It’s sort of an “anti-game theory game”.
I’m not a functionalist because I think it’s not as explanatory as its proponents suggest. It often amounts to retrospective justification, as Taleb points out. One can see all sorts of historical patterns after the fact but rarely in advance. It’s easy to spot perpetrators in retrospect; less so beforehand.
Despite this I still think it’s important to ask about almost anything: whose interests does it serve? This quite often (not always) reveals some truth about its validity. But you still have to prove causal mechanisms otherwise it’s just conspiracy theory.
An example from trade policy: Australia imposes rigorous quarantine measures on imported agricultural goods. Despite the government arguing that it’s all about consumer and plant health this functions in effect economically to protect domestic farmers and keep prices high. You could argue that its the result of constant lobbying by farmers, but unjustified protection is banned by WTO rules so this probably isn’t entirely the case. The status quo supports certain interests, who don’t have to make a great deal of fuss given the government’s tacit support. Yet it’s still worth asking in whose interests the strict quarantine measures operate because it will if nothing else push your line of inquiry in the right direction.
Similarly economic theory: as it happens a lot of it it tends to serve the interests of financiers and certain powerful interests. That’s not an explanation but it does propel you in the right direction. It’s a starting point, and this sort of background context a useful complement to the argument that “this economist or idea is silly”.
I really think it runs deeper than this. Does something like the EMH provide Greenspan, for example, with a justification to deregulate? Yes. And does this serve financial interests? Yes. This is not surprising. Why would financiers teach themselves, in their courses, something like Minsky? That would suggest that they are not a very positive force while the EMH teaches them that the are.
Do some people believe in this? Does it, as you suggest, enter their view of how the markets function? Yes. But they are dupes, I think. They are either academic types, empty-headed policymakers like Greenspan or people who occupy a very specific place in the finance industry — let’s cal them “financial bureaucrats”. The latter are a well-salaried group who never really make much advancement. They are the grey suits, as it were, behind the scenes keeping the whole Goliath ticking over and the EMH provides them with exactly what they need to do that: namely, the ideology to “follow the market” which basically means “follow the herd and do what the other guy is doing”.
The people actually driving the herd, however, I would argue don’t care about the EMH. They’re the ones that do trend stuff and the like. And I think that they’re the most important part of the market. Funnily, in mainstream literature they’re generally thought of as an anomaly and are called “noise traders”…
“Does something like the EMH provide Greenspan, for example, with a justification to deregulate? Yes. And does this serve financial interests? Yes. This is not surprising. Why would financiers teach themselves, in their courses, something like Minsky? That would suggest that they are not a very positive force while the EMH teaches them that the are.”
Sounds like i’ve convinced you! This is very close to a functionalist-style argument.
I’m very wary of telling traders and financial bureaucrats what about their theories doesn’t work. They’re rich and i’m not!
It’s not that they don’t work, it’s that they work in a very particular way. They don;t actually capture the truth of the market. They merely provide a framework in which the investor can make standard, market returns. They are, in that sense, wrong. Functionally wrong, but wrong all the same.
“In a very narrow sense I suspect that the rationalist, utilitarian, optimising fiction which is economic man may roughly approximate the behaviour of the kind of greedy, self-orientated atmosphere on Wall Street. As such certain parts of mainstream economics amount to a sort of narrow decision theory.”
I share the above, particularly in what refers to big corporations. The way I see things (and perhaps you’ll agree) a sizeable chunk of microeconomics overlaps with decision theory (a la Operations Research, for instance).
Business do apply some of these techniques: their decision-making and behaviour are moulded by theory. In other words, there is a performative side to economic theory: economic theory is supposed to describe and explain economic reality, but it also contributes to shape it.
Additionally, there has been much talk lately about economic theory also shaping economics students’ attitudes.
I don’t know much about operations research but I from little I understand I agree that there’s an overlap with micro. I do think that some critics of orthodox economics forget that it does have uses, however specific and however socially harmful these may be. Orthodox economics wouldn’t be orthodox if it didn’t serve some purpose.
On your other point, i can remember sitting next to a senior and renowned former microeconomics professor of mine at a dinner and him discussing whether or not to stand in line for the next course. I seem to remember him saying that jumping the queue if he could get away with it would be acceptable because it was rational and in his self-interest, when most normal people would say that it was just wrong. A trivial example, but it illustrates the impact of ‘economic’ thinking on peoples’ behaviour.
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