With politicians, taking an Easter break, inspiration has to come from elsewhere this morning. I am returning, in that case, to the article by economics Nobel Prize winner Angus Deaton on the IMF website, which was entitled "Rethinking my economics".
I admire Deaton for having the courage to write this article. That is what it takes to admit that you might well have been wrong throughout a large part of your career, which is what he appears to be doing.
There are, I think, three themes. The first is this one:
Power: Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages, in choosing the direction of technical change, and in influencing politics to change the rules of the game. Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.
Unsurprisingly, I agree. Political economy is all about the influence of power on the allocation of economic resources. Most economists assume that this is not a problem by suggesting that everyone has equal access to capital, which equal access can be equated with an assumption as to there being equality of power when they undertake their spurious calculations. The difference in worldview is decidedly stark. One reflects reality, and the other does not. It is about as blunt as that. It would seem that Angus Deaton has now realised that. That matters. As I argued earlier this week, power and its abuse are what really matters when it comes to the creation of economic justice.
Then there is the spurious economic argument for efficiency, which we hear expressed all the time as the demand for more productivity. On this Deaton says:
Efficiency is important, but we valorize it over other ends. Many subscribe to Lionel Robbins' definition of economics as the allocation of scarce resources among competing ends or to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution—frequently though not inevitably—our recommendations become little more than a license for plunder.
Again, I agree. The vast majority of the demands for productivity made within the economy are intended to reduce the level of labour input into the production of goods and services, whilst at the same time increasing the return to the rentier who has exploited the natural resources of the world to deliver the material component. Almost without exception, this becomes the license for plunder to which Deaton refers.
That said, I do of course know that there are exceptions. But, to refer to his previous argument on power, differentiating the two by undertaking an analysis of power is critical if we are to understand the reality of the demands for efficiency made within our economy. By no means all demands for efficiency are benign, and many are far from it.
Deaton added this when discussing this issue:
Keynes wrote that the problem of economics is to reconcile economic efficiency, social justice, and individual liberty. We are good at the first, and the libertarian streak in economics constantly pushes the last, but social justice can be an afterthought. After economists on the left bought into the Chicago School's deference to markets—“we are all Friedmanites now”—social justice became subservient to markets, and a concern with distribution was overruled by attention to the average, often nonsensically described as the “national interest.”
I am not sure what to add, apart from 'quite so'.
Let me then note the final issue he mentions that I want to highlight here, which is:
Humility: We are often too sure that we are right. Economics has powerful tools that can provide clear-cut answers, but that require assumptions that are not valid under all circumstances. It would be good to recognize that there are almost always competing accounts and learn how to choose between them.
I know he also refers to ethics and empirical methods in the note that he wrote, but I feel that both can be summarised in this single paragraph on humility.
If we are to make choices between competing accounts, then we necessarily need to have an economics that is ethical. In a very real sense, there is no other choice.
That, as Deaton himself noted, requires that economics rethink its use of empirical methods that necessarily impose an artificial worldview on economic analysis so that economists might undertake their existing form of mathematical interpretation of the incomplete and flawed data that they collect, which they do, however, presume to be value free in almost all the exercises that they undertake.
As I have always argued, the stories that we tell each other about the economy in which we live are more important than the data we collect about it because they provide the framework within which any information is interpreted. It would seem that Deaton now agrees.
I call that progress, except for the fact that about 92% of the world's living economists are probably now in disagreement with him now. We will just have to make progress, one step at a time.
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Might it be that current economics has been subverted from the society aware economics of Adam Smith, Karl Marx and co by the Chicago “School” and co, assisted by most of the main stream media and many politicians seeking donations?
Well, “there will be more joy in heaven over one sinner who repents than over ninety-nine just persons who need no repentance”
Framing matters, because it changes how people perceive, and then how they think and behave.
Public debt is public savings, by firms or individuals. Public spending is investment, in people or things.
Economics is not mathematics or physics. As a social science, it is more akin to anthropology or psychology: how people choose to organise for collective action.
Models are always wrong but they may be useful. But economics models can go horribly wrong when they make heroic assumptions which are plainly false, but then the results are treated without the circumspection the deserve.
Any economist who refers to the “invisible hand” or the “free market” needs to read the work that Smith published 17 years before The Wealth of Nations: his Theory of Moral Sentiments.
Happy Easter everyone.
Thanks
Much to agree with
The stories that we tell each other about the economy in which we live – we’ve had 14 years of austerity
The data we collect about it – tax and spending are historically high, much higher than in 2007 for example
The story is the important part.
Neoliberals will say we should use the data to help write the story.
Bearing in mind your earlier comments on the inadequacies of Econometrics what do you make of Steve Keen’s economic modelling program Minsky?
Is it econometrics?
I wouldn’t know. I guess I was just curious what you made of it.
No, it’s a macroeconomic system model that tries to show how instabilities and inequities result, in financialised capitalism; with a significant role for the banking sector. He uses it mainly to show “what if” scenarios, as well as “why” analyses; but without the econometrics approach of deriving parameters or correlations from lots of time series data. Although I think he does use real world data as starting conditions; and makes comparisons of outcomes post hoc, so not just hypothetical or theory.
I think (?) you’d also be happy with his ‘accounting’, sectoral balances etc.
I m very happy with Steve’s work, which I have discussed with him here in Ely
Yes very well said.
I think it is unfortunate that he channels the famous comment made in 1965 by Milton Friedman that we are all Keynesians now. Unless he wishes certain readers to remember those times. Sadly, the ugly truth is that we are further from being Keynesian now than we were in 1965.
True
It seems like Deaton has had something of an epiphany. And not before time.
And speaking as someone who in my academic career (and elsewhere, e.g. http://www.progressivepulse.org/society/lists-of-the-elite-are-interesting-but-never-forget-that-power-is-at-its-most-effective-when-it-is-least-observable) wrote a fair bit a power I can’t believe his naivety.
But then again, if he’d studied political economy along with, or instead of, straight economics the relationship between economics, politics and power would be no mystery to him whatsoever.
Agreed
The bullet from Deaton’s article on Philosophy and Ethics is very powerful. The ‘ends’ of economics are crucially important. Richard Layard banging the drum for the importance of wellbeing can only be the start.
It was Ha-joon Chang who said (probably repeating someone else) “economics is changing, one funeral at a time”.
But repentance, confession and a new ‘profession’ before judgment is always to be preferred!
I don’t know who first said it about economics. But Max Planck said something similar about physics in 1950.
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it”
https://en.m.wikipedia.org/wiki/Planck%27s_principle
Today in 1963 the first Beeching Report was published. The Minister for Transport was Ernest Marples. Before taking office he sold a big stake in a road building company to his wife.
He closed 1000s of miles of railways & built lots of motorway.
He fled to Monte Carlo in early 1975.
Is that data or is it a story (we tell ourselves about life before the milk snatcher). It could be the hang line of song except not many words rhyme with story. Except gory and Tory.
And his plan was a disaster
[…] The stories we tell each other about the economy in which we live are more important than the data w… Funding the Future […]
“Many subscribe to Lionel Robbins’ definition of economics as the allocation of scarce resources among competing ends”
This is where economics goes wrong – right from the beginning. The actual history of industrial and agricultural development shows that economics is actually all about how society goes about overcoming scarcity of resources. Understanding this would radically shift the what economists emphasize. Financial markets and prices would become much less importance, and the creation of science and new technology would become paramount areas of inquiry.
Very good…..I will remember that