Tuesday, October 04, 2011

The Big Issues: Economics for flourishing Part 1

Update: I originally published these three articles as a single, unreadably long post - To show more respect for my readers, and to try enforce some self-discipline, I have now broken it into separate, and I hope more digestible parts...

I've been struggling for a while to find the right angle to express my Sustainable Human Flourishing-related concerns about Chicago school neoclassical economics - (Note: If those words mean nothing to you, then you should look into it a bit, because this is the school of macroeconomic thought that pretty much runs the world today.)

Noah Smith has saved me from an important part of that struggle with this brilliant post, in which he expresses some very valid concerns on the widely debated topic of whether modern economics is a science (there are some stellar follow-up comments too). I've recently started following Noah because he seems to be a rather clever economics (almost) grad who eloquently expresses many of the same concerns I've heard in various forms from other younger generation economists. Some great quotes from Noah's post include:

Now, far be it from me to argue with the Oxford English Dictionary. But I contend that the real question here is substantive, not semantic. Whether or not an object is an "airplane," the important question is whether it flies. And whether or not economics is a "science," the important question is whether or not it discards its bad ideas.
What bothers me is that the economics profession, as a culture, does not always insist that the testable models be tested and discarded. When enough economists ignore the facts and keep believing in models that can and should be discarded, then even though economics is procedurally a science, culturally it is not behaving like one. 
I can't agree with Noah more - If we look at this by example then the contrast between real science and economics could not be more stark. First, an example from classical science:

Exhibit A) Just last week, we heard from scientists at CERN who, with the OPERA experiment, seem to have disproved one of the most deeply cherished tenets of modern physics - after a multi-year, multi-billion dollar experiment involving hundreds of the top scientists on the planet, they might just have succeeded, quite unexpectedly, in breaking the speed of light!

What do real scientists do when faced with such "success"? They literally beg other scientists to help them prove that they are wrong!

Now, on the other hand, we have an example from the "science" of economics. This example is just as significant but probably a lot more real to most readers:

Exhibit B) The extended global economic crisis of 2008 that we all continue to live through... This crisis is the result of systemic failures in the "scientific" models developed by neoclassical economists.

So, what do we hear from the "scientists" responsible for those models? Krugman puts it very nicely
"When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide."
Let me try to use an analogy here that I hope will become more apposite when I revisit it below - thousands of people around the world are making it their life's work to try prove that creationism is fact. This does not make creationism a science. It makes it mass wishful thinking. Creationism would become a science if thousands of people made it their life's work to disprove it, and all failed to do so.

Is there any wonder that there are so many comparisons made between neoclassical economic ideology and religious ideologies? With their dogged wishful thinking that their models are ok, despite the evidence, too many economists are behaving like creationists, not like scientists.

In the next part of this post, I'll explore an even more important concern about the current global economic system, and start what I hope will be an extended exploration of an alternative system...


  1. Read through these three blog posts of yours and noticed that you didn't even once mention "opportunity costs".

    Guess it's no surprise given that Noah also fails to consider what might arguably be the single most important economic concept. Economics is all about scarcity...and opportunity costs help ensure that scarce resources are efficiently allocated.

    It's fine if you want to critique libertarianism...but it might help if you actually understood your opponent's position first.

  2. Hey thanks for stopping by Xerographica. I've read a few of your posts, and I do like your "Pragmatarian" ideas in theory, but I just don't find them particularly, well, pragmatic I guess.

    I'm sorry, but what kind of infrastructure do you envisage to allow people to individually allocate their taxes? More importantly, how do you provide the information they need to make the best decision? More importantly still, what kind of oversight and penalties of you foresee to ensure that powerful entities do not manipulate individuals to act against their own self-interest?

    You seem to know what you're talking about, and you have very strong opinions on taxation, so surely you understand that one of the most important functions of taxation is as a societal commitment device? An individual acting in his own short-term self interest will rarely, spontaneously act in the long-term interest of society. Not acting in the long-term interests of a society generally means acting against the long-term interests of most of its members… Thus, in general, an individual left to his own devices will far too often act against his own long-term interest. I don't see how anyone can rationally argue otherwise?

    On deeper reflection, however, I suspect that the fundamental reason that I struggle to agree with you is that I believe in a better world, and I don't believe that we can get there with our current thinking. No matter how much more sophisticated we can get at traveling on our current path, I believe that the path itself is wrongheaded.

    Yes, I do understand the concept of opportunity costs, but it seems to me that you don't yet understand the concept of sustainability. Sustainability is about abundance, not scarcity. Opportunity costs are very different in a sustainable economy.

    I don't claim to have the answers Xenographica - I just want to do my tiny bit to move the conversation out of the rut that it has been stuck in for far too long.

    Thanks for the insights - hope you'll stick around. All the best!

  3. "An individual acting in his own short-term self interest will rarely, spontaneously act in the long-term interest of society. [...] I don't see how anyone can rationally argue otherwise?"

    Adam Smith, the founder of modern economics, argued otherwise when he described the concept of the Invisible Hand. Later...Bastiat helped develop Smith's concept when he wrote his essay on opportunity costs. More recently, Hayek also helped develop Smith's concept when he wrote his essay on partial knowledge.

    Adam Smith's concept was actually a development of Buddha's concept of how we are all just blind men touching different parts of an elephant. It's a "fatal conceit" for a relatively small group of "blind men" to think they can "see" enough of what it is that we are all touching to make informed economic decisions for the entire country.

    That's why socialist experiments have always failed. They fail because they do not integrate our diverse perspectives/values.

    In order to "move the conversation out of the rut that it has been stuck in for far too long" you have to understand what is at the heart of the debate. Look over the comments on that thread and see if you can appreciate how my comment offers a compromise between both sides of the debate.

    Everybody intuitively understands the opportunity cost concept...the hard part is understanding the value of millions and millions of people considering the opportunity costs of their spending decisions. In other words...the hard part is understanding the value of the Invisible Hand.

    It's great that you don't claim to have the answers. The thing is that everybody has some answers...but nobody has all the answers. Pragmatarianism is a system that facilitates the integration of everybody's answers.

    It would be great if you could thoroughly read through all the links that I provided...I'm certainly happy to stick around when somebody demonstrates a willingness to keep an open mind.

  4. Hi again Xerographica - I will read those articles with an open mind, as always. To date though I have not found anything that I haven't seen before.

    I'm sure you know that Adam Smith died 221 years ago, in a very different world. I hope that you would give some pause to the idea that if Smith were alive today, then he would be horrified at much of the suffering inflicted in his name. I am also pretty sure that Smith would consider the "developments" that you refer to as being largely responsible for that suffering.

    Anyway, I fear that we are way off topic because my posts are nothing to do with socialism vs capitalism - I will summarise my key points as:
    Part 1: Free market fundamentalists are very selective about the history lessons that they choose to incorporate into their ideology.
    Part 2: There are alternative capitalist systems that are more conducive to Sustainable Human Flourishing.
    Part 3: There is a dangerous link/conflation between free market fundamentalism and fundamentalist evangelical protestantism.

    Your comments so far seem to support my Part 1 thesis - While I am reviewing your other posts and comments, do you have anything to say about key points 2 & 3?

    I'm also still interested to hear your answers to the questions in my last comment?

    I look forward to continuing our discussion, but I warn you that I've heard it all before and quickly get bored with free market fundamentalism. I therefore encourage you to bring out your original ideas as soon as possible ;-)

  5. Jamie, you've got to give me specifics to respond to. When you say things like "suffering inflicted" in Adam Smith's name I'm not quite sure what you're referring to.

    Regarding Part 2...what alternative capitalist systems are more conducive to Sustainable Human Flourishing?

    Regarding Part 3...well...there's the protestant work ethic...but it's long since been disproved.

    My comment with all the links addressed all your original questions.

    My original idea is simply that we do not try to dictate how other people spend their own taxes. We let them allocate them as they see fit.

    The problem with religion and dogma has to do with intolerance. If I try and dictate how you allocate your taxes then I'm trying to impose my own beliefs onto you. If I impose my beliefs onto you it's still intolerance whether my goal is to save your soul or save the planet.

  6. Hi again Xerographica

    Well, I've checked out the links you sent, and I really don't know what to say…

    I express my concerns about a dangerous link between Chicago School Free Market Ideologies and Evangelical Protestantism, and you send me a bunch of links to Chicago School trained Evangelical Protestant Free Market ideologues?!? Are you serious?

    Do you think I don't agree with you because I'm just not trying hard enough? Do you think that if I read Hayek one more time then I will be saved by the divine revelation that you feel?

    You talk about the intolerance of trying to impose beliefs on others… What are your thoughts on hypocrisy? Clearly you have an ideological axe to grind, but I'm sorry Xerographica - I'm not going to play grindstone for you.

    As I mentioned before, I really quite like your "original idea" in principle. If you read my blog, you'll see that I'm all for anything that makes the world more fair and democratic. I want to live in a free world where people have power over their own destinies.

    I live in the real world though and I'm concerned about my children, so I need to be pragmatic and seek realistic solutions that are achievable today. Blind Freddy can see that your idea is not pragmatic today, nor anytime in the near future.

    I do think it will be a valuable exercise to explore your vision honestly though and I would like to reconvene to discuss after you've written a blog titled "How Pragmatic is Pragmatarianism?" You can use the three questions that I've raised above as a structure for your research and writing. Here they are again for your convenience:

    1) what infrastructure is needed to allow people to individually allocate their taxes?
    2) how do individuals get access to the information they need to make the best decision about where to invest their taxes?
    3) what kind of oversight and penalties are needed to ensure that powerful entities do not manipulate individuals to act against their own self-interest?

    I really look forward to reading that article - I'm even happy to give my honest opinions on an early review copy if it will help? As a reasonably capable computer nerd, I can certainly help you refine your answer for point 1. For 2 and 3 you're on your own though I'm afraid - those are waaay out of my league, although I can't help but think there might be some good ideas coming out of the Occupy Movement that might help you longer term if you get onboard...

  7. Jamie, Chicago school trained ideologues? Actually...the Chicago school snubbed Hayek. Which other "ideologues" did I link you to that were trained by the Chicago school? Clearly Bastiat and Smith died way before the Chicago school even began...

    You say you live in the "real world" but what is the "real world" if not the sum of all our life experiences? Pragmatarianism would allow you to allocate your taxes according to your life experiences and it would allow me to allocate my taxes according to my life experiences. Why wouldn't we want the allocation of taxes to reflect reality?

    Regarding your three questions...

    1. what infrastructure do non-profits need to accept donations?
    2. how do you access your values?
    3. how would you respond if I told you that I know for a fact what's in your best interests?

    Here's my most recent post which addresses many or your questions/concerns...other people's values.

  8. Sorry Xerographica, I'm not interested in listening to you preach your religion. I'm not going to be converted.

    Good luck with your mission.