Ugh, just had my first total loss of an allegedly saved draft in wordpress. Ah, the joys of the interwebs.
Here goes again.Definitely have lost my train of thought.
I came across this pretty great article at Slate by Annie Lowrey about the body of quite relevant work that already exists within economics showing how often conflicts of interest can and do interfere with market efficiency and utility. Few economists seem to see their own agency problems to keep it all in econ-speak. Many times these issues are possibly related directly to points of view that are cemented by actual monetary gains or at least the overall point of view that “becomes” a certain economic background. However, I wonder if there is often another sort of general proclivity that has to do with EITHER the effects of the sort of extensive training and peer influence that one receives during an education in economics or maybe even just a sort of person that tends to go into economics. An illuminating portion of the Slate article was this one:
There is research, for example, demonstrating economists’ occasional lack of what we might call consideration for their fellow man. (Put less gently: The literature describes a profession of amoral Scrooges.) In one paper, for instance, researchers set up simple zero-sum games between students of various disciplines, including economics: One player decides how to divvy up a $10 pool of cash; the other accepts or rejects his portion. When economists did the divvying, they proposed keeping $6.15, on average. Noneconomists proposed keeping $5.44. The verdict? Economists tend to be “self-interested.” Another study found that economics professors give less than half what other professors give to charity, even though they make more. Another confirms the bias outside the classroom, describing how economics students are more likely to “free-ride in experiments that called for private contributions to public goods” than other students. In English: They put their own profit first, even when the game calls for the maximization of public value.
I’ll get back to everyone on that in about 3 years I guess.
It is for this reason that I tend to find economists whose grounding is based thoroughly in economic history to seem much more humble. These are the people I TEND to occasionally hear mentioning that they were WRONG (!) about something and being able to concede the value of elements within a number of different economic theories. I occasionally find myself disagreeing with some of the more doctrinaire Democratic viewpoints of J. Bradford DeLong at UC Berkeley, but more often than not I find a refreshing humility and a VERY deep grasp of the currents of economic history that help to better understand some of our follies today.
On his rather kitchen sink blog (contains everything from entire repostings of others to class notes, to WWII history, to ongoing theoretical discussions with myriad economists) a few days ago, he posted a set of notes that were to be used in a discussion at this past weekend’s convention of the American Economics Association. (The Slate article mentions the current scuttlebutt over whether the AEA should have disclosure requirements for publishing work in it’s peer-reviewed journal…it should.) DeLong’s notes, though, seem to be squarely aimed at just how unbelievably non-existent even the most BASIC agreements on economic policy are in light of this once in a century crisis we are currently sitting just above the bottom of.
Certainly, many Austrians and Real Business Cycle types would not have agreed with this basic consensus. Indeed, it reflects a fairly optimistic viewpoint about banks and politics, but I think his point is valid insofar as this was more or less reflective of the framework that mainstream economics was based around.
His take away from the last 3 years though, is certainly a more cynical view about the fractured nature of the way class and politics interact with the dismal science.
This is where pretending economics is something other than philosophy with some scientific underpinnings will inevitably lead. I really wish I could have been at this discussion. Though I take it his final prescriptions below contained a dash of hyperbole (given his pretty excellent Macro 101 class you can listen through at iTunes U), I think he’s trying to make a valid point about the impotence of economics to speak with anything resembling a useful consensus. It’s more like a collection of yes men of every stripe, just pay their fees and they will give you whatever authoritative answer you desire.
It is truly a shame that in this (and the quotes indicate my pessimism, but let’s use the common parlance) “once in a lifetime” economic crisis, economists have done more to muddy the waters on solutions and causes than to clear them. Which doesn’t speak well of the profession at all. Not being at all well-versed, I THINK DeLong’s suggestion to perhaps “stop at Tobin” is where he would generally draw the line between more historically informed, pragmatic economics and the dawn of the “rational actor” and the accompanying blindness to the very imperfect markets that actually drive the world economy. DeLong has a great post about how many ways markets fail and just how stringent are the requirements for a market that fits most any of the models that drive so much economic thought today. It’s not a prescription, it’s a set of prerequisites to meet before most prescriptions would even be relevant and something I am already trying to drill into my brain as suggested.
December 05, 2010
What Do Econ 1 Students Need to Remember Second Most from the Course?
What is the second most important thing for you come one student remember? It is how stringent the requirements for any form of “market efficiency” are: how many ways a market economy can go wrong and go badly wrong. I count seven ways that market economies can and do go badly wrong:
First, the market will go wrong if the wealth distribution is wrong. The market judges value by willingness to pay, and the rich are much more willing to pay them the poor, and those without wealth or income have no willingness to pay at all. If your wealth and income are zero, then the market literally does not care whether you live or die–it is of no interest to it at all.
Second, the market will go wrong if commodities do not have the proper characteristics. Remember: rivalry, excludability, and also information–people have to know what they are buying. An absence of or imperfect rivalry–increasing returns to scale in production or consumption of any sort–and the market will go wrong. An absence of or imperfect excludability–free-rider problems of any sort, or any failure of property rights definition or enforcement–and the market will go wrong. An absence of good information about exactly what you are buying or selling–adverse selection or moral hazard problems of any sort–and the market will go wrong.
Third, the market will go wrong if market agents do not take the prices at which they buy and sell as given but rather have some control over the prices at which they transact. The belief that the market is efficient hinges on the absence of market power–as well as on the proper income distribution, and on the proper characteristics of commodities.
Fourth, the market will go wrong if prices do not equalize quantities supplied and quantities demanded at every moment. “Price stickiness” for any sociological or psychological reasons disrupts the market’s ability to function.
Fifth, the market will go wrong if Say’s Law breaks down. If there is substantial downward pressure on spending on currently-produced goods and services because of an excess demand for financial assets of a kind that the private sector cannot immediately and instantaneously generate on a large scale, then the market will go wrong and we will have a downturn and a depression. If there is substantial upward pressure on spending on currently-produced goods and services because of an excess supply of financial assets of a kind that the private sector cannot immediately and instantaneously shed, then the market will go wrong and we will have a burst of inflation that will disrupt the functioning of the price system.
Sixth, the market will go wrong whenever its prices function as forecasting mechanisms. A proper forecasting mechanism would weigh each individual’s opinion by the precision of his or her knowledge. A market tends on the contrary to weigh each individual’s opinion by his or her wealth. This means that whenever economic processes tend to revert to seem average level that the market is likely to get things wrong, for when prices rise above average those who are optimistic become richer and their opinions carry more weight and so prices tend to rise further above their likely long-run fundamental values. Bubbles and crashes, manias and panics, are thus built into the system.
Seventh, the market will go wrong whenever individuals are bad judges of their own long-term interests–note that I say when, not if. Humans are very bad at assessing and dealing with risk. Humans are not that great at appropriately weighting different conflicting pieces of information. And humans are absolutely horrible at dealing with substances or patterns of behavior that can be addictive.
Whenever the system falls into any one of these seven arenas of psychological, behavioral, or institutional myopia and market failure, the market will go wrong. A good government will put its thumb on the scale in order to offset all of these seven forms of market failure. A great government will have foresight and take care to structure political-economic institutions to make these seven arenas of myopia and market failure as small as possible.
Remember this too. Keep it as an active process running on your wetware always. Lay up this idea in your heart and in your soul. Bind it for a sign upon your hand, that they may be as frontlets between your eyes. Teach it to your children when thou sittest in thine house, when thou walkest by the way, when thou liest down, and when thou risest up. And write them upon the door posts of thine house, and upon thy gates: that thy days and the days of thy children–or at least the commodities they own–may be multiplied.