The Ivory Tower--The Internal Rigidity Of Economic "Thought"
For years economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.
So begins Patricia Cohen's piece, "Ivory Tower Unswayed by Crashing Economy". Despite all the hooplah epitomized by the Newsweek cover, "We're All Socialists Now", Cohen goes on to write:
Yet prominent economics professors say their academic discipline isn't shifting nearly as much as some people might think. Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country. True, some new approaches have been explored in recent years, particularly by behavioral economists who argue that human psychology is a crucial element in economic decision making. But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails.
The financial crash happened very quickly while "things in academia change very, very slowly," said David Card, a leading labor economist at the University of California, Berkeley. During the 1960s, he recalled, nearly all economists believed in what was known as the Phillips curve, which posited that unemployment and inflation were like the two ends of a seesaw: as one went up, the other went down. Then in the 1970s stagflation - high unemployment and high inflation - hit. But it took ten years before academia let go of the Phillips curve.
One could go farther back, and recall that even after the Great Depression had seemingly discredited all thinking before it, FDR still tried moving back toward a balanced budget in 1937, giving rise to the recession of 1937/38. Keyensian policies were stumbled into well before his actual thinking was embraced.
James K. Galbraith, tells her, "I don't detect any change at all," going on to say that academic economists are "like an ostrich with its head in the sand." And Yale economist Robert J. Shiller, an economist at Yale, blames "groupthink" for the failure of academic economists to foresee the financial crisis.
"I fear that there will not be much change in basic paradigms," Mr. Shiller wrote in an email message. "The rational expectations models will be tweaked to account for the current crisis. The basic curriculum will not change."
"I hope I am wrong," he added.
I found this paragraph particularly hilarious, because of the hallucinatory book alluded to in passing:
John B. Taylor, an economist at Stanford and one of President George W. Bush's advisors, whose forthcoming book is titled Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis, said he was planning to update his introductory textbook, Principles of Macroeconomics, because of the crash. But while the revision will include information about the financial crisis, he said, explanations of fundamental principles won't change.
Because there was just soooo much government regulation when they repealed Glass-Steagall!
The next paragraph represents something of a return to reality--a stodgy defense of stodginess. At least it knows what it is!
To Philip J. Reny, chairman of the economics department at the University of Chicago - Milton Friedman's intellectual home and free market headquarters - such caution is a good thing. "Academia typically moves slowly and carefully and thoughtfully," he said. "There is a lot of speculation in the press as to why the financial system collapsed," he added, but a lot of "work needs to be done to figure out what really happened, which dominoes are in front and caused others to fall."
Of course, he's absolutely right that a lot of work needs to be done. But the basic logic should be blindingly clear, and it has to do with the repeated historical tendency to swing between "normal" health growth and speculative crisis. (Sorry about that, Taylor, old boy.) On this point, the theorist that everyone points to is Hyman Minsky, who soon makes an appearance (albeit all too brief) in Cohen's piece:
To Mr. Galbraith and L. Randall Wray, an economist at Missouri, the two thinkers whose work is most relevant today are John Maynard Keynes, who argued that the government should spend its way out of the Great Depression, and Hyman Minsky, who maintained that financial institutions could prompt ruinous crashes by taking on too much risk. Neither, Mr. Galbraith said, is part of the core curriculum in most economics graduate programs.
When asked why graduate students don't study Keynes or Minksy, Mr. Reny replied that graduate students work on subjects - like real models of business cycles - that are at the frontier of the field; by contrast Keynes and Minsky are not on the frontier anymore.
Mr. Wray prefers to call such mathematical modeling "the frontier of nonsense."
Cohen's piece gets a bit fuzzy here, just where it needs to get sharp, so I'll offer my own cut to the chase: Economics as a field is not concerned with a scientific understanding of economic phenomena the way that, say, biology is concerned with a scientific understanding of biological phenomena. Rather, it's concerned with answering questions about economic phenomena. The same could be said about biology, too, of course. But biology benefits from the fact that it is overwhelmingly biologists themselves who set the question-asking agenda. With economics this is also the case--but only after the economists themselves have been pre-selected for their willingness to ask the "right" sorts of questions.
In a highly financialized economy, what could be more pertinent to understand than the risks of cyclical financial crises? Yet, Minsky, who studied them like no one else, is virtually ignored. Why? Because no one wanted to know about that. What they wanted to know was, "How can we make more money?" Which translated into "give us better models" based on ignoring systemic risks. This is what the economic elites wanted, and this is what they got. Call it "courtier economics", if you will.
(BTW, the Wikipedia entry on Minsky has an excellent brief overview of his Financial Instability Hypothesis and its application to the subprime mortgage crisis.)
Cohen ends her piece thus:
A real shift among economists will come only if there is a wholesale collapse, Mr. Wray and Mr. Card agreed. If unemployment is still high three years from now, then you might start to see a paradigm shift, Mr. Card said; economists will "have to say that the market isn't supposed to work this way." But if the economy bounces back in a year, then they will be able to dismiss the financial crash as an anomaly that is unimportant to the larger theory, he added.
A field shifts, Mr. Card and Mr. Wray said, not so much because the wise elders change their minds, (they are too invested in the way things are), but rather because a new generation of scholars comes along and pushes into new areas of research.
But this, I think, is too simplistic. This describes how normal scientific fields operate, based on internal dynamics. But economics is not a normal scientific field. It is the most directly implicated in serving elite needs, and thus, while what Cohen writes is true in some sense, it does not account for the severe constraints on just how much economics can change so long as power relationships in society remain more or less as they are.
Externalizing Economic Non-Sense
In contrast to Cohen's piece, which cocerns itself with the internals of the academic discipline, "Neocon Indoctrination - The Mankiw Way", Gilles Raveaud looks in a different direction--at how economic orthodoxy is spread more generally via a textbook most of whose readers never go on to take another course in economics. Of course the book has tremendous influence on incoming economics students who read it in their introductory courses. But its influence is arguably even more significant for those who never read another book on the subject.
What is most worrisome is that Mankiw's text presents economics as a unified discipline, one entirely committed to the neoliberal agenda. Mankiw believes that markets are the solution to everything - and he would like students to believe likewise. According to Mankiw, if a problem persists, it can only be for one of two reasons: the market is imperfect, or it is nonexistent. No other explanation for persisting economic or social problems is permitted.
He then goes on to discuss two examples: Unemployment as an example of market imperfection, and pollution as an example of market non-existence. The discussion of how Mankiw's explanations fail is not as crisp as it could be, but Raveaud does show that his simplified views gloss over more than they reveal. He grows stronger as he moves beyond pollution to the more general issue of environmental limits:
In fact Mankiw even insists in his textbook that we are not running out of resources because if that were the case, the price of oil would be much higher than it is now. Climate change is a critical issue, caused by ever-growing economic activity - but it doesn't even merit an index entry in Mankiw's book.
Incredibly, in Mankiw's chapter on growth, the only two factors of production cited are capital and labor. Apparently workers and firms somehow do not use land or electricity, gas, oil and coal. They produce with their hands and their brains, and work on machines that run day and night on ... what, exactly? Nobody knows. But you can be sure that it's not energy. As natural resources and energy are absent in Mankiw's model, they cannot become a problem - for economists, that is.
This is where Raveaud really hits his stride, and he gets even stronger when he focus on the triviality of examples that Mankiw uses, which has the effect of removing moral considerations from having any place in economics:
According to Mankiw, since markets are a good way to organize economic activity, supply and demand is just about all you need to know in economics....
But Mankiw's text is all about trivial choices, such as how many slices of pizza you are willing to give up to buy yourself an extra can of Coke. This method is extremely effective in hiding the magnitude of what is at stake. The reactions of the students would be different if the textbook addressed how much health care people have to give up to be able to buy basic food. Also, the very notion of "need" is absent from Mankiw's text. One may wonder how students would feel if we discussed the fact that a millionaire's desire for a yacht will always be met because it is backed by money, while a poor family's need for a roof won't. But such discussions are avoided.
By repeating his trivial examples, Mankiw accustoms the students to the idea of individual choices and preferences. The words "poor" and "rich" are rarely used. But more surprisingly, there is also no mention of the power of corporations to shape tastes. This is because Mankiw's world is a world of small firms operating in perfectly competitive markets. "Corporate America" is not part of the picture. No McDonald's, no Nike, no Microsoft.
Above all, I think this critique is important because I think it provides an insight into part of why Obama seems to occupy a parallel universe which is so impervious to the concerns that bloggers write about constantly, and that seem to threaten a crucial loss of base support in the mid-terms. This comes into sharp focus toward the end of the piece:
Mankiw knows that the vast majority of his students are not going to become economics majors. He is not interested in training economists - his textbook is too simplistic to prepare a student for advanced study in economics. As he explicitly tells his teaching fellows, Mankiw's interest is in shaping the minds of thousands of citizens and future leaders around the world. Mankiw's world is one where "there is no such thing as a society." Rather, the world is made up of isolated individuals. But it is also a world where fairness prevails: everybody gets what they deserve. It is a world where - thanks to the magic of markets, private enterprise and property rights - standards of living rise constantly. It's a beautiful world ... if only it existed.
And that's also the world that Obama seems to think he lives in, along with the vast majority of those that he surrounds himself with.
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