Many middle ways – introduction to a new series

keynesI have long been attracted to analyses in economics and politics which focus on the potential of a ‘middle way’ between free markets and state central planning in order to marry prosperity, social justice and liberty. John Maynard Keynes was a champion of such an approach to economic management. Although I have explored Marxism and find Marxist analyses of capitalism interesting and insightful, I have never been drawn to full-blooded socialism or communism, at least in the form that they have taken in societies across the world to date. At the same time, a fully free market system, if such a thing were possible, even under capitalism (and I am not convinced that it is) seems to me to be just as objectionable and if it were to exist, it would in my view do a poor job of attaining and sustaining the above three outcomes. In between the two, there is space for many varieties of socioeconomic system, probably capitalist, at least until it evolves into something better, which certainly need not be socialism. Continue reading

Conflict, state-building and development – some thoughts in the wake of the Afghanistan debacle

DSC00236This is not a post about Afghanistan per se, as I don’t know enough about its history, economy and politics, but the ideas discussed below are relevant to countries emerging from the experience of conflict, whether it be civil war or that between nation states. The Afghanistan situation prompted me to do some basic research into the political economy of civil war, post-conflict reconstruction and the conditions which are needed in a country in order to establish a more permanent peace, where possible.

Conflict as stupid?

To start with, the emergence of capitalism, as part of the pathway towards economic and social development, has historically been associated with violence. Christopher Cramer’s Civil War is not a Stupid Thing argues that capitalism has historically been founded on violent conflict. What Marx called primitive accumulation is the often brutal and ugly redistribution of assets which gives rise to emerging and changing classes and class relations in a country, and potentially lays the foundations for capitalist development and sustained economic growth. It inevitably creates winners and losers and is thus potentially associated with violent conflict, struggle and suffering. Continue reading

Psychology, economic man and competing schools of thought

rawOne of my favourite non-economics books of all is Prometheus Rising by the late renegade social philosopher Robert Anton Wilson. Its somewhat alternative and enormously eclectic approach to the workings and evolution of the human mind may not appeal to some, and neither may its author, but for me it contains a wealth of stimulating ideas, spanning all sorts of divides. It even contains exercises at the end of each chapter which are designed to push the mind of the reader in new directions. Overall, it is Wilson’s attempt to apply a what he calls a model of brain circuits to the condition of the individual, society and the human race, through its past, present and potential future. His first four circuits provide a compelling description of the range of much of human behaviour.

I have been meaning to try to apply aspects of Wilson’s model to economics for some time, so here goes. Many heterodox economists and other social theorists have long been critical of the focus on the individual and the neglect of the social contained in neoclassical and mainstream economics. However much heterodox economics does not attempt to formulate a new and improved model of the individual in society. It merely explores the importance of the social itself and how economic problems which have a social origin can be remedied by intervention, often by the state. Continue reading

Economics of Good and Evil: beautiful economics?

EconomicsofGoodandEvil“[I]n times when the economy is dazzling and growing, there seems to be no reason to doubt the abilities of economic science. But is it to the doctor’s credit that the child grows? He can certainly contribute with better or worse advice, but if the child is essentially healthy, you cannot tell the difference between a good and bad doctor. A good doctor, or economist, can be much better identified in the times of sickness, crisis.

From time to time it is argued (usually by economists) that economics is the queen of the social sciences. We were so fascinated with the growth of the global economy in recent years that we completely forgot how clueless economics is in times of crisis. The models stop working. They seem to work well when they work and not when they don’t…So what now?

It would appear in times of crisis, when changes are too sharp and too frequent, that standard mathematical models cannot be used. In their construction we must rely on sufficiently long time order; in the meantime, however, we must also turn to history and intuition for inspiration. How often has a person heard this sentence from analysts: “The model tells us this, but we think…” The model must be complemented with intuition. And this must be admitted.

Although thinking like an economist is a practical mental exercise, it is similar to playing chess. Now, chess is quite useful – it helps us to think strategically, but it would be preposterous to argue that the world is a chessboard and that moves on it correspond to the real movements of armies, that real horses move in the L-shaped motion. In addition, if a person gets into his or her role as an economist too much, her or she stops considering whether life can be played on different strings than the selfish-economic ones. Schumpeter also had something similar in mind: “General history (social, political, and cultural), economic history, and more particularly industrial history are not only indispensable but really the most important contributors to the understanding of our problem. All other materials and methods, statistical and theoretical, are only subservient to them and worse than useless without them.”

There are pieces of knowledge that an economist can learn from abstract models (just as in the case of chess), and there are situations when abstraction is the only thing we have. What’s more, at the moment when you have learned a given method of consideration, it is hard to get rid of the mental image in your head. Whenever you are confronted with the given problem, the image automatically comes back to mind. The model is sometimes useful but sometimes misleading; in both cases we must be aware that it does not describe reality but only its rational abstraction. It is therefore a fiction; hopefully a useful one, but still only a fiction. An economist must be aware of these fictions. Let the economist use his models, but he must, as Wittgenstein said, climb above them. He must look around, must not completely believe them (they are parables!), and must not completely devote himself to them. He must know where they are and are not useful. Otherwise he may cause more harm than good.”

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.317-8.

Economics of Good and Evil: models and the world they interpret

EconomicsofGoodandEvil“The introduction of certain abstractions (such as gravitation), that become generally accepted changes our world itself as well. A theory, if it is believed, will inevitably lead us to view the world through its own prism. The philosopher of mathematics Kolman comes to the conclusion that “as rational, self-confident beings we are not only products, but also co-creators of reality. Scientists, including mathematicians, systematically forget about the qualifications in their arguments.” Scientific theories, models of reality, become an indivisible part of reality themselves. Each theory is an ideology (I use the term ideology here without the negative connotation). Or, in other words, each interpretative framework forms an ideology (which, naturally, does not have to be political at all). And most successful ideologies are those that we take so naturally, so ideologically, that we do not even notice, let alone question, them. In the battleground of ideas, the home run of any ideology or idea is to become so deep-rooted as to seem natural and “always there.”

In this sense we are the perfectors of creation, similar to what is indicated in the book of Genesis, when Adam is given the task of naming the animals and, by doing so, arranges the world into orderly categories. We are not even able to perceive the world without an interpretational framework. So we can use Wittgenstein’s simile: even the seeing eye remains part of the world, and in our meaning that eye is the interpretational frame through which we see the world. As Kolman put it: “It can be seen precisely in mathematics that there exists, neither in the world nor in language, any kind of pre-provided, immediate, or natural facts if we do not first set a theory upon which we can discover, which means that everything may also be otherwise.” Facts and “objective reality” are fuzzy, that is, they offer themselves to various interpretations. And so it happens that economists using the same data sets, the same statistics, derive very different conclusions.

In science, we use the existing framework – with an awareness of its insufficiencies – until we manage to coherently construct a new framework, to create a “new world” (its new interpretation), so to speak. For example, over several centuries, the world “behaved” according to gravitation. This abstraction (gravitation) found neither competition nor dispute because (on a certain level of necessary simplification) it functioned sufficiently. We have asked the reality why items fall to the ground, and we have answered ourselves with the term “gravitation.” Our answer was (for a certain time) sufficient. In Hegel’s words: “If one looks at the world rationally the world looks rationally back.”

Similar laws are valid for economics. Assumptions (here we must point out that an overwhelming majority of our initial assumptions will remain unstated) are de facto only means of thinking about or observing the world. Without observers, in and of itself, the world is chaotic, until our ability for model thinking, or models within us (not in the world), enable us to view the world reasonably. The construct (mathematical equation, principle, law) according to which the world “behaves” does not rest in the world itself, but rather within us. It is our thinking, our imagination, that organizes the world into theories and models. Every great model that places as its ambition to become a worldview (to explain how and why the world functions as it does) always remains only a construct, a point of view, a standpoint, an opinion. Every theory therefore is a more or less useful fiction, or, if you prefer, a story, a myth. A myth we know not to be true (our assumptions are not realistic), but we still believe the theory to say something true about us and the world.

Models are usually an image of something (a model of a castle, a computer model of water simulation, the big bang model of the universe). Or are they models in the sense of models for statues or fashion? In other words, which models do we use to model reality? Do we shape the economy according to our models or do we create our models according to reality? The difference here is clear: the real castle, real water, and/or the entire physical world is not influenced by the models of physical science. However, the real economy is influenced by economic science. For example, economic theory influences the expectations of individuals as well as their behavior. That is one more reason why the choice of economic theory matters.

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.300-2.

Economics of Good and Evil: a social, not a natural science

EconomicsofGoodandEvil“The nineteenth century was dominated by determinism, or the conviction that the development of the world is mechanically given by its current and previous states. For determinism, it is difficult to come to grips with randomness, chance, and it instead explains these phenomena by a lack of knowledge of the causes of these phenomena. Newtonian physics is a symbol of determinism. Although quantum physics markedly weakened it, determinism remains firmly anchored in economics. Expressions of the world as a collection of equations, with initial conditions and the faith that if we avoid external shocks we can describe the development of the world infinitely are typical of a large part of modern economics.

Human behavior, of course, is often badly predictable. Determinism then belongs in economics on only a limited basis, and that is precisely one of the fundamental differences between economics and Newtonian physics. Unfortunately, the expectations of the lay public are different. With their thick books, equations, derivations, Nobel prizes, and degrees from prestigious universities, economists must, so the belief goes, be able to say when an economic crisis will end and which means – which medicines – to use so that it ends as quickly as possible. But that is a big mistake. Economics is still a social science, not, as it sometimes pretends to be, a natural science. Just because we use a lot of mathematics doesn’t mean we are an exact science (numerologists use a lot of mathematics, too).

Keynes predicted: “The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied and reoccupied by our real problems – the problems of life and of human relations, of creation and behaviour and religion.” This day seems to be quite far off still, despite the unbelievable growth in wealth. For all that, mathematics is not to blame. But I am persuaded that economics which – due to the strong focus on mathematics only – often neglects the wider social science approach to society (society is not just the economy), and pretends we understand the economy and the whole social context, and even can predict the future…this concept is to be blamed.”

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.296.

Economics of Good and Evil: on econometrics

EconomicsofGoodandEvil“Many economists (and a large part of the lay public) today narrow economics to econometrics. But it appears that economic (and other) model prophecies work “well” when reality (randomly or coincidently?) behaves according to models (therefore if they do not vary too much from the previous observations the models are based on).

The exaggerated application of mathematics paradoxically has, at least in the case of econometrics, a tendency to obscure reality. As Wassily Leontief, winner of the Nobel Prize in Economics, writes: “Unfortunately, (…) uncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs (…) In no other field of empirical inquiry [than economics] has so massive and sophisticated a statistical machinery been used with such indifferent results. (…) Most of these [models] are relegated to the stockpile without any practical application.” Some time-series econometrics even, according to the prominent Czech-American economist Jan Kmenta, “pushes econometrics away from economics. For instance, it is hard to believe that all that a person trained in economics can say about the generation of GDP is that it is determined by a time trend and a stochastic disturbance.

David Hendry wittily criticizes this approach in his analysis of the influence of rainstorms on inflation in Great Britain. The influence came out as very significant. The result was even more significant than attempts to explain inflation through the amount of money in the economy. Humorous, isn’t it? Unfortunately, with econometric analysis we frequently get the same valueless results, but for less obvious absurdities; and how can we then see that they are intuitively wrong if our intuition is silent (or if we have asked the wrong question)? For this reason, mathematics is only an important subtool for economics scientists; an economist must be equipped with wider social and historic knowledge. Only then can an economist distinguish between such absurdities and “more believable” causalities. It is the human in us that distinguishes us from computers.

However, perhaps the sharpest criticism of econometrics came in 1980 by Jeffrey Sachs, Christopher Sims, and Stephen Goldfeld, who declared that “One might go further and say that among academic macro-economists the conventional methods (of macro-econometric modeling) have not just been attacked, they have been discredited. The practice of using econometric models to project the likely outcome of different policy choices…is widely believed to be unjustifiable or even the primary source of recent problems.”

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.294-5.

Economics of Good and Evil: seductive mathematics

EconomicsofGoodandEvil“A fascination with the elegance of mathematics has found a safe haven in economics. Probably the greatest disadvantage or weakness of mathematics is precisely its attractiveness, which seduces us into using it too often – because it seems to be so elegant, robust, precise, and objective.

On the other hand, the elegance of mathematics is neither that surprising nor that miraculous, if we are aware that mathematics is a purely human creation, and that in reality it does not exist. It has no connection to the outside world – that connection must be added externally, for example through physics or civil engineering. Mathematics is a purely abstract creation of our minds – nothing more, nothing less. It is so elegant and perfect precisely because it was engineered to be so; mathematics is de facto not real.

Mathematics is pure tautology. In this regard, it is but an abstract construct, a language, a system of (useful) formulas that mutually refer to each other. This is why Ludwig Wittgenstein, one of the greatest logicians of the previous century, says that “[t]he propositions of logic are tautologies,” and that “[l]ogic is transcendental…[m]athematics is a logical method…[i]ndeed in real life a mathematical proposition is never what we want”. Yes, mathematics remains only a method, and pure mathematics is without content. Bertrand Russell, one of the best-known thinkers in the area of logic, mathematics, and philosophy, described it best: “Thus mathematics may be defined as the subject in which we never know what we are talking about, nor whether what we are saying is true.” It cannot be denied that economists have found a number of practical applications for abstract mathematical languages; but a good servant can also be a bad master. Wittgenstein’s comment unfortunately also holds true here: “The limits of my language mean the limits of my world.” If mathematics has become the language of economists, we must also count on the results: that by doing so we have duly limited our world…

If mathematics is not based on reality, it has a tendency to lead us astray. We have to be careful so that abstraction is confronted with reality. In theoretical economics, this is often impossible. In her book The Secret Sins of Economics, Deirdre McCloskey points out the fact that a large part of contemporary theoretical economics is nothing more than an intellectual game with assumptions. “A typical statement in economic ‘theory’ is, ‘if information is symmetric, an equilibrium of the game exists’ or, ‘if people are rational in their expectations in the following sense, buzz, buzz, buzz, then there exists an equilibrium of the economy in which government policy is useless’…Okay now imagine an alternative set of assumptions…There’s nothing deep or surprising about this: changing your assumptions changes your conclusions…And on and on and on and on, until the economists get tired and go home…I have expressed admiration for pure mathematics and for Mozart’s concertos. Fine. But economics is supposed to be an inquiry into the world, not pure thinking.””

Tomas Sedlacek (2013), Economics of Good and Evil, Oxford University Press, p.293-4.

Exploring the economics of good and evil

Economics-Good-EvilThis post is inspired by Tomas Sedlacek’s excellent book Economics of Good and Evil. I have already posted several, for me at least, thought-provoking extracts from the book, and there are more to come. Here I want to discuss some of the issues which arise from considering how economics is impossible to separate from ethics, though many of its modern practitioners would think otherwise. Even if they do acknowledge this truth, the ethics of modern economics are generally unspoken or presupposed. They exist, but are not often considered open to debate, except by those inclined to more heterodox perspectives.

The goods

What is counted as good in modern economics? To start with, most policymakers prioritise GDP growth, or perhaps growth in productivity, given their role in driving material prosperity and creating jobs. Increasing quantities of goods and services produced by a growing economy are part of the result. But it is surely rather short-sighted to assign ‘good’ only to the material aspects of production. Some ecological economists argue that the priority given to continuous growth in economic output are so damaging to planetary ecosystems and resources that we should aim for something like zero growth, or even ‘degrowth’. From their perspective, continued increases in GDP are ultimately unsustainable, and a radically different kind of economy is the required response. Space should be made for the poorest countries to grow, but the richest should radically change tack. Continue reading