Saturday, 21 January 2017

Putting the Cart Before the Horse

This week, like most weeks during semester time, we had a guest lecture with GURWES (Glasgow University Real World Economics Society), a heterodox students’ society focusing on academic pluralism of economic ideas. On campus, we’re known as the crazy-leftie economics society, and not without reason; apart from me, most other students involved with GURWES take various degrees of far-left positions, especially on economic issues. As I’ve discussed many times before (here and here) this is one of the major problems with the Rethinking Economics movement in general: pluralism is important, but only one-sided pluralism and, you know, how can those conservatives even live with themselves?

Anyway, for this week’s lecture we had the honour of hosting Dr. George Cooper, a fund manager-turned-economics-critic whose two popular anti-econ books (Money, Blood and Revolution and Fixing Economics) present a broad discussion of economic schools of thought and an attempt of unifying them under a common framework. The emphasis on various schools of thought was very welcome indeed, but his further discussion was much lacking. Friends of mine have objected to many points that he made, ranging from his use of Cromwell, ignoring uncertainty in the evolutionary arguments, historically misplacing democracy, and more, but I wanted to discuss the talk based on my own initial reactions. Let’s start from the beginning, and let’s also ignore the low-hanging fruits that “Scandinavian taxation got it right” and “there are no successful low-tax countries in the world”.

When I walked into the lecture a few minutes late (so I may have missed some crucial information here) I heard some lazy ranting that we stuff economists into central banks to stabilise the economy, but those economists are trained in models and perspectives that don’t include central banks, so how could they ever be successful at their job? That’s funny, I thought, considering that Diamond & Dybvig's model is one of the most cited and well-known articles in all of economics, and the discussion of central banks providing lender-of-last-resort functions is prevalent in writings ranging from Walter Bagehot to Keynes, Milton Friedman and Ben Bernanke. Not to mention that the correct answer to most questions in the IS/LM model (a model every second-year macro student has had nightmares over) is that the central bank contracts or stimulates the economy via the use of its interest rate. Claiming that economists stuffed into central banks never encountered central banks in their models or education is not only wrong, it’s irrelevant; as Bernanke and Mankiw and Romer and many others have emphasised, policy-makers and central bankers act much more pragmatically trying to solve whatever problem is in front of them rather than stick to academic models, which means that deep familiarity with such models are seldom even required.

He went on with a mind-blowingly boring and superficial attack on what he calls ‘neoclassical’ economics (he really means the NNS merger of New-Keynesians and New-Classicals that has dominated the economics education for the last decades, which people mistakenly refer to as ‘neoclassical’, rather than the actual neoclassical writings of Marshall, Fisher, Knight and Pareto; but everyone makes this silly mistake, so we won’t judge him too harshly). In ‘neoclassical’ economics, he argues, all individuals form preferences independently of others, and the only thing those individuals want is to get as rich as possible. Such statements make for nice one-liners in the era of clickbaits, but as for accuracy it won't hold. Nobody ever argued this; modern-day economics tend to model individuals’ preferences through a utility function that they maximise, but essentially anything can go into this utility function, including social expectations and influences from other people, various degrees of desire to get rich, play with one’s children or work in a soup kitchen.

The centrepiece of Coopers talk was a very interesting discussion based on Thomas Kuhn and paradigmatic shifts in various strands of science; Copernicus, Darwin, Continental Drift in geology etc. One of Kuhn’s less-appreciated points is that antagonistic schools of thought can't help a divided scientific community. We’ve had schools of thought in economics for hundreds of years, Cooper emphasised, before concluding  somewhat controversially in front of an audience that allegedly cares for pluralism  that diversity of economic ideas is not going to solve the scientific crisis in economics: “Neither logic nor data is gonna help us”. Instead, what we need is to find a new synthesis, like Copernicus and Darwin and others have done before us, that integrates what we know into a coherent whole; science is a narrative, and sometimes science can get stuck with the wrong stories for centuries. All we need to do in economics, Cooper said, is to find a narrative that works, create a synthesis between Karl Marx and Adam Smith. He put up a chart (that I currently can't find, Figure 11 of his Fixing Economics book) of economics schools along a two-dimensional axis: stability in the system, and ideal size of government. Needless to say, this description was an even worse strawmanning of various schools of thought than his initial attack on NNS; Adam Smith and Karl Marx are not two extremes on a scale, they were both classical economists and agreed on most things; neoclassical cannot be lumped together with classical, their work being entirely different (see Marginal Revolution); Marxian economists are not the opposite of classical economics, in fact many of their most prominent contributors see Marxian econ as a natural continuation of classical economics; and his description of Austrian economics could be improved by twenty seconds on google. 

He then moved on to the crown-jewel of bizarre conclusions: progressive taxation created the modern world. He pulled up the well-known hockey-stick chart over human history, illustrating the absolutely incredible enrichment we’ve seen since ~1750, and the comparatively stagnant societies we saw before that. As a raison d'etre he posited that neoclassical economics predicts that growth is a constant, never-ending feature of human kind (wrong, see the huge discussions regarding economic institutions: North & Weingast 1989, Acemoglu & Robinson 2013, McCloskey 2010 etc), but history requires us to explain why pre-1750 was conformingly poor, and post-1750 saw continuous upward-trending growth. He showed a pyramid with the rich and powerful on-top and poor peasants at the bottom and started imagining flows of income, trade, taxation and spending moving between these strata of society. When democratic demands for larger states came into being, Cooper argues, they begun taxing the richest to fund programs for the poorest, which meant that in order to remain in your social place (which Cooper, along the lines of Veblen believes we all strive towards) you had to work harder, treading more water just to stay afloat. When everyone did so, entire societies grew wealthy very quickly. Hurray, big government and progressive taxation created our modern wealth.
  • Problem 1: he misplaces big government by some 200 years; increasing taxes on the rich and large tax burdens on everyone beginning in the first half of the 20th century simply cannot have created growth in the mid-18th century (unless Cooper knows of some secret time-travel techniques...) 
  • Problem 2: governments and rulers throughout history have been very fond of alternating the tax burden between the peasants and the rich, neither of which caused an industrial revolution and great enrichment at those points in time. 
  • Problem 3: As a case in point, during various times in the history of the Roman empire, a large share of its population was supported by the state, funded by general taxation on traders and the rich, but by modern standards they were still dirt-poor; no Industrial Revolution there. 

If anything, Cooper’s lecture illustrates the value of history as well as economics. If you had no prior knowledge of those disciplines, his story sounds somewhat plausible; we need large redistributive states, we need flows of income and taxations and redistributions up and down the pyramid in order not to stagnate, and in order for growth to occur. Without knowledge of history or (proper) economics, almost anything can sound reasonable, which is why those fields are so important. Comparative advantage has been around for centuries, but we still believe trade tariffs are beneficial (and even elect presidents on such platforms...). 

As long as most voters (and popular economics-writers...?) remain ignorant of fundamental economics, I suppose that's inevitable. 

No comments:

Post a Comment