One common caricature of politics is that the ideological right attracts a homogenous cadre of serious-yet-uncaring bean counters, while the left attracts a rag-tag mob of caring, sharing mush-heads.
Stated this way, the caricature is obviously silly. But many progressives do not help their own credibility when they avoid talking about economics, thus lending credence to the false notion that all economists support the right.
While there is a pretty strong consensus in favour of free trade among academic economists, there are in fact sharp divisions within the profession on all other important matters of economic policy.
Yet the false perception of a right-leaning consensus endures, for two reasons: selective reporting of economists’ findings by some entrepreneurial commentators; and a preference among many progressives to talk around rather than about economic policy.
This particular think-site, of course, suffers from no such economic shyness, and nor do one or two of the authors at The Standard. But the strong economic analyses on these websites are sadly not reflected around much of the rest of the progressive movement.
If folk on the left are to challenge the caricature that they are economic illiterates swimming against the tide, we need – all of us – to confront economic issues much more directly.
Helpfully, four of the world’s most prominent economists have recently suggested progressive solutions to the world’s largest economic problems. That should help us to stop being coy.
Nobel laureates Joseph Stiglitz and Amartya Sen recently spearheaded a French economic commission that made a remarkable recommendation. After decades of measuring human progress using a purely financial measure (GDP), Stiglitz and Sen suggested that we instead measure human progress more broadly.
This recommendation draws on a wider “happiness economics” research agenda, which holds that human action is successful only in as much as it makes humans feel better about their lives. This is actually a pretty standard economic idea – the idea of utility. All people are doing with happiness economics (or, if you prefer, with Genuine Progress Indicators) is measuring utility better. Any attempt to measure the success of an economy using only financial measures like GDP misses this wider point.
The heroic assumption that more money necessarily makes people happier has been shown untrue in a large number of circumstances. For example, the near doubling of American GDP since 1950 has had no impact at all on their collective happiness. And in a recent ranking of “happy life years,” the top five nations were Costa Rica, Iceland, Denmark, Switzerland, and Canada – none of which crack the top five in terms of material wealth.
The right of course, has mocked happiness economics. A mere poll of feelings, they argued, was an impractical and fanciful way to judge progress (although that never stopped them when it came to measuring “business confidence”). Despite this shallow critique, Genuine Progress Indicators are catching on, and progressives everywhere should be singing their virtues.
Paul Krugman, another recent Nobel laureate, recently showed how the right’s belief in the “efficient markets hypothesis” lead them to completely misdiagnose the recent financial crisis. The efficient markets hypothesis says that the price of any asset is an accurate reflection of all available information about it. But it has no way of explaining the panic and implosion that engulfed major sectors of the American markets in 2008. The journalist Michael Lewis has made similar observations.
Any economic theory that misses the big real-world events, needless to say, is of only dubious usefulness. Social scientific theories are only as good as their empirical validity.
One especially welcome innovation in the area of explaining panic among supposedly rational economic agents is to juxtapose traditional economic theory with recent practical work on human behavior. Whereas traditional economists had tended to just assume that people are individually economically rational, behavioural economists have gone and tested those propositions against real world experience. And when we look in the real world, non-rational behaviour is surprisingly easy to find.
Jeffrey Sachs, a Full Professor of economics at Harvard at the age of 29, will likely win the Nobel Peace Prize for development work in Africa. A former darling of the right for his developmental prescription of “shock therapy” for third-world governments, Sachs has also recently “gone mushy.” He has embraced an activist role for both national governments and the UN, and has also explicitly rejected the claims from the right that expansive Scandinavian-style welfare systems are a drain on the economy.
These four stand at the pinnacle of the global economics profession. They all propose progressive policies and oppose neoclassical economic orthodoxy. Their stances show that economics is no guaranteed friend of the right. Progressives need to seize on these and other developments within economics, including the influential book The Spirit Level, to help us think about policy and to better make our case to the New Zealand people.
Links:
- New York Times article on “The Rise and Fall of the GDP” including discussion of the Stiglitz / Sen commission
- The Stiglitz / Sen commission itself
- Happiness economics
- Genuine Progress Indicator
- Happy Life Year Rankings (2009)
- Paul Krugman’s “How Did Economists Get It So Wrong” (New York Times magazine)
- Michael Lewis’ “Panic!”
- Behavioural Economics
- Jeffrey Sachs’ “Common Wealth”
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A native Wellingtonian, Rob Salmond now lives in the US. He is Assistant Professor of political science at the University of Michigan, and is also currently a Visiting Scholar in the department of political science at Stanford University. Rob’s academic areas of interest include legislative institutions, political media, and political economy, all with a cross-national focus.
Tags: Amartya Sen, economic theory, happiness, Jeffrey Sachs, Joseph Stiglitz, Paul Krugman
Great post Rob – you hit it right on the money.
Sen’s been one of my favourite economists for years (I stumbled across him during my honours year).
What I really need to crack is a mechanism to find the time to read all the fabulous stuff out there. I follow Krugman, but Stiglitz and Sachs are (shamefully) being negleted by me at the moment.
Clearly I must try harder.
Thanks for this thought-provoking post, Rob.
Some random comments:
It’s interesting that you picked ‘free trade’ as something that economists agree is an unqualified good. Two weeks ago I watched a video by Eric Maskin of Princeton Institute for Advanced Studies, in which he showed how under a simple extension of Ricardo’s model, making it more realistic, free trade can result in an increase in inequality both within and between countries–an increase which was observed under NAFTA, and until Maskin’s study, ignored. Maskin’s model doesn’t require increasing returns to scale; Krugman’s earlier work on economic geography, which is now on the way to becoming academic orthodoxy as the core-periphery model, did make use of increasing returns to scale to show a similar result.
So, even the benefits of free trade are debated–among academic economists. In the body of the profession, things are grimmer, because more unified.
Economics seems to be a schizoid discipline. The stuff that is taught at undergraduate level is subliminally freighted with right-wing views. Market models are presented without proper treatment of market failures–market power, agency difficulties like moral hazard, information asymmetry, externalities, bounded rationality, the impossibility of equilibrium, etc, etc, etc. Undergraduate texts focus almost exclusively on efficiency, but gloss over the fact that imperfect markets are inefficient both in theory and in practice. They treat growth and stability sketchily and social justice not at all. As a result, students who don’t go on to Ph.D.s, which is most of them, come away having been brainwashed into reflexively using the cartoonish free-market model, focusing entirely on efficiency, and ignoring social considerations. It is only at the higher levels that more realistic treatments are found.
So despite claims of being value-free and non-normative, economics as it is received by most practising economists is right-wing de facto.
Having received his indoctrination, the young economist finds work with a financial institution, where his colleagues validate and entrench his political and social opinions–prejudices, rather: unless he is caught before entering economics training, they are unlikely to have been rationally thought out. (The training of an economist omits history, human geography, and sociology–let alone philosophy of science–so he is sent out into the world without the tools to critically evaluate his own work, or his colleagues’.) The young economist then stops listening to anyone outside his peer group.
My point here is that to the majority of practising economists, those with a bare grasp of econometric tools, a firm conviction that the concept of utility is valid and useful, and not a clue about what inferences they can safely draw from their models–to these coarse economists, Stiglitz, Sen, Sachs, et al. are just as much outsiders as you and I are; and they will be heeded just as much, too. That is, not at all.
The Progressive case is easily made to the New Zealand people, but while governments continue to prefer policy advice from coarse economists over advice from other quarters, not a lot will change.
If the academic economists can be persuaded to toss out their Marshallian undergraduate textbooks and write new, more realistic texts, then there is hope for a gradual sea-change in a decade or two. Gintis is still something of a lone voice in this, though.
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From the foregoing you can see that I’m pessimistic about the idea of engaging with right-wingers on their own terms. (You know what they say about arguing with idiots.)
I prefer George Monbiot’s approach. He refuses to engage in economic debate about the costs of climate change mitigation. Human lives are at stake; it is a moral imperative to do what we can to save lives. Economic considerations are secondary. The same line can, and I think should, be taken with the ammunition from The Spirit Level.
I forgot to say–if you still want to have an economic debate with right-wingers, John Quiggin’s forthcoming book, Zombie Economics will, I hope, be a handy reference manual.
James – if you wish to sip from the fire-hose, here’s an economics and a progressive blog from the US of A: Naked Capitalism, Crooked Timber. But you probably know them already.
Thanks for the props James. The more we sip from this particular firehose, the better for our movement.
Greg I think you’re right about the undergraduate (and high school) presentations of economics. I guess that reinforces the point that, absent sea-change on the part of textbook writers and syllabus committees, it is important for progressives to present the other side of economists’ research in other environments.
I hadn’t heard about the Maskin study – I’ll have a look at some point soon. One question I have at the outset is whether there is a wealth / inequality tradeoff in his model. If there is, it could raise some questions the implications of the study. For some neolibs that tradeoff isn’t all that important. It is important to me, but I think there has to be some tipping point where we progressives would take the more wealth and pay some small inequality cost. In any case, that is an issue I’m sure Maskin will cover, so I’ll read with interest.
Greg,
Agreed on that. But maybe what you really wanted to say is that NZ economic policy has been run from the Treasury for 25 years and is probably the biggest barrier to meaningful reform there is
I am writing from the economic wasteland of western New York state (USA). I think your post terrific. . In addition to Sen, Stiglitz, and Krugman here are some other suggestions:
Roberto Unger – Free Trade ReExamined
Dani Rodrik. – One Economcis, Many Recipies
Thomas Schelling – Micromotives & Macrobehavior
Charles Lindblom – The Market System
Pranab Bardhan – Scarcity & Conflict
Partha Dasgupta – An Inquiry Into Wealth & Destitution
David Kreps – Game Theory & Economic Modeling
Debra Satz – Why Some Things Should Not Be For Sale
Cecile Fabre – Whose Body Is It Anyway
and a new introduction to economics for lefties by a former student of mine:
Joseph Heath – Economics Without Illusion
Joe’s whole point is that economics does not sustain right wing prescriptions and that lefties tend to suggest things that make no economic sense. He spends half the book on each message
On the larger theme of the political implications of economics: models are things we use to communicate with (Schelling) they do not necessarily determine what we say. As (typically) mathematical constructs they require interpretation (meaning each of a model’s constituent parts require a given the model itself requires it, and the enterprise as a whole requires it). David Kreps has a textbook (A Course In Microeconomic Theory) which is really terrific in posing quesitons about interpretation re: the basic neo-classical model. IN any case, if you look at economics as a tool, sometimes it will be useful sometimes it won’t. But the left (in the US at least) tends to want to condemn it wholesale – think of saying ‘hammers are ideological’ – instead of thinking that sometimes it is not useful or leads us in unacceptable directions.
Best,
Jim Johnson
Rob, good post. I don’t quite agree about the trade thing – my enduring memory from stage two trade policy was that the economic impact of trade is less important than the distributive impact. As a democratic socialist, I am interested in the distributive impact. If for minimal economic gain you get poor distributive outcomes, that isn’t an automatic yes.
On the broader point. Part of the issue is that many of the activists in left wing parties don’t care about economic policy. Yet there is a far deeper issue here. Economic life is a massively important underpinning of everything that social democracy wants to achieve. The constant diversion of focus into social liberal issues is fine, but not to the extent that it destroys our ability to build a left wing political-economy analysis and programme for change.
So the question: how can we who do have an understanding of economic policy debates and principles and the implications for our politics and our societies, make that more exciting – to the extent it’s the main focus of debate and campaigning energy inside our political movements?
Jordan,
“Part of the issue is that many of the activists in left wing parties don’t care about economic policy.”
Absolutely. I think this has been a major frustration for many reformers and progressive thinkers, who are not wedded to political party labels but want to build a more sustainable society. It has been very difficult to interest left leaning politicians in even the idea of economic reform never mind issues such as public credit, banking reform, basic income etc.
None of the goals of the left are achievable without a changing of the financial structure. I believe they have ignored these issues out of fear, fear of being made to look silly by the establishment. But this has simply allowed the embedded interests to dictate the way the show is run and remove any room for debate.
When the left really wake up to this and do their homework then they should find the answers they are looking for.
Thanks Jim for the references, especially to the book by your former student. It is now on my Amazon list.
Jordan: I think the broadish consensus regarding trade theory is that there are indeed distributional costs to be paid for the benefits of specialisation. But typically the costs are considered transitional while the gains are considered permanent. Government has tools other than protectionism that it can use to allay those transitional distributional costs, and that don’t require us all to forego the long-term benefits of specialisation and comparative advantage. Certainly I agree with the remainder of your points about progressive activists and economic foundations (and with raf’s points on those issues, too).
[...] good friend Rob Salmond has written an excellent post over at Policy Progress about the importance of the political left talking about economics. If folk on the left are to [...]
Rob, excellent post as others have noted. I share Greg’s respect for Quiggan, he’s a fantastically forensic economic commentator.
I also share your enthusiasm for behavioural economics and think it’s the ideal framework for the left to use to develop an alternative to the tired classical model. There’s been some good work done in Australia using this approach, including in my area of professional interest, vocational education. Leaving to one side the neuroscience, which is fascinating, what appeals most about the approach to me is the balance that it creates between governments guiding and designing markets and private citizens who messily operate within them.
Perhaps the way to progress the discussion, and improve economic literacy, is to review a particular area of policy? I’m sure David would pump for welfare, I’d suggest tertiary education since I agree with Grant Robertson’s comment this morning that tertiary education should be vital to NZ’s sustainable prosperity.
Don’t be too sure, Paul. I believe welfare is an important area of policy (and will take the opportunity to plug our sister-site welfarewatch.org.nz) and too dominated by rhetoric and prejudice rather than evidence and clear thinking (including economic thinking.
But if I was to choose one area to focus that would demonstrate the power and value of good (progressive) economic reasoning, I’d probably pick something much closer to the heart of economic theory. Maybe industrial policy, or taxation.
Thanks Rob,
Excellent post. I reckon I’d add Elinor Ostrom to Jim’s list above too (true she’s a political scientist but she did just win the Nobel Prize in Economics). Not necessarily leftwing per se, but her analysis of institutions and the governing of the commons certainly lends itself to left wing analysis.
Also, I’d definitely add to the list Herb Gintis and Sam Bowles – two American economists who’ve made the long journey from Marxism to behavioural economics and game theory but who, in doing so, haven’t foregone left wing ideals.
http://people.umass.edu/gintis/
http://tuvalu.santafe.edu/~bowles/
On trade: the consensus is there (except for Stiglitz, Rodrik and Krugman’s theoretical stuff), but it’s questionable whether it should be. Or, at least, whether it should be so categorical.
Relatively basic trade theory (such as the Stolper-Samuelson) suggests that while increased trade may make a nation as a whole better off certain sectors will quite likely become worse off in an absolute sense (so not just inequality). The standard reply to this is that winners from trade should compensate losers from trade through transfers. But do they? In NZ’s case when we lowered tariffs we also reduced transfers.
Also, so-called New Trade Theory (NTT) provides a theoretical case for infant industry protection. Once again, economists (including Krugman who was central in the development of NTT) tend to discount such theoretical implications, arguing that governments aren’t up to the task of ‘picking winners’. However, once again this isn’t unquestionably the case: Ha Joon Chang and others provide what looks to be evidence that, in practice, when done well, infant industry protection does work.
To be clear, none of this is evidence that increased international trade is a bad thing, or that countries should either de-link from the global economy or engage in protectionism. However, it does provide some evidence that the progressive instinct when it comes to trade isn’t completely unsupported by economic thought.
oh, one other thought while I’m in the moderation queue…
Paul Krugman’s ‘Chastening’ talk at LSE on Free trade is really, really well worth a listen:
http://richmedia.lse.ac.uk/publicLecturesAndEvents/20070614_1830_globilisationAndWelfare.mp3 [MP3]
Great post Rob, couldn’t agree more.
It seems to me that to be well armed for those future “discussions” with Treasury we need more progressives to read not just the sort of popular books discussed here, but also to have some familiarity with the technical tools of economics. This means knowing some equations and understanding some graphs, first year economics should be all that is necessary and there are lots of great texts these days.
Just to name one of those: if you’re concerned about the notorious political biases of Econ 1 texts, so is Paul Krugman, which is why he and his wife wrote a new one http://www.amazon.com/Economics-Paul-Krugman/dp/0716771586/ref=pd_sim_b_9. I’m going to be reading it. Whenever I find the time…
Oh and I’d like to second the Quiggin praise above, his academic work includes some very useful comments on New Zealand specifically, and his blog is pretty indispensible.