Economics still needs better critics

I just got back from the meeting of the Economic and Business History Society in Montreal, and I was going to blog about that, but then someone tweeted about this stupid essay at Evonomics. Eric Beinhocker writes about the problems with traditional economics and the benefits of the new economics. The primary problem with his essay is that his description of traditional economics is what would generally be referred to as bullshit.  He conveniently provides a table from his book, The Origin of Wealth, which I was fortunate enough to have never heard of before.

Pick any element you want. For instance the first one declares that traditional economics assumes that everyone has perfect information. Really? Even principles textbooks cover imperfect information and uncertainty. For Dynamics, he states that traditional economics assumes that the “The Economy automatically goes to equilibrium where social welfare is maximized.” Find me a principles textbook that doesn’t cover externalities, public goods, and monopoly. I like his description of the New Economics even better. “Economy is a highly dynamic system that can go far from equilibrium and become trapped in a suboptimal state.” It can become trapped in a state that is far from equilibrium? Does this guy not know what equilibrium means? Stability is the essential characteristic of equilibrium. In the absence of some sort of shock the situation won’t change. Later he refers to market failures, but he does so at the same time that he declares traditional economics assumes a natural tendency toward efficiency. Market failure is a situation in which the market equilibrium is inefficient. Moreover, equilibrium is a property of models, not reality. Reality is never stable. Equilibrium is nevertheless useful for helping us to consider the direction of change and possible unintended consequences.  In the case of innovation, what he ascribes to new economics is a feature of traditional economics and what he ascribes to traditional economics is not. Traditional economists have long studied the factors that are likely to encourage or impede innovation.

He describes one of the implications of new economic thinking for policy as follows:

Regulators take an action to address a perceived problem, that changes the perceptions and actions of market participants, which in turn creates a new set of problems triggering further regulator actions, and so on. Over time this infinite chase between fallible regulators and equally fallible market participants leaves a trail of rules, structures, and institutions that has a major effect on shaping the evolution of the economy.

Ironically, this is pretty much a description of my paper "LearningTo Tax: The Political Economy of the Opium Trade in Iran, 1921-1941," Journal of Economic History 61(March 2001):95-113. It is ironic because I regard myself as a pretty traditional economist. I see this paper, and most of my work on history and institutions, as building on traditional economics not refuting it.

I have taught pretty traditional principles of microeconomics for more than a quarter century, and I still believe that those simple models provide a great deal of value to students. 

I'll try to write about EBHS and Montreal later today.

Science Fiction and Economics

My friend John McAdams said that he was going to internet stalk me this week. This post is for him.

The Relationship Between Science Fiction and Economics

A List of the 50 Essential Science Fiction Books

Random Economic History Stuff

1. I will be in Montreal this week at the meeting of the Economic and Business History Society. Here is the program. I’ll be presenting a paper on “Trust Company Failures in New York State, 1875-1925.”

Abstract

Despite what appeared to be lax regulation and rapid growth, trust companies rarely failed. These few failures, however, provide a path to understanding the overall success of trust companies in New York in the late nineteenth and early twentieth centuries. Failures played a disproportionate role in shaping the rules and regulations that governed trust companies, and the resolution of each failure provided additional information about how the laws and regulations would be implemented. These failures shed light on issues of corporate governance and financial stability that are still relevant today.

2. This blog made the Intelligent Economist’s list of The Top 100 Economics Blogs of 2016.

Anton Howe’s Capitalism’s Cradle is another economic history focused blog on the list.

3. Pseudoerasmus' blog, which should also be on the list, has some new posts: Did Inequality Cause the First World War?; Inequality and the First Globalization, and Economic History Readings

4. By the way, for those of you who do not know, Pseudoerasmus is the name of a person who blogs and tweets, mostly about economic history and development. Most people seem to assume that that Pseudoerasmus is a pseudonym. Consequently, some people refer to him as an anonymous blogger.

He recently contributed to discussion about the history of capitalism at the Junto and published a long blogpost about the Lenin-Hobson theory of World War I as it appears in Branko Milanovic’s recent book.

Richard Drayton argued with Pseudoerasmus in the comments section over at the Junto. Drayton concluded his part of the exchange with the following:

I’m rather intrigued by a chap, and there’s too much chap coming out of your prose for me to go for gender neutral pronoun, who spends so much of his time writing aggressive anonymous critiques of — and these are only the ones I’ve noticed — David Armitage, Steve Pincus, Ed Baptist, Sven Beckert. These are, or have become, high profile figures, who have produced substantial original work which has been widely received and even often forcefully and critically responded to. Why not publish these pieces with your name behind it? It begins to look rather mean spirited, even envious, and as if you are afraid to defend your position in public, or afraid that somehow whoever you are would diminish the respect with which your opinions are received?

Reply

I, on the other hand, am intrigued by a chap who seems so much more concerned with who people are than with what they have to say. The last line is the most intriguing.  Are you “afraid that somehow whoever you are would diminish the respect with which your opinions are received?” What does that mean? Are we absolved from considering the logic and evidence that someone presents if they are not a high profile figure? Or, perhaps he just takes the same approach to argument  that people like Baptist and Cowie do. All you have to do is note that someone is an economist (or a sociologist in the case of John Clegg) before dismissing their argument.

Milanovic’s response to the blogpost by Pseudoerasmus challenging his interpretation of the cause of World War I was to retweet it.

New Institutional Economics and Economic History

The University of Wisconsin La Crosse has posted several videos of talks given at a conference there on New Institutional Economics and Economic History

JOHN NYE (GEORGE MASON UNIVERSITY) “HUMAN CAPITAL, BIOLOGY, AND INSTITUTIONS” COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

PHIL KEEFER (INTER-AMERICAN DEVELOPMENT BANK) “COME TOGETHER? ECONOMIC DEVELOPMENT AND THE CHALLENGE OF COLLECTIVE ACTION” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

GARY LIBECAP (UNIVERSITY OF CALIFORNIA-SANTA BARBARA) “THE ROLE OF INSTITUTIONS AND HISTORICAL ANALYSIS IN ADDRESSING CONTEMPORARY PROBLEMS” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

KEYNOTE ADDRESS: LEE ALSTON (UNIVERSITY OF INDIANA) “WHERE THE PATHS INTERSECT? ECONOMIC HISTORY AND THE NEW INSTITUTIONAL ECONOMICS" COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

The Ironic Origins of Libertarianism

From I Chose Liberty: Autobiographies of Contemporary Libertarians

“some liberty-loving soul had donated a copy of John Hospers’s Libertarianism: A Political Philosophy for Tomorrow (1971) to my local public library. While I doubt I would find Hospers’s book impressive today, at the time it was a thrilling read. I had never heard the “standard libertarian arguments” before. (Bryan Caplan)

 “When I was about thirteen, I decided I wanted to read all of the good books in the public library. …. At the public library I found Ayn Rand; my grandmother also recommended her to me. Capitalism: The Unknown Ideal had a big influence on me, as did Atlas Shrugged. Hayek and Rothbard followed shortly thereafter.” (Tyler Cowen)

“I had some unusual early influences. In the eighth grade I borrowed an H.L. Mencken book from the city library. I couldn’t understand why everybody didn’t think and write like he did. Also, I became enamored of the Barry Goldwater legend.” (Karen De Coster) 

“That experience led me to the public library and a host of books on economics, one of which was a book whose table of contents I could not understand and which had never before even been checked out: Mises’s Human Action.” (Robert Formaini) 

capitalism, institutions, and history

Related to yesterday’s post, here are a couple of reviews of Geoff Hodgson’s Conceptualizing Capitalism by Christian Barrere and Mehmet Kerem Coban.

Speaking of Geoff Hodgson (editor of the Journal of Institutional Economics), I just got an email from Cambridge University Press letting me know that BRADLEY A. HANSEN and MARY ESCHELBACH HANSEN (2016). The historian's craft and economics. Journal of Institutional Economics, 12, pp 349-370 was just published.

Is capitalism a useful concept?

Thanks to Tom Cutterham at the Junto for blogging about the Capitalism and Slavery session at the meeting of the Organization of American Historians.

I have been very critical of the “New History of Capitalism” NHC, which is the label that has been applied to much of the recent work in this area. Mostly, I have criticized it because it is bad history. The worst problems are that they tend to provide misleading historiography and simply make things up. The description of Beckert’s talk doesn’t do anything to alleviate these concerns.

It is particularly ironic that Beckert should point to “an active act of forgetting” since that is largely what he has been promoting. Rather than developing a truly novel argument, Beckert has simply tried to wipe out the work of earlier historians. The role of force has been prominent in the work of numerous scholars from Carlo Cippola’s Guns, Sails and Empire, to O’Rourke and Findlay’s Power and Plenty, and even Jared Diamond’s Guns, Germs and Steel. The use of force to maximize profits is the essence of Fogel’s analysis of slavery, which he repeatedly referred to as a dynamic capitalist system.  It is not just traditional economic historians that actively forgotten, John Clegg and  Peter James Hudson show how Beckert and Baptist also disregard the work of radical scholars.

The work of Edward Baptist is built on an even more misleading myth, the myth that he is telling the half that has never been told. Rather than responding to criticisms of his argument and evidence claims that people who disagree with him refuse to accept the legitimacy of slave testimony. Ed Baptist speaks for the enslaved, like the Lorax speaks for the trees. If you disagree with him you are denying the voice of enslaved people. The fundamental problem with Baptist’s claim is that the story has been told. Unlike the trees, enslaved people spoke for themselves. Charles Ball and Solomon Northrup don’t need to be filtered through Baptist. The half has been told. If you haven’t heard it, it’s because you chose not to listen until a professor at a prestigious university said it. Moreover, the economic historians that disagree with Baptist have not at any point rejected the statements of former slaves about the brutality of slaveholders. Their arguments are premised on the belief that enslaved people were brutally beaten to force them to work at maximum effort. Instead they argue that these accounts by former slaves to not provide evidence that increases in productivity were the result of improvements in torture that led to improvements in picking techniques over time.     

Even if the most prominent authors in this field were not doing really bad history, one can question the extent to which capitalism is a useful construct for analysis. In this regard, Caitlin Rosenthal’s attempt to define capitalism is an interesting development among new historians of capitalism and I am curious to see how it plays out. It is new development because to the extent that other historians follow her, I think it will force people to confront the more fundamental question: Is capitalism a useful concept for the analysis of societies?

Up to this point NHC have acted as if it is, but it is not clear to me that the work supports this conclusion. Beckert provides a good illustration of the problem. Beckert asserts that capitalism is not necessarily characterized by the things people normally associate with it:  wage labor, markets and contracts, property rights, and the rule of law. Sometimes it is associated with these things, but sometimes it is not. There are different capitalisms with different characteristics. But what makes a system capitalist as opposed to something else?  When discussing the expansion of cotton production in the Soviet Union, he explains that “Such recourse to the state in postcolonial and postcapitalist societies was not a return to the war capitalism of the eighteenth and early nineteenth centuries, but a sharpening of the tools and an enhancing of the methods of industrial capitalism.” (page 436) If the Soviet Union provides an illustration of industrial capitalism I’m left wondering if there is anything that is not capitalism. And if everything is capitalism what does the concept add to our understanding? Rather than using it as a tool, Beckert seems to toss the word capitalism in every once and a while, occasionally changing the adjective in front of it, to add a little flavor to the dish.  I think it is this sort of use of capitalism that prompted Lou Galambos to suggest that the NHC was primarily a clever marketing ploy.

Personally, I am skeptical of the extent to which capitalism can be a useful analytical concept. Economists, economic historians, and business historians do not seem to me to have had much success with it as a tool for analysis. Economics departments used to frequently have courses on Comparative Economic Systems, which were largely about comparing capitalism and socialism. Even before the fall of the Soviet Union and China’s turn toward markets these courses seemed to be running into a dead end. The differences among the capitalist and socialist countries often seemed more relevant the similarities. Economists generally turned to the analysis of specific institutions, rather than trying to classify entire systems.  It seems to me that much of the recent work in economic history has tended to undermine simple notions about capitalism. Things like individualism and private property seem to predate what had been thought of as the emergence of capitalism in England, and a lot of work since Pomeranz Great Divergence has challenged conventional notions about the significant differences between the West and the Rest.

I am not suggesting that historians abandon the study of capitalism. Historians can’t really avoid studying capitalism. “Capitalism” is a term that people have used for a long time to express their beliefs about certain kinds of economic systems since the early 19^th century (according to my very old copy of Raymond Williams Keywords). To the extent that ideas about “capitalism” have played an important role in shaping people’s thoughts and actions historians must study “capitalism.” But, at least for the most part, this hasn’t been what the “new historians of capitalism” have been doing. The NHC treat capitalism as an analytic concept. They write as if there is an objective thing called capitalism that by means of historical analysis they can make concrete statements about. 

Behavioral Whatever

I’m going to start a new discipline called behavioral physics. Unlike traditional physics, which assumes that objects just fly apart from each other, behavioral physicists recognize that a phenomenon they call “gravity,” prevents this from happening.  Or maybe I will create behavioral evolutionary biology based upon the concept of natural selection, rather than the assumption that everything just stays the same, which traditional evolutionary biologists rely on. The way a physicist or biologist would feel reading those sentences is the way that I feel most of the times I read about behavioral economics.

The latest irritation is an article from the New York Times about getting doctors to stop over-prescribing antibiotics. Getting doctors to stop over-prescribing antibiotics is a good thing. Personally, I worry more about the negative consequences of overuse of antibiotics than I do about the negative consequences of the overuse of painkillers. On the other hand, their suggestion that they are able to solve this problem because behavioral economics has remedied the flaws of traditional economics is nonsense.

They describe how various attempts to get doctors to stop prescribing unnecessary antibiotics have failed because they “are all based on the assumption that physicians are rational agents who will do the right thing if provided proper information and incentives. But,” they ask, “what if doctors are a little irrational, like the rest of us? They may over-prescribe antibiotics out of an unrealistic fear that the patient could eventually develop complications and need them, or because it is easier than arguing with a patient who insists on getting them.” The situation they just described is practically a definition of a rational choice. Prescribing the antibiotic has a benefit for the doctor (the patient is happy) and no cost to the doctor. 

Nevertheless, they go on to explain that “Over the last few years, our research team has developed several new approaches to reducing unnecessary antibiotic prescribing, drawing on insights from behavioral economics and social psychology. These disciplines acknowledge that people do not always behave rationally and are strongly motivated by social incentives to seek approval from others and compare favorably to their peers.” I have no idea what they mean by rational.  There is nothing irrational about being motivated by social incentives or wanting to compare favorably with peers. One of the characteristics of traditional economics is that economists don’t care what your preferences are, or where they came from.The only thing that is really required for rational behavior is that you respond in predictable ways to changes in the costs and benefits of a choice, which brings us to the interventions they introduced.

In one of their interventions “whenever doctors prescribed an antibiotic that was not clearly called for by the diagnosis, the electronic health record system asked them to provide a short “antibiotic justification note.”” Wait a minute, did they just say that they increased the cost to the doctor of prescribing an unnecessary antibiotic, and doctors chose to write less unnecessary prescriptions. Let me see if I’ve got this straight. As the cost of doing something increases, other things equal, people will do it less. Thank God for behavioral economics. If only someone had thought of this before, they could have given it a name like “the law of demand” and taught it in every principles of economics course.

Next week, I think I’ll invent behavioral history, which, unlike traditional history, relies on critical analysis of primary sources. You can play along too. It’s easy. Take any discipline, x. Identify one of the primary features of that discipline, y. Assert, contrary to all evidence, that x does not do y. Claim that the new discipline “behavioral x” does y. Repackage some standard results from x as startling new results of “behavioral x.”