Ev Ehrlich's Everyday Economics

It Don’t Ring No Bell

The Peace Prize for Obama fracas is small beer compared to the true Nobel disaster – the Nobel Prize in Economics.  And by that, I mean not only the people to whom it was awarded this year, but the very idea of having one in the first place. 

In its defense, economics is not completely worthless, even if that’s like saying that Helen Keller had three functioning senses.  But to give its practitioners the same piece of tin given to Dr. King or Madame Curie or Desmond Tutu or William Faulkner or Salvador Luria or Alexander Fleming any number of people who have moved civilization forward is an affront.

Before the larger critique, a salute to the award-winners.  Elinor Ostrom’s specific accomplishment is demonstrating that when people are in close proximity, they can co-operate for the communal good.  This somehow disproved ”the Tragedy of the Commons” the degradation of communal English grazing lands the refutation of which has been a high-end wish-list item on the planet-toasting, Conservative agenda.

Two things need be said about this accomplishment.  The first is that it is of no significance in the world of social decisions.  There has never been an environmental issue of any consequence that was resolved by this kind of communalism of belief or action, and if anyone can think of one that was averted, raise your hand.  Charles Mann makes a case that pre-Colombian farmers in the Amazon managed to sustain their environment, but he also notes that most pre-Colombians changed their environments radically and more or less lucked out.  It’s one thing to advocate “new property forms” by, say, letting tenants run public housing collectively – I’m for that.  (Is Ostrom?).  But this is a finding of no relevance to any sustainability issue on the agenda today.  It strikes me as beyond the utopianism we projected onto chimps before Jane Goodall watched them for an afternoon and found out they were mean little sons of bitches.  Or that Alan Greenspan finds in markets.  No way.  Tell it to heads on Easter Island.

But even more impressive is that if Ostrom were right, and people were motivated by something other than naked avarice, (I find it semantic if not a truism  to argue they would do so out of “self interest”) then most of the other Prizes the Nobel committee has given out to a long line of theoretical practitioners – from Arrow to Debreu to Becker to the creeps who advised Long Term Capital – would be utterly worthless – because all of neo-classical economics is based on the idea that people are oriented around unbridled self-aggrandizement.  The theory doesn’t work if they’re not.  Economists, with dry eyes, refer to this as homo economicus, economic man, who creates the problem of “economics” by trying to reconcile his unbounded desires for material comfort with his limited resources.  If Ostrom’s right and people act communally – adopting the view that it’s good to subvert your self-aggrandizing motives in order to reach a better, collective state based on reciprocal trust, as some anthropologists now claim primates and other animals may do – then the hyper-individualism that characterizes capitalism may just be a historical aberration rather than a true reflection of the human spirit.  Kind of like an episode of Mad Men.

So if she’s right, no one’s ever seen it happen at a level above It Takes A Village (at best) and the theory the pinnacle of which she is rewarded for representing is a joke.

I’m heartened, of course, that a woman won the Prize.  But there was a woman who was a long-standing colossus of economics and was overlooked – Joan Robinson.    She was perhaps the leading voice against the consensus drawn around the Samuelson-led effort in postwar economics to turn the discipline into a more abstract and quantitative science, one that lost its historical setting and behavioral context, and that so preferred its theoretical construct to the world itself that now we have the economy of today.  She invented (with Chamberlain) the idea of “imperfect competition” that I’ve used to discuss, for example, the market for wireless telephony,   and she demonstrated (with Pierro Sraffa) that a fundamental tenet of quantitative economics – that capital could be “added up” – was wrong.  Of course, Solow, Phelps, and the other growth theorists added it up anyway and got the Prize.  Can you imagine a physicist proving that a methodological technique was incorrect and it still was prevelent decades after the fact?  Only in economics.

Here she is in a cheesecake shot. 

When the prize was first given to Rangar Frisch in 1969 – a Scandinavian favorite son  -- many of us wondered if the Committee would get around to recognizing her, or if they would instead toss the heavy iron around to the usual suspects until she died (she was already fairly on in years).  Predictably, that’s what they did. 

Oliver Williamson, the other Prize winner, deserves a kinder write-up.  I enjoyed reading his work when I was reading that sort of stuff in the hope of being given exercise privileges and extra cigarettes back  in Ann Arbor.  Williamson extended the work of Ronald Coase on the nature of the firm and Coase was a smart guy, as I have said elsewhere.      Coase is such a commanding thinker that the people who publically disagreed with me claimed my problem was I didn’t understand Coase.   (Allow me this self-indulgence; let me quote from the critic I just linked.  “Coase wasn't really concerned with the size of firms. He was concerned with the decision to conduct economic activity across a market or within a firm (the so-called "make or buy" decision).  The difference being?) 

 As Coase, and then Williamson, helped to establish (in theory), the cost of information determines the boundaries of a firm.  So long as the bureaucracy can make better and faster decisions than can independent agents coordinated by markets, the firm will grow in scale and scope.  Coase got a prize for this thinking (and some other clever ideas), so Williamson’s is less objectionable – in for a dollar, in for a dime, I guess.

It’s a clever insight, but is it really an achievement that deserves global recognition?  That’s the biggest problem of all.  Economics has been remarkably successful as a discipline, if the point of a discipline is to expand the pyramid, build awareness, and obtain stature.  It’s now the most popular major at many universities.  To me, the secret behind its success (in its present form) is that receives endless and continuous stream of data.  There are prices and quantities – and everything in economics can be thought of as one or the other, whether overt or tacit, that’s kind of the point – every day, all the time.  And that has allowed economics to get mathy in the extreme, because unlike such ideas as “consciousness,” “development,” “relatedness,” or “community,” those prices (including interest rates) and quantities (including quantities of everything, which is called growth) are already variables.   

And what’s more, those variables are lined up in a row – years, quarters, whatever – as opposed to other social sciences’ variables, which are usually measured across a group of people.  So economics is not aimed at hard questions like “why do teenagers have babies?” or “what factors predict heart disease?,” and instead focus on questions like “what predicts growth in output (as measured by markets)?”  It turns out that’s easy, from a statistical perspective.  The factors that lead to teenage pregnancy have low “R-squareds” – you can’t explain most of the variance in the observed answers to the question.  But predicting tomorrow is easy – it’s today plus a little more – and that generates good statistical “fits.”  (so long as you ignore Robinson and Sraffa’s disproof of their technique.) Of course, that suggests what we’ve all seen to be true – economists stink at predicting the big turning points – when things turn south or go north -- but since none of them can really do that, they’re good about not getting in each others’ faces.  And ignore the guys who do a good job of it. 

Perhaps the best evidence of the problem with economics is the list of people who have won the award.  Mind you, a know a couple of them, and they’re all very smart, and sometimes nice, people.  And I know other economists who ought to get the Prize by the standards of past recipients, but Bert Blyleven  and Gil Hodges aren’t in the Baseball hall of fame, either.   Don’t wait up for the Fairness Fairy.  But the impressive thing about them as a group is that there’s very little they agree on.  The general equilibrium theorists , like Arrow or Debreu, based their work on assumptions that guys like Stiglitz or Ackerloff disputed.  Rational expectations guys like Mundel or Scholes believe that economic policy doesn’t work, while Tobin, Solow, or Krugman swear on it.  Then the Committee humiliated itself by rewarding Merton and Scholes, who then helped found the hedge fund Long-Term Capital Management, the failure of which echoed the events of the last year or so, so they tried to clean up theior act by awarding people with a conscience (Sen) or narrow technocrats (McFadden).

These aren’t “theoretical” disagreements, like whether superstring theorists are nuts are not.  These guys are arguing about things they all see every day – it’s like doctors arguing whether or not germs make you sick, or physicists debating if the universe is expanding .  I can’t think of any other discipline that’s awarded the Prize where the winners so fundamentally disagreed with each other.  And that’s because there’s no “there” there.

Look, if you read my stuff, it’s obvious I’m an economist, and in many ways an unrepentant one.  Supply and demand work – I bet that when we meet other civilizations millennia into the future, we will discover that social phenomenon.  But why throw good medals after bad? 

I would rather quit giving an economics prize and instead create Prizes in two new “areas” that capture what good economics are about.  One would be for Social Welfare, for the thinking and action that make human life more materially and uniformly comfortable.  Keynes would have merited on – so would the architects of Chinese market reforms, the European Union, and other policy reforms (as would Muhammad Yunnus, in fact, it’s what he should have received).    Among economists, Jagdeesh Bagwatti , maybe even Bill Nordhaus  (although it took him a while to figure out that climate change was not going to be pretty) are the kinds of people we’d expect to see rewarded.

And a second prize would be in Civilization, where great intellectual achievements in the social sciences would be identified and rewarded.  An example that comes to mind is Fernand Braudel’s three-volume of the transition from feudalism to capitalism, a work of scholarship, diligence, and intelligence.    (Braudel’s dead, of course, so that’s just an example.)    Perhaps Gunner Myrdal’s work on global poverty and American race discrimination would then be rewarded, (or perhaps he would be recognized with his wife, and disarmament champion Alva) as opposed to his less important theoretical work on trade and expectations.  The same for Sen’s work on famines.

In the meantime, economics lumbers on.  Supply and demand clears markets, except when they don’t, people get jobs (except when they don’t, the system keeps moving towards what economists actually call “golden rule” growth (except when it doesn’t).  So stop whining about President Obama’s prize  -- one day he well may deserve it.