History of Economics Playground

In the last few, summer, months I have been an unreliable blogger. It is going to get worse. One good reason is that I have set up a new blog that requires my attention.

For 7 weeks in September and October, I teach a class titled generically “History and Methodology of Economics”, which I have ambitiously re-named as “the politics of economics.” The course reviews literature on the place and role of economists in contemporary society from an historical standpoint. Because one of my goals for the class is to develop appreciation for the multiple interpretations of which economics is subjected to, and to the multiple uses given to economic ideas in public life, I asked them to participate in a course-blog. This will be 10% of their final grade. Their task is capture commentary on economics or uses of economics in unexpected places, notably in mass culture.

From my brief, hands in the air, survey, nearly none of the students had experience with the blogging form. So they are learning not only about the practice of observing economics in its historical drift, but also about expressing themselves in a blogging setting. I leave you here an invitation to visit, to comment and to encourage on “Observing Economics“.

The current crisis questioned the extent to which economics has produced “useful” knowledge, in particular the areas of macroeconomics and financial economics. There has been another round of criticisms and of defenses that may interest historians and economists alike.

The Economist, Jul. 18th 2009, Cover

The July 18th edition of The Economist had in its cover a melting wax-like book titled “Modern Economic Theory”. In it there are two interesting articles appraising the developments in macroeconomics and in financial economics (and the hypothesis of efficient markets) and the problems these economists have had in dealing with the crisis.

After that, the Nobel Laureate Professor of Chicago, Robert Lucas, has written an article to the magazine noting that:

both pieces were dominated by the views of people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008. Macroeconomists in particular were caricatured as a lost generation educated in the use of valueless, even harmful, mathematical models, an education that made them incapable of conducting sensible economic policy. I think this caricature is nonsense and of no value in thinking about the larger questions: What can the public reasonably expect of specialists in these areas, and how well has it been served by them in the current crisis?

Lucas goes on to defend Fama and the efficient hypothesis market and to argue against the “caricatures” in The Economist’s briefings (in the macro piece, mainstream macroeconomics is referred to as “dark age of macroeconomics”). He recasts his view that the crisis is an adverse shock that has being dealt with by many macroeconomists over the last two years. In doing so, these economists have “drawn on recently developed theoretical models when they judged them to have something to contribute. They have drawn on the ideas and research of Keynes from the 1930s, of Friedman and Schwartz in the 1960s, and of many others.”

More recently, a new round of criticisms has started in the United Kingdom. The Queen has visited the London School of Economics on November 5th last year and has asked there why had no economists noticed the crisis that was on its way? On July 22nd, 2009, Professors Tim Besley (LSE and external member of the Bank of England monetary policy committee) and Peter Hennessy (Department of History, Queen Mary, University of London), on the behalf of the British Academy, wrote a letter to the Queen giving the consensus view that emerged during a forum promoted by the British Academy a few days earlier, whose theme was “The Global Financial Crisis: Why Didn’t Anybody Notice?” They summarize this view as following:

So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

A group of ten dissident British economists felt that Besley and Hennessy’s letter did not address the heart of the issue: “that in recent years economics has turned virtually into a branch of applied mathematics, and has been become detached from realworld institutions and events.”  They wrote another letter to the Queen explaining their position. Among them, one finds Sheila Dow (University of Stirling), Geoffrey Harcourt (Emeritus, University of Cambridge, University of Adelaide), Geoffrey Hodgson (University of Hertfordshire), and Malcolm C. Sawyer (University of Leeds).

Let’s see what comes next.

You don’t find jokes about economic graphs every day. Looking for a catch phrase for a paper on visual representation and economics textbooks, I came across political satirist PJ O’Rourke’s Eat the Rich, subtitled “A Treatise on Economics”. On page 110, O’Rourke introduces an absurd diagram in which he relates “the number of pages of Econ text devoted to graphical analysis” to “the number of Econ students asleep in the lecture hall”.  On page 105, he summarizes the attitude of most undergraduate students toward the principles of economics class: “I. There are a lot of graphs II. I’d better memorize them III. Or get last year’s test”. Okay, that’s funny. And so I have my catch phrase.

What is not as fun, on the other hand, is the rather populist background that comes with that joke when we get deeper into O’Rourke’s book. What he really means, in fact, is that economic diagrams as well as other technical elements are thrown in the introductory course only to introduce socialist ideas, for example the idea that “all wealth is the result of criminal conspiracy among: A. Jews B. Japanese. C. Pirates in neckties on Wall Street” (Ibid.). One of the examples provided by the author is the Keynesian equation Y=[C+I+G+(X-M)]/(1-c). He notes that “it’s hard to imagine applying the above formula to any ordinary economic question, e.g. should I put my bonus in a certificate of deposit or buy new stereo speakers?” (p. 106). O’Rourke may well have his definition of “economics” from Aristotle rather than from Robbins, so it’s easy to disembowel the guy for writing that but most importantly, all of the chapter is to show us that mathematical economics is simply socialist thinking dressed in fashionable mathematical nonsense. I thought this kind of thinking had been thrown out with McCarthyism. So this is not so funny, after all …

What is a bit funnier, on the other hand, is that the opposite discourse has become as fashionable: thanks to Sonja Amadae, we know that mathematical economics and assumptions about rational behavior necessarily imply the defense of capitalism as a political discourse. Amadae is probably more researched than O’Rourke in her demonstration but the similarity between the two theses is that mathematical economists are just idiots who are not even aware of the political implications of their discourse. For O’Rourke, they’re just a bunch of socialists in disguise; for Amadae, they just underwrite the protection of big corporations. I am not naive: I would not assert that there is no politics in methods. I just wonder whether it is too much asking for more subtlety…