The fundamental flaws with classical economics are its dubious assumptions and simplifications. Things like how much information someone is likely to have about the market, the role their personal characteristics play, and how much logical reasoning they will actually employ.
If you were to substitute the usual assumptions of economics with more realistic models obtained from real human behavioral studies, you would find yourself with a completely unworkable model, and it would come to conclusions drastically different from those of the traditional version. Economics is a social science pretending to be something more rigorous and coughing up meaningless findings.
My main problem with orthodox economics is the acceptance of the idea of Benthamite utilitarianism. Utilitarianism is treated as though it were a solid foundation upon which to build an edifice of analysis… when in fact it relies on treating untestable assumptions as though they were hard fact. Utilitarianism is an idea which doesn’t even mesh with ordinary experience, let alone have the kind of solidity, integrity, predictive power, &c, one would want in a reliable theory.
If anyone’s interested in reading something about heterodox economics, I highly recommend Steve Keen’s “Debunking Economics: The Naked Emperor of the Social Sciences”. It’s not written in academese, and it most certainly isn’t Marxian or postmodernist or any of those other labels I see being thrown around. Generally it covers the same material you’d find in an Econ 101 textbook and then goes through some of the arguments against it in a straightforward and logical way.
Regarding the whole “Economists always argue the interests of the rich” line; I think it’s often (not always) true, but it’s not the result of any conspiracy. It’s just like the fact that white judges give less harsh sentences to white criminals than black criminals - even though they don’t think of themselves as prejudiced, and intend to carry out their duties impartially. People naturally tend to form opinions that line up with their preconceived ideas about the world, the biases in their upbringing and so on. And most professional economists don’t come from working class backgrounds. They have a “confirmation bias” for theories which fit their class interests. This bias isn’t so strong or overwhelming as to make it impossible for any economist to accept an argument which goes against those class interests - but it does explain why, for example, economists in the public sphere are more vocal in their denunciation of unions than they are in their denunciation of monopolies. (Well, at least here in Oz, that’s how it looks to me. ;) )
I second that recommendation. Hardly any charts or numbers in the whole book, but still lots of information about interesting things like how companies use clever price discrimination tricks.
The Becker-Posner blog, for one. To paraphrase Posner: Regardless of the effect of the minimum wage on employment, consider the desired outcome of raising it: that people working full-time at the minimum wage will be better able to provide for themselves and their families. Now consider who makes the minimum wage: lots of them are teenagers, students, people with two jobs, part-time moms, etc, in addition to the people who support themselves solely from a minimum-wage job. Rather than saddle small businesses with the costs of raising the wage of all these people to help the poorest, why not increase the EITC so that the actual working poor are helped? If national poverty-reduction is the goal, it’s fairer to have it be at the expense of the government instead of restaurants.
I’d enjoy a trade-policy melee! Maybe in another thread though.
I’d say that Paul Krugman’s also more subtle in his Living Wage article:
Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which–Card/Krueger notwithstanding–must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?
One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won’t. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.
But I suspect there is another, deeper issue here–namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don’t want people to “have” a decent income, they want them to “earn” it, not be dependent on demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.
Well, the 2001 Nobel Prize winners have the common theme of “asymmetric information.” Really, it should be common knowledge that people have differing levels of information, but economics has had a tough time integrating that into it’s theories. When it does so, the conclusions can end up showing a situation that is less than perfect.
What I take from these types of studies is that economics is far more complex than people typically think. It should truly be a social science, with all the difficulties that entails. Even on a large scale, human behavior needs to be acknowledged.
(I used Nobel winners because people tend to trust them more than other sources and they are easy to find. Not enough time at the moment put together something deeper.)
I’m lost. I thought economics was nonsense because of its “dubious assumptions and simplifications.” When asked for examples, you point out work by mainstream, Nobel-prize-winning economists that incorporates more realistic assumptions into mainstream economic theory? You seem to be arguing against your own point. Both game and information theoretic models have been very important parts of economic theory for more than three decades (arguably six decades, in the case of game theory).
Of course economic models make simplifying assumptions. Pointing out these assumptions are false isn’t exactly novel. Consider that there’s a reason those assumptions must be made: models which cannot be solved are not much good to anyone, and even models with apparently very simple assumptions can quickly become so difficult that it takes 30 pages of dense advanced mathematics and/or a few weeks of CPU time on a fast computer to solve.
Benthamite utilitarianism was discarded from economic theory in the 19th century: since that time, “utility” is an ordinal concept, it cannot be meaningfully aggregated across people, and it does not denote “pleasure.” It is unfortunate that the term “utility” has stuck in the jargon. It would be far more accurate if the behavioral assumption in most economic models were referred to as “goal-directed” rather than “utility maximizing.”
If anyone’s interested in reading something about heterodox economics, I highly recommend Steve Keen’s “Debunking Economics: The Naked Emperor of the Social Sciences”. It’s not written in academese, and it most certainly isn’t Marxian or postmodernist or any of those other labels I see being thrown around. Generally it covers the same material you’d find in an Econ 101 textbook and then goes through some of the arguments against it in a straightforward and logical way.
This is somewhat like recommending Michael Behe’s Darwin’s Black Box as an introduction to modern evolutionary biology.
People naturally tend to form opinions that line up with their preconceived ideas about the world, the biases in their upbringing and so on. And most professional economists don’t come from working class backgrounds. They have a “confirmation bias” for theories which fit their class interests.
How much do you think academics get paid? Damn professors, always zooming around in their Ferraris.
This bias isn’t so strong or overwhelming as to make it impossible for any economist to accept an argument which goes against those class interests - but it does explain why, for example, economists in the public sphere are more vocal in their denunciation of unions than they are in their denunciation of monopolies. (Well, at least here in Oz, that’s how it looks to me. ;) )
No, it’s that economics is off off in la la modeling land, divorced from the reality of how the economy actually operates, so their own personal ideological preferences economic (upper middle class white guy, basically) end up in the models. Combine that with a system that doesn’t encourage people to rock the boat of the reigning society-wide free-market orthodoxy, and then combine that with lots of right wing funding sources in the quasi-academic think tanks, and ta da.
I’m not publishing a peer-reviewed paper, am I?
I’m claiming that I personally cannot imagine, or come up with a model, where minimum wage increases in the real world - with virtually all minimum wage employers exhibiting serious market power, the minimum wage at the lowest real dollar level since the 1960s, work hours increasing a significant amount among the poor to try to keep compensation at real-dollar parity - would result in disemployment.
That professors have no ferraris doesn’t contradict the point about the demographics being white guys from top 50% of the income distribution families.
Paul, Contrary, note that neither Krugman is the only one I’ve seen reference Card’s data outside of academia. I really don’t think Posner’s basically academic blog is the “public sphere”, either.
Your premise is false. Most economists support many policies which are not in the class interest of the rich, including but not limited to income redistribution, anti-trust, and opposition to tariffs and subsidies. Your idea that economists aren’t interested in the economy is an interesting one.
I’m not publishing a peer-reviewed paper, am I?
No, you’re making claims about what the peer-reviewed literature says without ever having read it. And following that up by arguing that your “looking” at the labor market trumps statistical analysis. You’re not off to a good start.
I’m claiming that I personally cannot imagine, or come up with a model, where minimum wage increases in the real world - with virtually all minimum wage employers exhibiting serious market power, the minimum wage at the lowest real dollar level since the 1960s, work hours increasing a significant amount among the poor to try to keep compensation at real-dollar parity - would result in disemployment.
The claim that “virtually all” employers of unskilled labourers have “serious market power” is ridiculous. A reason Card and Krueger’s results were surprising is that the market for unskilled labour is pretty competitive.
Stating the minimum wage does not have disemployment effects because it is currently low confuses levels and differences. It may be the case that the number of people disemployed is low because the minimum wage is low, but that does not imply that a change in the minimum wage wouldn’t change employment.
Finally, I am not sure what changes in work hours have to do with anything. If you are correct that labor supply has shifted out among low wage workers over time, that would, if anything, tend to exacerbate the minimum wage’s disemployment effect.
These issues aside: you are trying to sweep away evidence that doesn’t conform to your priors, subsituting your ad hoc theory for evidence. Couldn’t we claim that you, Jason McCullough, are “immune” to empirical results? Why should anyone put any weight whatsoever on your guesses, particularly when the evidence contradicts them?
That professors have no ferraris doesn’t contradict the point about the demographics being white guys from top 50% of the income distribution families.
One becomes “rich” by being in the top half of the income distribution?
Paul, Contrary, note that neither Krugman is the only one I’ve seen reference Card’s data outside of academia. I really don’t think Posner’s basically academic blog is the “public sphere”, either.
I seem to recall that Card and Krueger’s results were widely discussed in the popular media. Perhaps too much so: obviously, some people were exposed to their result, and, not being professional economists, have not kept up with the literature. They may then not be aware that the bulk of the evidence then and particularly now supports the idea that increases in the minimum wage have disemployment effects.
If the simplifications result in a conclusion that differs greatly from reality, then it should not presented as reality. They’ve done a great job of propping up certain ideologies, but have shown us very little about real-world economics. You can’t just throw away layer after layer of complexity because it makes things difficult. If that complexity has a noticeable effect on the conlusion, then it either has to be included, or it must force an acknowledgement of the limitations of the model.
We try to predict weather all the time, but we never pretend that those predictions are accurate. Putting your full faith behind such predictions is a surefire way to get stuck in the rain.
I’m not a professional economist, and I’m never going to be. I’m no more going to read all the literature in economics, even for a subject I’m interested in, then you’re going to for an area of physics you’re interested in. I’m not going to be able to out argue you on your own professional turf; I’ll leave that to the professionals. This one Duncan Black bit provides a shorthand version; it’s obviously not a published paper, but he’s much more capable of arguing it than I am, and he was an actual economist for a while.
My point in this discussion has been to provide you with examples of what I find odd about the discipline, and why I find the “non-mainstream” stuff interesting to think about. Note that the non-mainstream stuff in the Austrian/real business cycle theory seems asinine (recessions are just when everyone decides its not worth it to work for a while!), for what it’s worth.
Real-world data: the effects and history of the minimum wage and trade policy that I know of, as actually implemented, don’t seem to match the discipline’s models in any useful manner, especially the models as presented to people outside the discipline. Ricardo’s corn arguments have jack to do with first-world trade in similar goods, apparently.
Real-world effects: The economics discipline’s focus on models that don’t apply to relaity, near as I can tell, is mostly responsible for the total debacle of the World Bank and IMFs effects on the third world in the post-WWII era. Same thing for the post-Soviet collapse in Russian quality of life and the rise of a gangster economy there. Also significantly responsible for providing “respectable people talk to them” cover for the Suharto and Pinochet dictatorships.
Theory: The cambridge capital controversy, from what I’ve read of it, looks fatal to large parts of neoclassical theory. I’m not a professional, though, so I can’t be too confident of this one. :)
I don’t understand. Who’s presenting models as “reality?” Who’s presenting theoretical predictions which are known to be different from “reality?”
All models in all disciplines involve simplifications, that’s why they’re called “models.” Whining about those simplifications is useless. It isn’t as if we have the option of just writing down “reality” instead of a model and choose not to do so out of sheer petulance. When those self-proclaimed “heterodox” economists on occasion actually try to investigate something instead of sitting on their asses hurling stones, they make exactly the same sorts of gross simplifications evil mainstream economists make.
They’ve done a great job of propping up certain ideologies, but have shown us very little about real-world economics.
You can’t just throw away layer after layer of complexity because it makes things difficult. If that complexity has a noticeable effect on the conlusion, then it either has to be included, or it must force an acknowledgement of the limitations of the model.
Um, what? Economics has “shown us little” about how the economic world operates? Where did you get that idea?
If you read economic studies, you’ll find that they usually include a section devoted to “limitations.” In that section the authors will discuss the assumptions they made and the ways in which the conclusions might differ under a different set of assumptions.
You guys talk as if the observation that models make simplifications is something economists aren’t aware of and don’t acknowledge. That’s a very mistaken point of view.
Any economist advising any policy making or decision making govermental body?
Too true, but economics I think sins worse than others because the simplifications remove key factors. My economics knowledge is a bit rusty, it’s been a few years since college, but I recall rolling my eyes at how much of the economic theory I had to memorize was predicated on humans being fully informed fully rational actors.
The bottom line is that economics can’t explain the psychological aspects of a human group activity (an economy) because nobody has “solved” individual human psychology yet or even quantified any objective way to study it. So there is always going to be a big X factor in any economic model that is going to seriously limit its predictive usefulness, until the discipline of psychology gets more advanced.
Don’t get me wrong, I think the study of economics is a fine thing but I also think it’s a relatively young discipline that doesn’t have a lot to offer yet in terms of non-obvious findings, discoveries, or outcomes.
I’m not going to be able to out argue you on your own professional turf; I’ll leave that to the professionals. This one Duncan Black bit provides a shorthand version; it’s obviously not a published paper, but he’s much more capable of arguing it than I am, and he was an actual economist for a while.
Uh, a paragraph in a blog pointing out precisely the same thing that I pointed out earlier in this thread – that there are many models of the labour market, taught in Econ 101 even, consistent with no disemployment effect of the minimum wage – is supposed to be an argument against the mainstream literature, or an argument against what I’ve been saying? Don’t follow you at all.
Real-world data: the effects and history of the minimum wage and trade policy that I know of, as actually implemented, don’t seem to match the discipline’s models in any useful manner, especially the models as presented to people outside the discipline.
To which models do you refer? We’ve already established that you haven’t actually read any of the literature on the subject. You started this post claiming that you wouldn’t argue about what the literature says, and here you are a few sentences later railing against the literature again.
Theory: The cambridge capital controversy, from what I’ve read of it, looks fatal to large parts of neoclassical theory. I’m not a professional, though, so I can’t be too confident of this one. :)
Ah, yes. A forty year old argument over a technicality, still held dear by Marxians because Paul Samuelson made a mistake in 1962. The upshot: aggregation is problematic. Duh.
sked I think the phenomenon you’re facing here is people with only a very basic grounding (if any) in the subject making ignorant criticisms. FYI I’ve only got a basic grounding (but you’ll notice I’m not touching on the actual topics your discussing).
It’s not a phenomenon restricted to economics. Go to any physics message board and you’ll see the same thing - Noise’s comments about models being overly simplified, and the earlier comment about how “if only they’d stop using jargon it’d be so much easier” will be mirrored almost word for word. Pick any other highly technical subject - aeronautical engineering, OS development, whatever - and you’ll get the exact same thing.
Oh and I don’t include Jason in this - I at least know he hs enough backing in the subject to speak on it.
Economics courses at the undergraduate level typically place little-to-no emphasis on learning the tools of economic science, instead focusing on teaching algebraic simplifications of actual economic work, and then assigning problem sets in which students plug in values for the different variables. It is good practice, perhaps, for a few specific mathematical techniques, namely constrained maximization, but it is hardly a training in how to think creatively about dealing with the economy. The bedrock of economics as it is taught is not the subject matter - the economy - or even the approach - the neoclassical school of thought - but ideology, as Stiglitz said. The repetition of simplified and vulgarized economic conclusions is the main task of introductory, intermediate, and even some advanced economics courses, and little else sticks with the students.
I agree with a lot of what jeffd has observed. As a social scientist in another field (psychology), I find it fascinating how many parallels there are with this economic discussion. In my field, family systems theory tends to be critical of mainstream psychology, and has similarities to (my brief exposure to) heterodox economics – systems theory claims that most psychology is reductionist, embraces postmodernism, and features writing with many instances of the terms “paradigm,” “emergent interdependence,” and “intersubjective hermeneutic interpretation”.
I find systems theory valuable, because it is more explicit than mainstream psychology in examining the historical and political context of scientific theories. One of Jason’s links found out that graduates from a small group of economics departments comprise the bulk of editorial journal boards and the top organizational positions. This has to have an effect on shaping the dominant view, and can delay development. In psychology, cognitive papers in the 50s (a time of behavioral dominance) languished in obscurity, only to be rediscovered in the rise of cognitive psychology in the 70s.
However, unorthodox views go too far in insinuating a conspiracy of powerful social scientists that don’t allow revision of models. Dominant views of social theory have changed over time, but not by abandoning the scientific method (a radical move often championed by the unorthodox). Instead, a minority view uses established methods to point out limitations of previous findings, and then shows how the new approach addresses some limitations while still accounting for earlier findings. That’s how I interpret Noise’s citations of Nobel prize winners (thanks for those links). From what I understand, the winners used conventional economic techniques, but incorporated new variables that better explained certain phenomena.
In contrast, the heterodox folks seem to advocate abandonment of all conventional assumptions, because they are intrinsically associated with patriarchy and vested interest. They critique dominant approaches, but don’t replace our understanding with a new model – they just point out flaws, and say their process-oriented views will never be accepted by the mainstream.
Experts in any area have well-developed schemas that allow them to rapidly reduce complicated phenomena into smaller, more understandable categories. This is useful, but comes with a cost – our schemas become self-perpetuating, and we ignore alternative frameworks in favor of the familiar. I suspect the Nobel prize winners had to publish dozens of studies and repeatedly point out limitations of existing models, in part because of unconscious biases held by older generations of editors. Unorthodox minority views encourage awareness of these unconscious frameworks. There is resistance to overturning conventional wisdom, and outsiders often see this resistance better than folks in the system.
Unfortunately, some of these alternative viewpoints go too far. They encourage revolution by quoting Kuhn’s paradigm change, but forget that Kuhn’s major exemplar was relativity theory. Einstein didn’t abandon the findings of Newtonian physics or the scientific method – instead, his stunning insights found a way to incorporate Newtonian results, but added to our ability to predict phenomena at high speeds.
It’s probably impossible to sway Jason & Noise and their allies in this thread, because I’d be trying to argue against the impressions they’ve built up over years, presumably from markedly different sources than I’ve been reading.
All I can say is that any implication that mainstream economics exists solely to defend its dogmatic positions and protect the interests of the wealthy is heavily distorted. Economists are competing like crazy to expand the boundaries of the science and explain things that aren’t explained by the basic theories. Doing so strengthens the foundations, it doesn’t undermine them. Just like evolutionary theory has made huge strides since Darwin’s day to explain lots of seemingly contradictory real-life occurrences, economic theory is constantly being challenged and updated to do the same. Why didn’t the World Bank and IMF bring prosperity to every country they touched? It’s not because mainstream econ is fatally flawed and lacking in introspection; there are loads of new papers out there trying to answer this question by testing variables such as the importance of property rights, or banking systems, or innate cultural attitudes towards investment or corruption. Read the Economics and Finance section of The Economist sometime; it’s fascinating.
As for the minimum wage argument – Even if Posner & Krugman are not mainstream and/or numerous enough to satisfy Jason, I’d be interested to hear from the left-leaning people in the thread if they’re swayed by that argument against the minimum wage; that is, instead of instituting a de facto tax on companies which employ unskilled workers, is it not better to expand the Earned Income Tax Credit correspondingly to provide a top-up to the working poor who really need it? I know that a “Living Wage Law” sounds a lot nicer than “Negative Income Tax Expansion”, but honestly? The former is a really stupid alternative to the latter. It’s just politically sexier, that’s all.
Edit: Also, what Sidd_Budd says in the post above.
