Economic Ignorance?

from Peter Radford

Ha-Joon Chang nails it.

But I wish he hadn’t.

You see, I agree with his analysis of the inverse nature of status within the economics profession. As a useful general rule the more notable you are within the profession the less you know about the economy. This is a result of the perverse nature of what economists actually do: they are amongst the very few disciplines — perhaps they are unique — who invent the artifacts that they then seek to explain and study. This relieves them, as you can imagine, from having to engage with the mucky real world.

You might wonder how this came about. It is quite a puzzle isn’t it? All those extremely clever people resolutely avoiding contact with the very substance that their chosen topic of study presents them from outside; averting their eyes from the glare of reality; turning inward as they search for clarity and that song sought after simplicity that so beguiles them.

It’s actually quite dispiriting for anyone who dares imagine that economics has relevance to humanity and its ability to chart a course towards a generally more prosperous world.

So how did this disconnect happen? How is it that the very best are the most ignorant?

Two causes come to mind: math and math. No, I am joking. Only one cause is math. The other is ideology.

Economies are devilishly complicated things. They are full of obstreperous and notoriously difficult subject matter. Notably people. And people, as we all know, do the darnedest things. They, for instance, change their minds and sometimes even contradict themselves — with a straight face too. This makes plotting and explaining their activity very hard. In fact it often makes it impossible. So, if you want to locate general ‘laws’ that govern all that bizarre behavior, you have to ignore it. Or you simply get people out the equation altogether and substitute ‘agents’ in their place. The great advantage that these ‘agents’ have over ‘people’ is that the former are artificial and can thus be trained to act according to rules that can be modeled mathematically.

So, if you want economics to become more mathematically rigorous you are forced to exit reality and enter the realm of the artificial. At least that’s what happened in economics beginning around the 1860’s. Don’t forget that everyone back then was seduced by the thought that everything could be explained through the lens of math. So why not economics?

Besides, the period right before the 1860’s — from 1848 onwards — was one of social turmoil and push back against the rise of industrialization and who was working that angle most effectively? Marx was. Now, Marx may have had his history all wrong, but his critique of capitalism was pretty much on the mark. By this time economics was already deeply concerned with explaining the efficacy of free markets as opposed to the dead hand of government, so the Marxist critique has to be dealt with — at least within the confines of economics. What better way than pretending that the ‘laws’ of economics were natural forces and were not human-made? If those ‘laws’ were, indeed, natural, then mucking around with them à la Marx was a silly delusion.

And once you have launched yourself into the search for natural ‘laws’, what better way to explain them than with math? It makes it extra hard to understand and so acts as a barrier to entry into the domain of higher understanding.

The rest, as they say is history. Once on that trajectory into the world of imagination, and away from reality, each step had, logically, to reinforce the last. It had, in other words, to travel deeper into the imagination. For to do otherwise would be to retreat. The journey was arduous. Along the way alls sorts of sensible ideas had to be jettisoned. The search for imagined purity can claim all sorts of victims, not least the sensibility of its most ardent students. Conversely, in order to rise up within the ranks of economics, students had to demonstrate a dedication and a willingness to believe in magic. The higher reaches of the profession became almost occult. So only those most willing to leave behind the real world, to adhere to the most fantastical beliefs, to tell the least real stories, and to dabble most diligently in the magic itself could become the masters of the profession.

Thus we arrive at the world that Ha-Joon Chang is describing.

My only disagreement is that I would, on reflection, reverse everything. I would borrow from Dante. To enter the highest echelons of economics, is to descend into the deepest error. Thus to any student pondering whether to study economics I say — to paraphrase somewhat — “beware all ye who enter here”.

Which do you want? To lose your mind? Or to study actual economies?

If the latter, think twice about studying what is called economics: because that’s the former.

  1. paul davidson
    March 2, 2015 at 11:36 pm

    Don’t blame it on rigor! Notice no one on the internet provided any answer to my question “Why does the real world economies use money denominated contracts to organize all market transactions?”

    No one knows the answer????? Even without math????

    • Marko
      March 3, 2015 at 1:36 am

      “Why does the real world economies use money denominated contracts to organize all market transactions?”

      Simple. Because , post – Pink Floyd , TINA.

    • March 3, 2015 at 7:51 am

      We do.

      It’s because you can’t discharge your tax liabilities in Conch shells or Gold Bars. You have to use the liability determined by the tax authorities and dictated by the same authorities as the liability peg in the banking hierarchy.

      Money denominated contracts then become the path of least resistance from that point, and convention quickly takes over.

      That’s why the Danish Krone continues to exist, even though it is effectively a Euro.

    • March 3, 2015 at 1:21 pm

      I confess, I’m not sure I know exactly what you’re asking. I presume you don’t mean: “why are most transactions goods for money, rather than goods for goods?”. I’m guessing you mean something along the lines of: “why, for the majority of financial assets, is the value to be delivered in the future determined by reference to a monetary amount rather than to some quantity of a commodity or basket of commodities?”.

    • Anon
      March 3, 2015 at 2:05 pm

      “No one knows the answer????? Even without math????”

      Because durable assets exist..?

    • David Richardson
      March 4, 2015 at 10:06 am

      Perhaps part of the answer is that economists should learn to pose their questions grammatically. It helps a lot.

  2. March 3, 2015 at 4:03 am

    “And people, as we all know, do the darnedest things. They, for instance, change their minds and sometimes even contradict themselves — with a straight face too.”

    Much of modern economics depends on the idea that there exist path-independent solutions to the price equilibrium equations. In fact, to the contrary, supply curves are actually very dependent on wage history. This is a violation a thousand times larger than the silly “humans are not rational” straw dummy criticism.

    You might be right about general procedures, but I think if you bring in some math heavyweights you will find the situation is much worse even than the critics are saying. How many of even the harshest critics are saying that the theory used is wrong because the economy is chaotic in the mathematical sense?

    • March 3, 2015 at 4:24 am

      Oops! Did I say supply curves? I meant consumption demand curves. Turns out I actually have to think when I talk, dang it!

  3. BC
    March 3, 2015 at 4:41 am

    “Why does the real world economies use money denominated contracts to organize all market transactions?”

    The parasitic top 0.001-0.1% rentiers’ hyper-financialization of the economy and virtually every aspect of existence in order to extract imputed compounding interest from the growth of debt-money, i.e., making money from creating money, to wages and GDP, resulting in a money-for-nothing, non-productive, inflationary claim on all labor, profits, and gov’t receipts in perpetuity.

  4. Macrocompassion
    March 3, 2015 at 6:43 am

    It may well be true that there are certain places within our macroeconomic system where no freedom of marketing occurs, but this is a far cry from the market when we consider it as a whole. In other words, by choosing particular examples Ha-Joon Chang and Peter Radford have claimed that it also applies in general. This is not the true situation and the Smithian principle of the “invisible-hand” of competition having real power in regulating business remains basic and is still closer to the whole of the market situation.

    • davidmbrichardson
      March 10, 2015 at 3:44 pm

      You are making unsupported assertions in reply to assertions that might or might not be supported. If modern capitalism tends towards monopoly, which is at least arguable, then Chang and Radford must be more convincing. Even if the Smithian “invisible hand” still has some power in regulating business, in whose interests does that regulation occur? Companies and corporations look to the effect of their activities on share prices, in a short-term scenario, divorced from the common good. Hence the need for democratically-determined regulation for the long-term general interest. It is public money that builds sewers, roads and railways, and maintains a universal health service, in short safeguards the long-term infrastructure of a modern society. The “invisible hand” has no interest without the prospect of short-term profit. In 2008 that hand led us all by the nose, and in the end had to be held out to receive public largesse.

  5. Alex
    March 3, 2015 at 9:19 am

    A very interesting discussion which I follow with great interest, because it greatly fits to my feeling and thinking about the status of economics as scientific discipline. I just like to add some point.

    In my opinion (likely more a speculation…) one major reason for the ignorance of many economic authorities is a combination of path dependency in (the economic thinking today as result of what has been developed decades ago) with the following dysbalance: on the one hand much of the existing economic theory is far from reality and therefore usually useless if you want give certain advice to a decision maker. But, on the other hand, economists have managed to become very important advice-giver to politicians who often base concrete politic decisions on adivce form economics. Furthermore economic theories affect many areas of life even outside the economy.

    I think, that this dysbalance put economic authorities into a trap. They can not remove the majority of economic theory as unreal and return to the drawing board without admitting that most economic adive during the last decades was terribly wrong and often harmful. The consequence would be a massive loss of power and (academic) reputation. As a result the exisiting theories and ways of thinking are massively defendet aggainst all alternative ways of thinking and theorising.

  6. blocke
    March 3, 2015 at 11:27 am

    I simply remember Clemenceau’s remark that war is too important to be left to generals and apply it to economics. Just as it is important not to let generals determine policies in matters of war, it is necessary for people who are not economists to participate on discussions about economic policies in academia and on councils that deal with economic affairs. Where the science is questionable, it must be tempered by civil society.

  7. paul davidson
    March 3, 2015 at 3:19 pm

    answer to Nick Edmonds. No –I am asking why are all market transactions organized and sealed by a money contract so that goods and services trade for money and not goods and services trading for goods and services!!

    response to Neil W. It has nothing necessarily to do with what government requires one to pay taxes in. There are cases in history where the government required payment in one currency [ e.g. Korean government during and right after the Korean war required tax payments in yuan, while the money used by Koreans for civil transactions with other Koreans was US military script –which was only convertible in the US Armed Forces Post Exchanges.

    • Alex
      March 3, 2015 at 4:23 pm

      Goods and services are traded by money, because the combination-matrix of all goods/services x all goods/services is such large that it is a question of simplicity that a society developes one benchmark aggainst which all goods and services are valued. Also imagine to try to pay a house by bread (if you are a baker for instance). How many breads do you have to pay? What should the houseseller do with all these breads, given they will be dilapidated after some days? Extreme example, I know but it should show the problem with “trading goods for goods”.

      So, once a society developed the idea of one value-benchmark for all goods and services the question is what benchmark to use? Taking any good (like wheat e.g.) is disadvantageous, because this good is a trading good itsself. So better take something economically “neutral” like rare shells or better rare metals (more resistent than shells). However also rare metals have disadvantages as trading benchmark (e.g. given constant prizes, possibility of money growth and hence also economic growth depends on natural metal ressources available). So it is even much better to use something as trading benchmark which is not only neutral but also “unmaterial” in that sence that it must not be extracted from the environment, and this is: modern money underlaid not by naturals or by metals but by productivity of the economy for which it is valid.

      • paul davidson
        March 3, 2015 at 4:30 pm

        the essence of a capitalist economy is the sanctity of the money contract and the civil law of contracts? It is not just the convenience of a common denominator on one side or the other of market transactions. It has to do with liquidity and uncertainty about the future real economy!

    • Nietil
      March 11, 2015 at 6:00 pm

      Where did you see that all transactions are sealed by a money contract ? I do lots of non monetary transactions everyday, and I never write down contracts for them.
      In my opinion you are doing lamp-post science : people don’t record most non monetary transactions, so you won’t find them under your lamp-post, even though it’s the only place you can see.

  8. Alex
    March 4, 2015 at 9:19 am

    As I understood you, your question was not about the essence of a capitalist economy, but about the essence of modern money, and the essence of money is to be the most practicable tool to organice market transactions. It is not a question of “sanctity” but of “practicability”. Trading goods vs. goods works in an economy as simple as a stone age economy, but does not work in an economy as complex as ours.

  9. John McDonald
    March 6, 2015 at 7:59 pm

    “I would borrow from Dante. To enter the highest echelons of economics, is to descend into the deepest error.”

    Indeed. It appears that Dante has a place in Hell for the “economic man/woman” of mainstream, positivist economics who make all economic choices without any moral content.

    So we read, “Virgil leads Dante up to the Gate of Hell, upon which they read a foreboding inscription that includes the admonition “abandon all hope, you who enter here.” As soon as they enter, Dante hears innumerable cries of torment and suffering. Virgil explains that these cries emanate from the souls of those who did not commit to either good or evil but who lived their lives without making conscious moral choices….” (http://www.sparknotes.com/poetry/inferno/section2.rhtml)

  10. March 7, 2015 at 12:02 am

    Newton is still the model of science. But every science that deals with human beings is modeled on Darwin. But economics sticks with Newton. The more Newtontian, the higher the status… and the further from reality.

  11. blocke
    March 7, 2015 at 9:03 am

    “The more Newtontian, the higher the status… and the further from reality.”

    If this is true, as knowledge evolves , economics becomes more parochial and we end up with Tertullian’s argument, “I believe because it is absurd,” which is a hard belief to live with if one embraces the liberal view of existence “that the aim of life is life itself.”

  12. Kihano
    March 8, 2015 at 8:44 pm

    The answer here is simple. Because the economics is not a science, but a class ideology. The more ideology one repeats, the more grants, media access, and prestige he gets from the class which ideology he repeats. To serve the aim of class ideology one does not need to know the real economy. Just opposite. If one knows, and understands the capitalist economy he will immediately turn into dissident, which is in most cases very far from being notable. At best you will be ousted from the economist’s community. The entire problem is that economics is a class ideology, like Marxism, bit of the antagonistic class.

    • blocke
      March 9, 2015 at 10:36 am

      This was not always the case; it arose in economics during the Cold War; when the American Economics Association swallowed the neoclassical economics poison. The En., Britannica states that “History and economics were once closely related. Adam Smith, Thomas Malthus, and Karl Marx were all political economists who incorporated historical data into their analyses. A historical school of economics developed in Germany in the late 19th century and was associated with figures such as Gustav von Schmoller (1838–1917). Reacting against the free-trade doctrines of British economists (which would have prevented Germany from protecting its industries until they were strong enough to compete), the historical economists argued that there are no universally valid economic laws and that each country should define its own economic path. That school of German educated economists dominated the American Economics Association at its origins, which respected state interventionist anti-laissez-faire doctrines.

      • Kihano
        March 9, 2015 at 11:06 pm

        I think your examples show exactly what I say – the economics is a class ideology, and always have been such. Free market ideology serves the richest capitalists in the most developed countries, i.e. Great Britain in 18 and 19 century and the US and Europe now. The protectionism, developmentalism stateism,anti-laissez-faire or name it as you wish, is an ideology of the not so rich non-comprador bourgeoisie in poor and underdeveloped countries. Such where US and Germany in 19 century. Ironically, such ideology is often adopted by the state bureaucracies to achieve economic development, e.g. in South Korea, Mexico, Taiwan, without the participation of the local bourgeoisie. But the problem here is more a matter of organization, but not of ideology. The not so rich bourgeoisie in underdeveloped countries has neither capital nor vision for long term development. That is why the state plays crustal role in applying this ideology in practice. And yes, the Cold War increased the antagonism between the countries adopting the antagonistic ideologies – namely – Marxism and capitalistic free market (the ideology of the richest, i.e. the strongest). That called for tougher dogmatism.
        Otherwise, if you try an unbiased look – there is no reason for the existence of private ownership of capital and means of production! The profit is a major problem of the economy! The monetary profit is even a mathematical problem. But, economics has always been a class ideology. With the exception of Marxism, it appeared as a result of the interests of this class and always served this class. We are so accustomed to that fact, that we do not see the class bias in economics and do not even dare to think beyond capitalism. Moreover, already nearly all social classes have adopted the free market ideology regardless that it goes against the interest of most of them. That is a remarkable result of the well cultivated economic ignorance or as you say “neoclassical economics poison”.

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