The value of economics — a cost-benefit analysis
from Lars Syll
Economists cannot simply dismiss as “absurd” or “impossible” the possibility that our profession has imposed total costs that exceed total benefits. And no, building a model which shows that it is logically possible for economists to make a positive net contribution is not going to make questions about our actual effect go away. Why don’t we just stipulate that economists are now so clever at building models that they can use a model to show that almost anything is logically possible. Then we could move on to making estimates and doing the math.
In the 19th century, when it became clear that the net effect of having a doctor assist a woman in child-birth was to increase the probability that she would die, western society faced a choice:
– Get rid of doctors; or
– Insist that they wash their hands.I do not want western society to get rid of economists. But to remain viable, our profession needs to be open to the possibility that in a few cases, a few of its members are doing enormous harm; then it must take on a collective responsibility for making sure that everyone keeps their hands clean.
Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of our real-world economic system.
The problem is that without strong evidence, all kinds of absurd claims and nonsense may pretend to be science. Mathematics and logic cannot establish the truth value of facts.
We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth. It would be far better if they instead made sure they “keep their hands clean”!
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Real-World Economics Review Blog 
I would have thought that Paul Romer and his ilk, particularly those stamped with the Nobel Prize winner are a major source of the dysfunction that is causing Economics back to the drawing board, although to look at the rough treatment by the big names one might conclude they have reason. MMT does not give them an out. It is a description or a lens if you like to explain how economies really work, starting with national constitutions as source and going on from there.
Let’s hope Mr Romer can get his house in order and others follow suit.
https://www.tandfonline.com/doi/full/10.1080/14747731.2020.1807856 Here is an example of such harm, described by Steve Keen.
This is a very poor and misleading retelling of the story of Ignaz Philipp Semmelweis and his discovery of the importance of hand washing by doctors. Whoever Romer is, he has misled your readers and you should take down this rather stupid quote.
And I really recommend looking up the real story because it is one of the great success stories in the history of science and medicine. It was before the germ theory of disease was even proposed.
this quote is supposed to be from an Economist who in fact misrepresents the science of the 19th century. How apt for these times.
Thank you, Javarava and Charlie Thomas. I agree with you.
Please see my Reply on February 23, 2020 at 3:03 am that was posted as a comment on Lars Syll’s article on February 22, 2020 “Paul Romer explains what went wrong with economic” Lars Syll cited exactly the same place and added a bit longer comment.
I have there explicitly warned that Paul Romer’s aphorism is not exact and requires a modification. I have concluded that “Simply refuting math is almost equivalent to fall in obscurantism. Before accusing math, Lars Syll has to learn more about math, or how math can be a good tool of thinking.” He neglected it and repeated the same contention in this article again. I hope Lars Syll learns a bit with these severe comments he received this time. If not he will surely fall in obscurantism.
Please also see my reply on October 12, 2018 at 6:18 am (with two corrections) that was posted as comment on Lars Syll’s aricle on October 12, 2018 “Paul Romer’s critique of ‘post-real’ economics“. I posted it when Paul Romer received a “Nobel Prize” in Economic Sciences. Although he has criticized macroeconomic econometric models, his major contribution was completely in the mainstream tradition. I wonder why Lars Syll does not criticize Romer-style endogenous growth models (Endogenous growth theory), which are a popular genre of econometric models that use mathematical formulations. I have give an example how this growth theory works noxiously on developing countries.
One day before the above 2018 article, Lars Syll posted another article “At last – Paul Romer got his ‘Nobel prize” that felicitates Paul Romer’s nomination to the Nobel Prize in Economic Sciences for 2018. I do not object to the felicitation itself, but I had to object that he praised Paul Romer as an economist “enough to openly criticize the ‘post-real’ things”.
Lars Syll is completely mistaken the fundamental character of Romer’s endogenous growth theory as neoclassical economics. He introduced a third state variable (knowledge) but the formulation has no difference than Solow’s aggregate production function and he keeps the conventional equilibrium framework. How can we say it is not neoclassical? Praising Romer in this way, he is not only praising neoclassical growth theory but also he reveals himself he does not understand what is neoclassical economics. We can know the level of Lars Syll’s understanding (or misunderstanding) of mainstream economics.
How could he criticize mainstream economics with such an understanding? What does he really mean when he accuse neoclassical economics? Isn’t it a self-contradiction? One possible interpretation is that Syll has no ability to discern neoclassical and other economics by contents. This explains why he sticks to criticize mathematics. I am sad to say this and hope I am wrong.
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Exactly what does Shiozawa agree with? From the cryptic comment by both Javarava and Charlie it is not exactly obvious what their point is, except that perhaps gnaz Philipp Semmelweis and the history of this case deserves more careful explanation. It seems the main point of this story if Wiki’s history is anywhere correct is that careful observation trumps theoretical dogma and tradition.
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Yet, as usual, Shiozawa blesses (trashes and trolls) this site with his Pile-On non sequitur mentality for self-serving purposes thereby obscuring anything of real value he ever tries to say.
La Paz, January 1986. The young Harvard economist Jeffrey Sachs arrives at the airport in a city he has visited only twice before. What he knows to expect: the thin air of Bolivia’s capital, three and a half kilometers above sea level, which will leave him short of breath throughout his visit; the extreme poverty; the beauty of the mountains; the hyperinflation that is beginning. He goes from the airport directly to the Banco Central de Bolivia, where he discovers that the money supply had sharply increased in December.
Almost immediately Sachs, the economist delivers his advice to Bolivia’s planning minister and then its president. The advice may seem dangerous-Sachs was later summoned by the International Monetary Fund to explain himself-but for Sachs it was a straightforward implication of what his discipline teaches about the theory of money. If inflation is to be brought under control, the pesos that are flooding the economy must be taken out of circulation, even at the cost of spending Bolivia’s precious, limited reserves of foreign currency to buy them up. Much later, Sachs mused on his meager understanding of the country to whose leaders he gave his crucial advice. It was more than two years later he realized via a conversation that Bolivia’s physical geography was a fundamental feature of its economic situation; not merely an incidental fact. “Of course I knew that Bolivia was landlocked and mountainous …. Yet I had not reflected on how these conditions were key geographical factors, perhaps the overriding factors, in Bolivia’s chronic poverty [chronic poverty his advice only exacerbated] …. Almost all the international commentary and academic economic writing about Bolivia neglected this very basic point. It bothered me greatly that the most basic and central features of economic reality could be overlooked by academic economists spinning their theories from thousands of miles away” (Sachs 2005, p. 105). Nevertheless, remarked Sachs, a meager knowledge of the context had not stopped his advice on monetary policy being successful. Bolivia’s hyperinflation did come to an end. “Monetary theory, thank goodness, still worked at thirteen thousand feet” (Sachs 2005, p. 105). It, along with Sachs general ignorance of the country only added more poverty and suffering for the nation and the Bolivian community.
Sachs’ advice to the government of Bolivia is unusual in another way. It marked the beginning of an exceptional degree of individual influence. Sachs and his former student David Lipton went on to draw up what became the plan of first Solidarity and with the Polish government to shape the economic structure of post-communist Poland; they attempted, much less successfully, to repeat the exercise in Yeltsin’s Russia. Later, Sachs, et al went on to advise the United Nations and world leaders on how to end poverty in Africa.
Considered more generally, Sachs’ Bolivian trips were simply one manifestation of a far more usual phenomenon: the move of economics from the journals, textbooks, and lecture theaters into “the real economy.” In Chile, for example, the “Chicago boys”-Chilean economists trained at the University of Chicago-reshaped Chile in the 1970s and 1980s in a fashion more fundamental than Sachs’ influence on Bolivia (Valdes 1995). The trend is not restricted to Latin America, to the former Soviet bloc, or to matters of government policy: economics is built into the modern world far more pervasively than that. And I ignore here, for now a long history of economists directly shaping economies and many elements of culture that extends back more than 250 years.
The shaping of economies by economics can be viewed as a triumph for the ‘truths’ discovered by the discipline, or it can be condemned as the damaging imposition of an abstract and unrealistic worldview. Such matters are controversial and have grown ever more controversial since Sachs’ work in the 1980s and 1990s. At a minimum, however, what seems clear from the cases of Bolivia, Poland, Russia, Chile, and many others is that economics is at work within economies in a way that is at odds with the widespread conception of science as an activity whose sole purpose is to observe and study. That is, to ‘know’ the world that others have made. In the concepts of anthropology, to study, describe, and write about the cultures that people have constructed. In this case, the economies people have made.
The issue that needs to be tackled by economists and society is not just ‘knowing’ the world accurately. It is about ‘producing’ it. About ‘performing’ it. It is not only about economics being ‘right’ or ‘wrong” but also (and perhaps more importantly) about it being ‘able’ or ‘unable’ to transform the world. Economics today and for some time prior has swung between ‘representation’ and ‘action,’ between science and policy, between academic inquiry and political intervention, both as a discipline and in the careers of many individual economists. Sachs is far from alone in this respect. Economics often seems abstract (to some of its proponents, as well as to its critics), yet it also articulates with, influences, is deployed in, and restructures concrete economies in all their messy materiality and their complex sociality. How can we confront such a cumbersome object?
Many social scientists (sociologists, anthropologists, etc.) confront economics through the notion of ‘performativity.’ For the philosopher J. L. Austin, a performative utterance is a specific kind of statement or expression that establishes its referent through the very act of uttering (Austin 1962). In saying, for instance, ‘I apologize,’ I am not reporting on an already existing state of affairs. I am bringing that state of affairs into being. To say “I apologize” is to make an apology. “I apologize” is, thus, a performative utterance. Although (as far as I am aware) it was Austin who coined the term “performative,” the notion partakes of a long pragmatist tradition (nurtured by the work of authors such as Charles S. Peirce, William James, John Dewey, Charles W. Morris, and more recently John R. Searle) for which a central issue is the way in which actions, entities, and representations are intertwined. Performativity is not achieved by words alone. Even in the case of a simple utterance such as “I apologize,” the speaker can undermine the performative effect by adopting a sarcastic tone of voice or sneering facial expression. Then the words no longer constitute an apology: they do not bring into being that of which they apparently speak. More generally, the ‘conditions of felicity’ that make an utterance successfully performative are social as well as linguistic and bodily, as the sociologist Pierre Bourdieu points out (Bourdieu, 1991). In the Middle Ages, a monarch could make someone an ‘outlaw’ by declaring that person to be such, but only if the monarch’s right to do so was accepted sufficiently widely.
Although the origins of the notion of performativity lie in philosophy, the concept has been taken up in the social sciences and humanities more widely. Judith Butler, for example, takes it into the mainstream of feminist theory (1990, 1997). The diverse fields that have adopted Robert K. Merton’s (1949) notion of the ‘self-fulfilling prophecy’-in which the release and social circulation of a description or prediction enhances its validity-can be seen as investigating a version of performativity. One area in which the notion has been especially drawn upon is science studies. Historians, sociologists, philosophers, and anthropologists of science have used performativity or similar notions to understand the nature of scientific claims and practices. For instance, Ian Hacking (1983) showed how the sciences’ representations of the world can be understood only in their close entanglement with intervention in that world. Andrew Pickering (1995) suggested that a ‘performative idiom’ more attentive to activity than to knowledge alone, could surpass the limitations of the ‘representational idiom’ that is common in the scholarly appraisal of science. Barry Barnes (1983) pointed to the performative nature of the feedback loops between certain terms-which he calls ‘social kind’ terms-and their referents. These approaches connect to larger considerations of the reflexive nature of modernization and of the complex interactions between science and society (see, for example, Beck et al. 1994).
The two first paragraphs were impressive. It is a pity that Ken Zimmerman did not use this impressive case to let people know how economists’s were divided concerning the transition strategy. Geffrey Sachs took the rapid transition strategy, whereas there were many who sought more gradual transition policy. Seen from the present point of time, rapid transition in East European and ex-Soviet countries brought many deforms in economic structure and generated oligarchy.both in economy and in politics. Chinese took gradualist strategy. This is one of reasons that China was more successful than Russia in its economy. Gradualists put more emphasis on institutional and customary aspect of the economy. It was the good opportunity to reflect on institutions. They depend much more on customs than stipulated rules. Ken Zimmerman must be able to contribute in this aspect of economics.
At any rate, the transition was for economics a precious experience and a rare opportunity of experiments. We should learn more from this history.
For me, Yoshinori the key proposition is that economists somehow manage to project their abstract models onto economies. While economic man, say, at the outset is a purely abstract invention of economics, it gradually becomes true because powerful actors manage to reconstitute the world in its image. So, we should never buy into the idea that economics-the theoretical abstractions of economists-can be separated out completely from the practical workings of the economy. Instead, hold onto the view that economists are active partners in economic activity. Economists do not study the economy; they perform it. Take for example, the Laffer curve on a napkin (https://americanhistory.si.edu/collections/search/object/nmah_1439217). Economist Arthur Laffer drew the curve in 1974 during dinner with Donald Rumsfeld and other Republican politicians. Because the conditions needed to make an utterance successfully performative are social as well as linguistic and bodily, a lot more would be needed to make Laffer’s napkin drawing successfully performative than just Laffer’s enthusiasm and the drawing. It required first the Presidency of Ronald Reagan and the rise of neoconservatism. From that Laffer’s drawing became Reaganomics (supply-side economics). Which has been Republican Party dogma ever since. Trump’s 2017 tax reform law was the latest iteration of the dogma. But still it remains incomplete. After the 2017 law the dogma is probably denied now by more than denied it while Reagan was President. Performativity is often a decades long or even centuries long process.
As for Jeffrey Sachs, he was not nearly so radical as many of his economist colleagues. And he was considerably more reflective on his actions than they. Most, like the ‘Chicago-boys’ never showed any hint of reflection or remorse.
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Great resource Ken, thanks for posting. Constructive comment Yoshinori. Appreciate it.
It is undeniable that economists and economic doctrines have had an influence on real economies and sometimes the influence has been very bad. Someone on this blog (sorry I can’t recall who) said an engineer was an interpreter between the theoretical physicist and the mechanic. In a healthy system he intermediates in both directions. Practical economists in business or government are in fact working as engineers who have to decide which bits of economic theory are applicable to a given situation and whether and how they need to be battered and bent to fit. It is a necessarily highly uncertain exercise and it is best to leave large error margins to avoid doing harm. Unlike real engineers, however, there is no training in economic engineering and useful economists learn on the job, if at all. Moreover there is little interest among academic economics in the experience of the “engineers” and their feedback on the theoretician is extremely limited. I am reminded of this when contributors to this blog generalise about “economists”. Sachs learned his economic engineering on the job as well. No doubt he is better at it now than he was when he started. I don’t know enough about Bolivia to comment but it is possible that there was no painless way out of their predicament. Runaway inflation is debilitating for any economy but halting it is nearly always disruptive.
Engineers are essential in any system in both the hard and social sciences, because they extrapolate out current thinking, but even they are are left behind in times of paradigm change. All of the Ptolemaic cosmology engineers kept making that system a little less wrong for hundreds of years, but it took the temporal universe reality inverting single concept of helio-centrism to actually resolve Ptolemy’s systemic problem….after which the engineers dutifully found new ways to practically apply the new paradigm. Precisely like I have done in my book.
In this instance the engineering example is apples and oranges. If one carefully listens to and observes the actors (human and nonhuman) who create economies (sellers, buyers, bankers, politicians, investors, financialists, etc.) they will reveal and explain why they construct as they do. Their theories and priorities are revealed. For arguments sake we can identify social scientists as those who do this listening and observing. Historically, each kind of social scientist has at times exceeded this mandate and attempted to substitute their theories and priorities for those who do the bulk of the construction work. Some of this is even legitimate as social scientists have a non-disciplinary interest in how the economy looks and operates. It is the extent and focus of this involvement that is of concern. Social scientists should not be imperialistic. That is, they should not attempt to force construction of the economy in the image proposed by their theories and priorities. In violating this restriction social scientists propose substitution of their discipline’s views and designs for those of the many other actors involved, including institutional actors. From my research it seems economists are the most frequent violators and the least reflective on their own actions’ impacts on others in the economy. In simpler terms, economists are staggeringly imperialistic. In part this is a result of economists’ training. Which is decidedly ethnocentric and authoritarian. And, in part the result of economists’ general lack of curiosity.
The engineer/scientist connection suggests a collaborative of equals and an exchange of information. With all involved partners to the collaborative learning and teaching. My experience with economists is they only teach but do not learn from the other actors constructing an economy. In fact, they often ignore the intentions and needs of those other actors about constructing an economy. And may even at times seek to punish other actors if they stray from or oppose the preferences of economic theory. The events in Chile with the ‘Chicago Boys’ being an extreme example of this involving armies and armed conflict. This is a dangerous development both because it tends to send economic development off in a single direction and because it reduces or denies widespread participation in the construction of economic life and the outcomes that flow from that life.
Ken, I don’t want to defend the “imperialistic” tendencies of economists. Chile is an instructive example of the bad effects. You deplore it when. “social scientists propose substitution of their discipline’s views and designs for those of the many other actors involved, including institutional actors”. I agree that we should listen carefully to economic actors and be suitably modest and tentative when we advance prescriptions. The point of social science, however, is to spot connections that may not be obvious to the actors themselves. Received opinion was mercantilist when Ricardo preached free trade; equally it mainly believed in sound money and balanced budgets when Keynes urged budget deficits. We have to accept the wishes and objectives of the various actors but if we can’t occasionally advise them on a better way to get there what is the point of social science? Anthropologists like historians are impressed by life’s rich variety and sceptical of generalisations. Scepticism is good but now and again you have to make a call. That said, I doubt if we would disagree in practice.
“I agree that we should listen carefully to economic actors and be suitably modest and tentative when we advance prescriptions. The point of social science, however, is to spot connections that may not be obvious to the actors themselves. The point of social science, however, is to spot connections that may not be obvious to the actors themselves.”
Perfectly reasonable statements. As is this one: “Scepticism is good but now and again you have to make a call.”
Here is a list of “connections that may not be obvious to the actors themselves”:
1) All of the current heterodox reformers are about and agree that money and finance are where the problem lies
2) Every economist and pundit is either using only mathematics or theoretics based on certain unexamined orthodoxies (for instance the quantity theory of money and the velocity of its circulation) as the ways of looking at the problem…..when
a) looking directly at the economic/productive process itself in its entirety and at its terminal ending point (retail sale) for every consumer product and service and
b) considering that two unexamined aspects of money is that the current paradigm for its creation and distribution (Debt Only) is a virtual monopoly controlled by a single business model, and it (money and debt) exists only within an accounting infrastructure and will thus be subject to its conventions (equal debits and credits sum to zero) and
c) putting these two insights together equal debits and credits of money at retail sale enables the resolution to all of the most problematic and resistant problems of the current economy and its paradigm (individual monetary scarcity and systemic monetary austerity, creeping and high inflation, debt deflation, puzzling paralysis of policy toward the existential problem of climate change)
3) The actual operations of paradigm changes are always deep simplicities informed by new tools and/or insights (numbers 1 & 2 above) that alter entire patterns and are always in conceptual opposition to the current paradigm (Debt Only vs Monetary Gifting).
So lets make the call already.
In negotiations that are collaborative rather than driven by top-down force, all the actors involved at times “spot connections that may not be obvious to the actors themselves” and may suggest how those might affect the results of the negotiations. But this in no way ensures their suggestions will be accepted by the group negotiating. It is my experience that economists do not accept such rejections well. And often they push back, hard. Economists also have difficulty compromising about the suggestions they put forward. I am not certain why this situation exists. But it needs to be examined if economists intend to continue taking part in negotiating groups. Each party to a negotiation enters with preconceptions and assumptions. But none in my experience defend these with such certainty as economists. Even politicians tied to clear political ideologies are more willing to compromise than most economists with whom I have worked. Is this the result of training and education, or of the types of persons economics programs recruit, some combination of these, or some other factors? I do not know. But it continues to be a potential impediment to negotiations. We can, I believe help to change this. And ought to do so. I have seldom witnessed or heard of sociologists, anthropologists, historians, etc. displaying such reluctance to compromise or accept rejection of their suggestions. Perhaps we should examine the differences in how these social scientists view working in negotiations with how such work is viewed by economists. Might be enlightening. Among social scientists, why do economists stand out in this respect?
Craig, I agree that in any negotiations finally a decision on action must be made and implemented (performed). In this work, paradigms (the term you use) among participants almost never wholly align. The real heart of any negotiations is to fit these different paradigms into a way to action. Even if sometimes the action fails. There are two mains problems facing this effort. First, participants that will not change their stance to accord with any agreement reached by the other participants. Second, participants that sabotage the work, often deliberately. Unfortunately, economists are often involved in both problems. To put in place the ‘rules’ you list would require that negotiations groups include only heterodox economists. This is not realistic since often even the moderators of negotiations cannot control a group’s membership. And generally, have no desire to do so, since it is counter to the goals of negotiations.
You’re quite correct regarding negotiations, but you’ve not considered that a mass socio-economic and political movement whose integration of the particles of truth in opposing economic theories, and that is able to integrate traditionally opposed political perspectives due to its being beneficial to all economic agents individual and commercial can consolidate the main advocates for change and isolate the true and virtually only opposition to same, namely for profit finance.
The private for profit Bankers and The Temple have alternated in their dominance of the rest of us with their monopolistic monetary and financial paradigm, namely Debt Only, as the sole form and vehicle for the creation of money and its distribution for over 5000 years.
And now we’re standing up on our hind legs and changing that into personal and systemic freedom with the 1500 year old formalized system of accounting and its conventions, and the missed and neglected insight that the point of retail sale is the ending point of economics and that thus equal debits and credits of money at that point can guarantee stable economic and financial security for all.
Beyond that only rational, ethical and philosophically aligned taxation and regulations are needed to protect us all and the system itself from the inevitably other intentioned and anti-social who we “will always have with us”.
It’s as simple and paradigm changing as that. And for those who are caught in the fears, doubts and inactions of obsessive dualism and/or the love of complexities, no matter, as Aristotle, who even though he may not have had everything right, was correct in saying: “We learn by doing.”