The Dull Compulsion of the Economic (#3)
A series of blog entries by D&S collective member Larry Peterson.In the last few weeks an interesting debate has been going on, primarily in the blogosphere, about the relationship between so—called heterodox and orthodox economics. The debate was set off by an article posted by The Nation in which Chistopher Hayes surveyed the history of a relationship characterized for many years by utter dismissiveness on the part of the orthodox towards the rebels (Paul Krugman has gone so far as to characterize the kind of work of economists acclaimed by the heterodox, like John Kenneth Galbraith, for instance, as, essentially, not even wrong; an apologia of sorts, by Galbraith's son, James, is here), and taunts of reaction, narrow-mindedness, and hostility to empirical evidence on the part of conventional economics by the heterodox. But he also noted that this standoff is beginning to ease. He mentions, too, the strange role of behavioral economics in mediating this relationship, and leaves us with the sense that there is much dissatisfaction with the status quo on all sides.
I'm going to provide links to the subsequent debate, which should, in turn, fill in some of the contours in the picture of the development Hayes tracked in his Nation article. Much of the relevant discussion can be surveyed here, but I'd also add Dani Rodrick's contribution (see his May 30th entry and Brad DeLong's).
Since I am a proud member of URPE (the Union for Radical Political Economics), it probably won't surprise many people where I come out on many of the issues brought up in the debate. But I would like to discuss two specific aspects of the debate which seem most important to me. The first concerns the place of methodological individualism in the dispute. Just about every conventional Econ 101 textbook contains in chapter one four basic assumptions of economics, of which that of methodological individualism is almost always given the most prominent place. My desk-reference (REA's Economics Problem Solvers) defines methodological individualism thus: "Societies are composed of individuals. All actions by societies are really the actions of many individuals. Consequently, economists place great emphasis in the study of individuals" (p.1-B). Such a schematic and in ways tautological rendition is often all that beginning students will encounter by way of the presentation of one of the fundamental assumptions of the entire discipline of economics. But, as Marx outlined so well in the Grundrisse (see especially pages 266-274 in the Penguin edition), the exchange of labor for wages involves different presuppositions which structure the logic of the exchange for the different individuals involved, and which become specifically relevant to initiating the exchange based purely on the socially mediated relation of class, rather than a more abstract one involving the self-interest of individuals. You can't engage analytically with the phenomenon unless this relational element provides the context in which individual decisions, intentions and incentives are shaped. Heterodox economics has unearthed many such asymmetries in what were considered basic and elemental economic relations throughout the years.
The other topic I'd like to discuss briefly concerns behavioral economics. Behavioral economics, which has attempted to import the findings of cognitive science and even neuroscience into economics, by both interrogating some of economics' basic assumptions—especially that of rationality, another one of the big 4 mentioned in intro texts—and attempting to structure experiments which might provide a firm empirical basis for economic behavior, has thereby attained a stature that many of the orthodox cannot but respect, notwithstanding its attacks on the rationality assumption. After all, studies on live human subjects—on real individuals—were precisely the sort of thing orthodox economics couldn't achieve (there are few ways to introduce controls in studies, particularly if the subject matter involves interactions in free markets); and that contributed to the orthodox insistence on modeling and the excessive reliance on mathematical abstractions of which the heterodox have long complained.
My concern with behavioral economics is that while it relaxes the rationality conditions, it seems to be reinforcing that of methodological individualism, particularly inasmuch as it is precisely consumer behavior that is most amenable to neurological—type experimentation (it's a lot easier to wire up a subject and test her reactions when presented with choices between receiving objects and giving up tokens rather than, say, evaluating job offers for real cash or learning new tasks; and such studies are difficult to structure over long periods of time, which, after all, provides much of the sense of economic decision making). And while behavioral economics is fast becoming more sophisticated (it has shown how subjects tend to prefer punishing freeloaders rather than maximizing values in replays of game settings), I fear that these very gains may prompt its practitioners to cast elements of economics, like labor economics, under the inappropriate guise of that which can more successfully be studied using its methods, like consumer behavior. And even then, given the role of advertising and whatnot (as John Kenneth Galbraith would have insisted), we must be very careful in attributing this kind of behavior to individual choice alone.
Labels: behavioral economics, Brad DeLong, Christopher Hayes, Dani Rodrick, heterodox economics, James K. Galbraith, John Kenneth Galbraith, Paul Krugman, URPE
This Just In: D&S Reads the News (#2)
The second in a new series of blog entries by D&S collective member Larry Peterson.Before getting into the econ nitty-gritty, I'm going to take this opportunity to briefly lay out my plans for this series of blog entries, and invite suggestions, criticisms, and comments. It's my impression that lots of people aren't aware of the diversity of opinions and magnitude of the disagreements that characterize academic and policy discussions in economics, finance and business, even among conventional practitioners. That being the case, it behooves all of us, and especially those of us who consider questions of justice to be an essential motivator in our thinking about such issues, to attempt to maintain as broad an overview of the subject as we can.
Accordingly, I propose, in this series of blog entries, to use my familiarity with the literature to trawl, two or three times a week, for stories, especially in the mainstream press, but also in academic papers and longer articles, that seem to me to be emblematic of how the economy interfaces with questions of justice in its current conjuncture. In addition, I hope to find stories that aren't widely disseminated or discussed in the mainstream press (though they are, in many instances, mined from it).
In short, I hope to provide a useful reference and summary for those who, while interested in economic issues in general, aren't familiar with all the facets of the controversies that animate—or should animate, from the perspective of those for whom social justice issues are important, or indeed paramount—its public debates.
As for a name, I propose two candidates: "Moral Hazards" and "Lagging Indicators." If anyone has any strong feelings about the name, or proposes an alternative, I'm all ears. Otherwise I'd probably go with the former.
Oh—then there's me. I'm a very recent addition to the D&S collective, and am a member of the Union for Radical Political Economics (URPE). I'm not a professional economist or journalist, but have studied all aspects of economics, finance and business pretty intensively for about fifteen years now. Hey, that was good enough for Marx, right (forgive me, Karl!)?
Alrighty (to use the favorite expression of our esteemed co-editor here): I'm going to focus today on two issues: trade with China and the housing bubble (so much for all the bit about attempting to publicise what often gets overlooked, I know). Last week the administration slapped import duties on certain Chinese manufactured goods, claiming they were the beneficiaries of improper subsidies. And today, reports The New York Times (U.S. Toughens Its Position on China Trade), a World Trade Organization complaint is being prepared against China which will center on trade barriers and the piracy of goods. The Times notes that the recent aggressiveness towards China in trade matters stems from an increasing impatience in the Democratic-led Congress for action. In this light, the Bush administration appears to be attempting to prevent Congress from taking even harsher actions in the future, if nothing is done now. The administration is particularly keen to avoid such a scenario while Treasury Secretary Henry Paulson is engaged in sensitive ongoing talks about revaluing China's currency in an attempt to reverse the humungous US trade deficit with China. The Times also says that China is trying to ease tensions by committing to more large bulk purchases of US imports, which the administration no doubts hopes will keep select members of Congress quiet while softer diplomacy is given a chance to work.
The reason I picked this article to comment on is that it's interesting to juxtapose it with a piece that appears in today's Asia Times (How Foreign Firms Dodge Taxes in China). The article, by Olivia Chung, begins with a paradox: "It seems strange that while Chinese enterprises, including state-owned, joint-stock and private companies, have been making profits in recent years, nearly half of all foreign owned-businesses have been losing money. Yet while so many foreign enterprises claim to be losing money, China witnesses a continual rise in its foreigh direct investment (FDI)." The article goes on to present some pretty astonishing statistics (mostly from official Chinese sources): two-thirds of foreign companies in China report "extraordinary losses;" of the top 10 countries or regions investing in China in 2005, many were offshore financial centers (including Hong Kong) customarily grouped as tax shelters, and that these foreign funds often outstripped those provided by major trading partners, including the US; and finally, the kicker: "…foreign funded companies contributed to one-third of China's industrial output, but generated one-fifth of the total tax revenues." The upshot of the story is clear: foreign investors in China are being accused of using all manner of devices to transfer costs to their Chinese subsidiaries while repatriating profits without paying tax. That being the case, the US complaints about China may not resonate as much with trade negotiators in Beijing (though the article also mentions how Chinese firms game the system by registering as foreign, and that local officials encourage foreign investors to play the tax-avoidance game to pad the books on local production.
Now to the housing bubble. The Washington Post had an article today which suggests that one of the most alarming, yet underappreciated aspects of the housing bubble is the prevalence of fraud. It notes that a confluence of developments led to a situation rife with opportunities for criminal gain, from lax-or no-oversight of new mortgage companies to the huge demand for bonds made up of repackaged mortgage loans (a good deal purchased by the very Chinese we want to stop from buying our bonds now). Much of this stuff is common knowledge now, so I'll simply let the follwing comment from the article speak for itself: "No one knows exactly how extensive the crime has become, but new data from the federal government suggest that it has jumped tenfold since 2000 (another bubble year, recall, LP). Prosecutors are finding cases all over the country in which sham transactions, based on fraudulent appeals, led to homes changing hands at far above their real value." If such homes were purchased far above cost, that must have driven up the values of surrounding properties in to a similar extent. And that means there may be more-perhaps far more air left in the housing bubble than we care to imagine. This is particularly so inasmuch as investment in industrial property, which offset losses in the constructions sector for a while, appears to be tapering off as well. (Note also the April 7th op-ed piece on the housing crisis by Dean Baker of the left-leaning Economic Policy Institute (and also an occasional D&S contributor.)
Oh—one last thing. The New York Times reported yesterday (Democrats Seek to Lead the Way in Tax Overhaul) about Democratic efforts to abolish the alternative minimum tax. This tax is slated to fall on unprecedented numbers of Americans in coming years (as their nominal incomes enter brackets set long ago, before the inflations of the ‘seventies and ‘eighties), and most politicians want to avoid this at all costs. The Democrats, while deserving applause for attemting to shield middle-class families from the incidence of this tax, propose no new taxes to offset the losses in revenue. The Times notes that this amount "…would be far bigger than Democratic initiatives to provide money for children's health care, education or any other spending program." Scared of their obscenely wealthy donors, ir seems the Dems are all too willing to shelter the rich by abolishing the AMT altogether, rather than for families earning up to, say, $250,000 a year (or raising other taxes on them). This inn is already full.
Labels: alternative minimum tax, China, fair trade, housing bubble, subprime lending, URPE