Economics and “the market”

Economics Now Points Away From the Laissez-Faire Approach”: A recent interview featuring the economist, Sureish Naidu, briefly summarized all the reasons why economics these days has a lot more to contribute to the policy world. Here’s a few quotes to which I could directly relate to my own reflections and past experience with economics, being my major:

Q: But of course, everyone claims to be empirical. Those who hold the opposite view from you would say that they’re on the side of empirics, and you guys are the ones doing the purely ideological work. 

A: Yeah, I guess everyone will say that. In a way, everyone has always said that: ”Of course, what we’re doing is evidence, what everyone else is doing is just pure ideology.” But it is now very difficult to lie with statistics in economics.

Q: And you don’t see economists’ capture as having a major role in this?

A:(…) The vast bulk of economists are not involved in any of that stuff. They’re doing their work and not even particularly ideological about anything, just doing their economics work and thinking about things. It’s only in the economists-for-hire world that you see the corruption side of things, where people are basically getting paid to write reports about things. That creates a distorted view of the field. But those are not professional economists. It’s a whole set of people that call themselves economists that work in DC and basically say that economics says things like “Mergers are generally efficient,” in total contradiction with the empirical evidence.

Q: Sure, but the financial crisis set in motion a process of introspection, didn’t it?

A: (…) I agree with you that something is different. It might be a general “Millennials are left-wing.” I know for a fact that some of my grad students who were research assistants at the Federal Reserve all became pro-Bernie [Sanders] people in the ’15–’16 election cycle. That’s surprising to me that you could see this very left-wing politics alive in very traditional economic circles. So something’s definitely changed.

This also comes to suggest that the majority of (academic) economists actually enjoy far less influence in the policy world than many people outside the discipline tend to believe, and thereby, condemn economics by its entirety (e.g. “What if Sociologists Had as Much Influence as Economists?“). From the point of critics, the latest launch of the “Economics for Inclusive Prosperity” initiative may be a subtle confession by “mainstream economists” that the latter group are now supposedly taking responsibility for the calamities of e.g. the 2008 financial crisis. But in my view, this launch should be treated as a firm attempt to establish the fact that economics is not, by its inherent nature and history, a mere tool for promoting conservative policies.

A day after I wrote this post, a highly informative piece by Bloomberg columnist, Noah Smith, depicted historical and current frictions between economists and conservatism/US republicanism: “Republicans Turn Away From Experts and Economics” (2019). In relation to this piece, also check “Economics Stars Swing Left” (2015), “Do Economists Lean Left?” and “Economists Are Warming to Government Intervention” (2016). Nevertheless, whether or not economists are turning right or left, more globalist or localist, these directions should be treated as coincidental intersections with ongoing, pragmatic needs and symptoms of society rather than as permanent ideological turns. As current unacceptably high levels of income inequality, especially in the advanced democracies, are comparable to levels seen during the Great Depression of the 1930s, of course it makes sense from a policy making point of view to turn more to the left of politics. Against all forms of labelling, what I try to repeat to myself these days is: use systematic empirical evidence as a disciplining device against ideological policy prescriptions (Naidu et. al. 2019).

In fact, there is so much thematic variety of economics research going on these days (see: “Economics After Neoliberalism“). Given the ever-growing ample availability of digitalised (big) data and progress in statistical tools, the sub-fields of economic history, behavioural economics and labour economics are particularly earning greater focus. The rise of behavioural economics is especially important against the backdrop of (outdated) criticism of economics involving the disputed assumption about perfectly rational agents. By my own curiosity, I would like to also mention my excitement for current trends that are taking place in political and cultural economics: how do institutions or cultural practices establish different development trajectories? Theory has gradually been losing steam since the late 90s, when highly data-driven studies on the (insignificant) impact of minimum wages on employment by David Card and Alan Krueger (and most recently in this study by Dube et. al. (2019) achieving the same empirical results) set forth the gradual transformation of economics as an empirical exercise.

But when compared to other fields, the exciting changes that are happening within economics are perhaps taking place in a much more incremental manner compared with other fields. A recent study by Angrist et. al. (2017) calculated weighted citation rates between each of five social sciences: political science, sociology, anthropology, psychology and economics, to the other four based on papers cited and published between 1955 and 2015. On the issue of economists these days incorporating insights from other fields into their research, the inconsistent scaling of the y-axes doesn’t seem to demonstrate an appealing image of economics that much. But at least, things are moving in the right directions.

Another revealing study from 2018 by the economist, Henrik Kleven (Princeton), looked at thematic changes within the sub-field public economics using quantitative text analysis: it concludes that the language of public economics has changed substantially over the last four decades. Economists now talk a lot more about social policy, such as transfers and education, and political economy, such as the 1% and income inequality.

However, one unfortunate trend is the decline of mentions about taxes. Tax avoidance, especially among the richest individuals and multinational companies, has been part of the problem behind the rising wealth inequality in many Western countries today. This has even been acknowledged by economists who previously downplayed the magnitude of the inequality problem: now they urgently advocate for the return of progressive tax rates (see “Land of Hope and Dreams: Rock and Roll, Economics and Rebuilding the Middle Class” or “The Rise and Consequences of Inequality in the United States” by Alan Krueger). “The Great Gatsby Curve” by Alan Krueger also shows how income inequality these days are associated with less social mobility, and how future earnings are becoming increasingly more dependent on your own family’s present earnings (intergenerational mobility) in many Western countries today (also see “Intergenerational mobility between and within Canada and the United States” by Miles Corak).

Source: Angrist et. al. (2017)
Source: Kleven (2018)
Source: Kleven (2018)
Source: Kleven (2018)
Source: Kleven (2018)
Source: Kleven (2018)
Source: “The Great Gatsby Curve” in Corak (2012)

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