When the Economist Does Bad Philosophy

Authors:  Erin Nash and Joe Seydl

In an article in the New York Times in December 2011, Gregory Mankiw, Chair of Harvard University’s economics department, asserts that “like most economists” he doesn’t “view the study of economics as laden with ideology”.

However, his piece last month in the New York Times entitled “When the Scientist is also a Philosopher” indicates that there has been an evolution in his thinking. He effectively retracts his 2011 statement by admitting to the (in his words) “dirty little secret of economists who give policy advice”, which is that “When we do so, we are often speaking not just as economic scientists, but also as political philosophers. Our recommendations are based….on our judgments about what makes a good society”.

But the reality is that the vast majority of economists are not also trained in political philosophy during their undergraduate education, let alone able to be considered ‘political philosophers’. This is just one of the reasons why more than 42 groups across 19 countries in our global network are rethinking economics and seeking changes to the way economics is taught at universities. 

Political philosophy is a separate academic discipline with a much longer and richer history than economics, replete with its own body of knowledge, skill sets and methodologies, and importantly, many complex ongoing debates. Mankiw fails to acknowledge and respect this, and through the philosophical mistakes and omissions he makes in his proceeding analysis, it is evident that we should view Mankiw himself as an economist and not also as a political philosopher.    

For example, Mankiw instructs practicing economists and students to “be sure to apply the principle “first, do no harm”. But just what is a harm? Mankiw presupposes a common acceptance of a definition of harm where no consensus exists, especially among academic philosophers. This is the first indication that Mankiw is smuggling morally-loaded material into methodological prescriptions he conveys as morally neutral.  

For Mankiw, the ultimate harm is interfering in what he calls the voluntary agreements made within free markets. This is a type of libertarian philosophy most famously propounded by Harvard philosopher Robert Nozick in the 1970s, but that is very easily countered.

The first key counter argument relates to fairness and inequality. This argument interrogates the background conditions within which so-called voluntary transactions are carried out. If someone is desperate (hungry, homeless, ill, needing to provide for their dependents) or they do not possess the knowledge and ability to bargain on fair terms, then the transaction cannot be considered to be without a type of coercion, and therefore does not count as voluntary. This is one is one justification for not allowing people to sell themselves into slavery, and perhaps one of the key reasons why a society may choose to mandate a minimum wage. Mankiw’s colleague at Harvard University, Political Philosopher Michael Sandel, outlines the fairness and inequality argument in his latest book, ‘The Moral Limits to Markets’.

The second key counter argument relates peoples’ rights. By not intervening in voluntary transactions we can sometimes fail to uphold certain human rights. What is and is not a human right is also somewhat of an open philosophical debate. However, there are compelling arguments that universal access to a certain standard of health care is a human right, and that through providing this we value and respect humans in an appropriate way. This relates to the second key argument within Sandel’s book regarding how we ought to value certain things within society, and how these things can be degraded or corrupted if we engage in economic or market reasoning about them.  

Mankiw may even accept these counter-arguments and agree that ideology lurks underneath his advice. However, he might attempt to argue that economics itself still remains ‘value-free’ because it is only in the application of economic models and the provision of policy advice based on this economic information that the economist is forced to make value judgments. But this does not hold for the following two reasons.

First, the construction of some types of the economic models very obviously demand value judgments on behalf of the economist. For example, discount rates are parameters used within some modeling that represent the rate at which society as a whole is willing to trade off present benefits for future benefits. The discount rate therefore effectively places a value on the welfare of current and future people. In calculating the appropriate discount rate to use, the economist must decide what we owe to future generations. What discount rate economists ought to use in their models is therefore tied up in moral and political philosophy and cannot be answered by using economic data alone.

Second, economists study social phenomena, which in essence is created and then attempted to be understood by humans. As such, economic phenomena are continually manipulated and directed by new ideas, beliefs and assumptions which generates an intrinsic feedback loop between the ideas proffered by social scientists like economists, and the way in which those ideas eventually manifest within, propagate through, and affect the very social world some of these scholars claim to be studying objectively. Many economists are not aware of or do not understand this important relationship. Thus the ontology of the social world mandates that the endeavors of economists are fundamentally not positive, but normative.

Our arguments in response to Mankiw highlight the secondary nature of economics in providing answers to these policy questions and the predominance of political and moral philosophy. It therefore seems there are two options open to society: either economists are cognisant of the boundaries of their discipline and engage and defer to the expertise of philosophers on certain matters; or economists also play the role of a political philosopher.

Both of these solutions necessitate a change to the way economics is currently taught at universities to somehow encompass moral, political and economic philosophy, so that as a minimum, the economist is aware that economics is not an objective, positive science, and that economics and its application are entangled with ideology. It is critical that we understand this and are adequately equipped to navigate the implications that follow with due care.  

Authors: Erin Nash and Joe Seydl – International Organisers for Rethinking Economics in London and New York.  Erin's Twitter handle is @ErinJNash.

Shimomuran Economics and the Rise of Japan and China

Author: George Tait Edwards

The BoJ Law of 1942 set out the major objective of the BoJ as assisting economic growth. During Japan’s Economic Miracle years (from about 1950 to 1975) the BoJ enabled Japanese economic growth by acting under Government control and creating no-cost investment credit (with a targeted effect of between 10% to 15% of GDP a year) with the objective of increasing the percentage of national investment in plant and equipment in private industry.

“Japan’s most influential post-war economist” was Dr Osamu Shimomura (1910-89). Shimomuran Economics is based upon no-debt Investment Credit Creation at the BoJ, where created credit is distributed to all businesses (including millions of SMEs) through the national banking system to long-term, low-cost loans for private industry in every part of the country, creating a lasting boom in capital investment and widespread prosperity as evidenced by high, continually increasing productivity, in a nearly full employment economy with increasing wages and good social benefits.

Dr Osamu Shimomura’s model replaces the I=S Keynesian Investment-Saving equation in his “Model of the Japanese Economy” (Shimomura, 1961) with the more dynamic equation:

Is +Id = S+D

where Is= Investment financed by Saving, and Id = Investment financed by Debt, and where S=Saving and D=Debt

This is the prime equation for an economy in which investment vastly exceeds saving due to investment credit creation. That central equation of Shimomuran Economics is the natural development from Keynes’ observations, as follows:

i) “While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (Keynes, 1936, p. 376)

 ii) “Saving can be created in advance of the return on investments which justify it..”

These observations are fundamental to the practice of Shimomuran economics. Or as Kenneth Bieda has written: “The Japanese monetary policy, in fact, applied one of the Keynesian principles: saving does not have to precede investment in conditions where there is unemployment, but investment acts financed by bank-created money can precede savings" (Beida, 1970).

iii) Central Banks can purchase no-debt assets by making claims against themselves - In the “Tract on Monetary Reform”, Keynes recognised that a Central Bank “may itself purchase assets, i.e. add to its investments, and pay for them, in the first instance at least, by establishing a claim against itself” (Keynes, 1923).

This is precisely what the Central Banks of all the “economic miracle” countries have done (the USA 1938-44, Japan 1946-75, China mid-1970s to now) and they did not only do this in the first instance but, in the case of Japan and China persisted in that policy over several decades, as a deliberate act of long-term economic policy. These created credits have a repayment schedule, so they are CB assets, and no borrowing to support them is necessary, but a fictional entry of “savings of the people” is usually generated to preserve the double-entry nature of national bookkeeping. As John Kenneth Galbraith observed “the creation of money is so simple that the mind is repelled”.

Keynes’ writings are like a box of fireworks and not just the single-rocket solution to deficient demand in which the neoclassicists have boxed him. The economist Professor Richard Andreas Werner, has proven that the Japanese BoJ credit creation has a Granger Predictive Causality linkage to subsequent economic growth (Werner, 2005). Shimomuran economics is not, as so many neo-classical economists have told me over decades, just based on a correlation but is now founded on a Granger Causative proof - that higher investment credit produces subsequent higher growth.

Shimomuran economics has the same credit-creating principles as the Rooseveltian economics which won the Second World War for the Allies by producing the explosive economic growth of America from 1938-44, when the USA doubled its economic output. It is the understandings set out in his seminal book “Seicho Seisaku No Kihon Mondai” which propelled Japan, in the course of a few decades, from being an  impoverished war-damaged economy into one of the major industrial economies of the world. China’s adoption of Shimomuran economics from the mid 1970s has produced the largest economic miracle and potentially the major preponderant superpower of the 21st century.

The relevance of the Shimomuran Economic Model Today

According to the DBJ, Dr Osamu Shimomura (1910-89) “rose to become Japan’s most influential post war economist, founding a school of thought based on the “Shimomura Theory,” which attracted numerous followers" and "Dr Shimomura was well known for the development of a theory of economic growth based on a dynamic view of Keynesian economics.”Yet Shimomura’s works have been almost totally ignored by Western economists.

In brief, Shimomuran economics, by providing abundant capital:

a) Enables full employment and thus can tap all of the available human ingenuity in the economy

b) Improves labour productivity through higher investment in new and existing facilities

c) Provides upskilling of the workforce through training

d) Funds higher invention and R&D

e) Funds innovation and increases economic growth

f) Assists government by providing the capital funds for major projects and to provide the restorative capital required in the aftermath of national disasters

Abundant no-cost investment capital solves many of the economic problems of the world. As the master growth economist Dr Kenneth Kenkichi Kurihara has concluded with respect to the Shimomuran Model of Economic Growth:

“If, therefore, greater investment can be financed partly by credits, there is no need for that 'abstinence' which the classical economists considered necessary for economic progress, any more than there is for that 'austerity' which some present day underdeveloped countries impose on already under-consuming populations at the constant peril of social unrest. Nor is it difficult, in such credit-creating circumstances, to agree with Keynes' observation that investment and consumption should be regarded as complementary rather than competitive." (Kurihara, 1963, p. 61).

Why have Western Economists Ignored Shimomura?

The works of Shimomura are not generally available in the West, although the Library of Congress has many of his works and the National Library of Scotland has successfully acquired three of the eight which I asked them to acquire. The only English translation of one of Shimomura’s books ("Basic Problems of Growth Policy" 1961) has been provided by the Indian Statistical Unit at Kolkata.

If Western Economists have ignored Shimomura to date, then perhaps it is time to grant him his proper place as one of the world’s greatest economists. Judging by the great prosperity and history-tilting results his insights have produced so far, he should be placed where he belongs, among the giants of economic understanding.

Bibliography

Beida, K. (1970) "The Structure and Operation of the Japanese Economy" John Wiley and Sons Australasia Pty Ltd, Sydney

Keynes, J.M. (1923) "Tract on Monetary Reform"

Keynes, J.M. (1936) “The General Theory, Book 6, Chapter 24, Section 2

Kurihara (1963) Applied Dynamic Economics, George Allen and Unwin, London

Shimomura, O. (1961), “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy)

Werner, R.A. (2005) “"New Paradigm in Macro-Economics” Chapter 15 

Rethinking Economics Italia - Manifesto

Modern economics is a discipline that confronts a stark contrast between its willingness to reform and the static reality it faces, endlessly stuck on its own problems.

 Supporters of quantitative methods and supporters of qualitative methods often disagree about the role either plays in modern economics. While the former put forth a realist view of the world, the latter cry for normative reforms: students need to be taught how things should be rather than how they just are. Herein lies the figure of the social scientist, whose lack of interdisciplinarity today inevitably leads to a debate that is nothing short of hollow.

We need to stop thinking of the economist as someone who is able to tell us how things are going to change, how any economic policy affects our lives, and start turning future economists into social scientists who know how to face social, ethical, and anthropological problems alike. It is they who are going to carry on the normative approach, in a better, independent way.

Social scientists of tomorrow must base their work on their own beliefs, yet must overcome their creeds and to refute them, if needed. Their job is not to find the truth as much as disprove it. It is their own intellectual honesty and open-mindness which makes them a reliable scientist.

For this very purpose, we need to challenge the concept of the economics faculty as an institution whose sole job is to prepare its pupils to manipulate the inner workings of financial capitalism.

But even here universities fall short, and there are two words that tell us why: mainstream economics. In almost every university swathes of students are taught but mainstream economics – post-Keynesian and neoclassical. The rationale underlying this choice is that these are the only theories used by policymakers. A vicious cycle is thus created: alternative economic theories are put aside because they lack empirical evidence, and they lack empirical evidence because no policymaker wants to use them.

Therefore, we need to provide students, if possible from the very start of their academic careers, with the chance to have a taste of the different lines of economic thought, and to provide them with teachings that go pari passu with the evolution of the economic thought itself. To study different ways of thinking does not mean making things hard for the pupils as much as it means broadening their horizons.

We also need to overcome the hegemony of quantitative thinking. Quantitative tools, lacking variables that economic processes themselves cannot take into account, inevitably lead many a theory to fail. However, it needs to be said that challenging this hegemony does not mean reducing the use of quantitative tools; rather, it means aiming at discovering mathematical and statistical models that can take into account social and political parameters.

As of now, in fact, theoretical teachings and practical matters are completely out of kilter with each other. Economics, like any other social science, is created by people for other people. Hence, it withholds human virtues as much as its vices. Wrongdoings are commonplace and just because a law – be it economic, social, or political – works, it does not mean that it is right. Along similar lines, just because an economic theory has worked in the past, does not mean that it will fulfill any future needs.

Future social scientists, therefore, need to be prepared to work on the subtle difference between equity and equality and it is crystal-clear that modern economics cannot provide them with the necessary tools to face such a gigantic task. Rather than trying various (and not very successful) one-size-fits-all measures, universities should focus on offering specific trainings that encourage their students’ inclinations. This way, students can choose whether to follow a business-oriented career by applying to a business school, or to to continue towards a more academic path, in brand-new schools for social sciences.

Intellectual Darwinism and the fallacy of the marketplace of ideas

Author: Sam Wheldon-Bayes (Originally posted here)

I recently attended a panel discussion, organised by the University of Manchester’s Post-Crash Economics Society as a counterweight to the Royal Economic Society’s conference, between Victoria Chick and Diane Coyle on economic pluralism. The Q&A session became somewhat heated after one audience member suggested that the reason modern economics is dominated by one school of thought is that this particular school of thought has beaten out the others. He referred to the numerous paradigm shifts we have seen in economics – from the classics to Keynesianism and from Keynesianism to the monetarists – as evidence that the best theory prevails.

This, however, is a view which neglects the long history of paradigm shifts, both inside and outside economics. Wherever ideas and viewpoints are challenged, those who hold them are often quite naturally defensive. This is normal, and a perfectly human reaction. I am certainly not accusing anyone of wilfully suppressing debate and critical engagement – I think it happens accidentally because we are all, alas, human. However, just because it happens by accident does not mean it is a phenomenon we should close our eyes to.

Throughout the history of the sciences – natural and social – challenging viewpoints have been met with hostility. Within our own discipline, John Atkinson Hobson’s initial theories on under-consumption were to influence the thoughts of John Maynard Keynes over 50 years later in his magnum opus, The General Theory. However, in his own time, Hobson was not so highly regarded. Having found himself unable to counter the arguments of a friend using orthodox theory, he turned away from it, in what was to be a damaging career move. In his own words (cited in Keynes’ The General Theory, 1936: 365-6)

“The Physiology of Industry [was] published in 1889.This was the first open step in my heretical career, and I did not realise in the least its momentous consequences. For just at that time I had given up my scholastic post and was opening up a new line of work as a University Extension Lecturer in Economics and Literature. The first shock came in a refusal of the London Extension Board to allow me to offer courses in Political Economy. This was due, I learned, to the intervention of an Economic Professor who had read my book and considered it equivalent in rationality to an attempt to prove the flatness of the earth”

This situation – a promising theory which challenged the deficiencies of the orthodoxy of the time – bears a somewhat worrying resemblance to the present situation, particularly the recent cancellation of Manchester’s Bubbles, Panics and Crashes module. Differing points of view are blocked from academic positions, denied funding and effectively silenced. Of course, those doing the silencing do it in good faith, but that does not change the reality of the situation – dissent is possible, but exceedingly difficult. As a social science, we should be fostering dissent, debate and critical thinking, rather than impeding it. As pointed out in the Association of Heterodox Economists’ response to the last QAA review of the economics curriculum, almost all other social sciences view debate between different and legitimate viewpoints as central to their discipline itself.

If, like many in economics, we prefer to view our discipline as closer to the natural sciences than social sciences, there are still powerful lessons to be learned. Many of the natural sciences have a shameful history of suppressing what would later turn out to be revolutionary ideas. Alfred Wegener’s theories about plate tectonics were met with scathing criticism and hostility during his lifetime. Crick and Watson were instructed to drop their research on DNA, yet continued it on their own time – again, much like the recent Bubbles, Panics and Crashes module.  Even within the “purest” of fields, mathematics, Gauss was unwilling to publish his work on non-Euclidean geometry for fear of ridicule. This fear proved well-founded, as Lobachevsky was, indeed, to face ridicule for daring to publish work on non-Euclidean geometry.

This pattern of hostility to new thought proves that we cannot simply assume that the prevailing ideas of the time are the best. Much like advocates of Social Darwinism, advocates of Intellectual Darwinism fail to comprehend the structural constraints in a system they perceive to be perfectly competitive. The situation is more akin to a sapling trying to grow under a large tree; even if the sapling could potentially grow to be taller than the tree, it will not do so while the larger tree shades it and stunts its growth. It might, perhaps, be suitable to prune back some of the branches of the larger tree in order to see which sapling might grow tallest.

Building on this, it is difficult to see why a talented young economist who could potentially revolutionise the discipline would stay within it. Expensive degrees, vanishingly low wages for PhD tutors and few opportunities to meaningfully challenge the existing paradigm make the life of the next potential Smith, Marx, Keynes or Friedman a somewhat unappealing one, should they choose economic academia. Suffice to say, it is difficult to see why a rational utility-maximising individual would bother with trying to change economics.

Economics needs to change, and it cannot wait until the next great idea in order to do so. Without changing the discipline, we reduce the likelihood of that idea every coming into existence by driving its potential originators out of the discipline. Only by actively fostering debate and critical thinking, and going out of our way to ensure that orthodoxies can be challenged, do we ensure the survival and relevance of economics.

Whether we view economics as closer to a natural or social science, it is clear that we must learn from other disciplines. If it is to be viewed as akin to a social science, we must be mindful of the fact that paradigms in social sciences are allowed to compete and coexist, and that this complex interaction is a key part of the discipline itself. If, on the other hand, it is to be viewed as closer to a natural science, we must be mindful of the long and shameful history of silencing dissent within the natural sciences, and ensure that our paradigms can be effectively challenged.

Book Review Series

Money, Blood and Revolution  by George Cooper

             Author: Isabelle Crosby

HOW DARWIN & THE WORKINGS OF THE HUMAN HEART COULD FIX THE BROKEN SCIENCE OF ECONOMICS ONCE AND FOR ALL.

Many authors have written about the failure of economic theory but best-selling financial author, George Cooper, seems to be the first to have come up with an original solution on how to fix both economic theory and the economies of the world once and for all. He has done this by “plagiarising from the masters’ (in his own words) and taking the key ideas from the greatest scientific revolutions in history to re-imagine how our economies really work in the first place.  Once you figure that out, it is much easier to identify the flaws. Child’s play? Why, yes. In fact, it could be taught in junior school.

By illustrating how both our economic theories and our economic policies can be fixed, Cooper is setting out to present a simple idea that has the power to revolutionise how we think about our economies and how our governments set their policies – he calls the idea the circulatory growth model in his new book Money, Blood and Revolution, published by Harriman House.

The circulatory growth model could help policy makers understand what really drives economic growth. It recognises that capitalism has a tendency towards wealth and income polarisation and explains how this problem can be addressed. The model makes it very clear why the financial crisis happened in the first place and why the policies we’ve been running since then – quantitative easing for example – have not really brought our economies back onto a sustainable growth path. If the model gets an audience and becomes widely understood it should help drag the policy debate back toward the centre ground. In the last few decades, economic theory has become surprisingly extremist, in ways that not many people understand. This is doing a lot of damage to our economies. For example the model makes it immediately obvious how policies designed to promote borrowing lead directly to lower economic growth, higher income inequality and, in the end, to higher government deficits. If the model can help fix that unholy trinity then it will have done some good.

The way Cooper gets to his circulatory growth model is as fascinating as the model itself. There are no pages of dry economic arguments, no equations and even the ubiquitous economic charts are banished to just the final chapter. Instead Cooper takes his readers on a remarkable journey through the history and philosophy of scientific progress.

He starts with the scientific philosopher Thomas Kuhn’s analysis of the process of scientific revolutions. He then goes on to illustrate Kuhn’s ideas with the stories of four of the greatest scientific revolutions in history: the Copernican revolution in astronomy, which started the modern scientific age; William Harvey’s theory of blood flow, which led to the development of modern medicine; Darwin’s discovery of evolution, which turned biology into a science; and Alfred Wegener’s theory of continental drift which allowed geology to also graduate to the science faculty.

Both Kuhn’s work and the stories of Copernicus, Harvey, Darwin and Wegener are there to soften his readers up for what comes in the second section of the book.

He compares the confused state of economics today to the confusion which dogged astronomy, medicine, biology and geology prior to their respective revolutions. In doing this he builds a persuasive case that economics is long overdue its very own scientific revolution.

Cooper constructs his circulatory growth model drawing directly on the ideas of Darwin and William Harvey, the doctor of King Charles I. The connections which he sees between previous scientific revolutions and his proposed scientific revolution for the field of economics are fascinating.

The circulatory growth model has some surprising implications. It shows, for example, why some countries have prospered while others have failed. It also shows why government spending and taxation are necessary for economic growth. These conclusions fly in the face of today’s accepted mainstream economic ideas, which press always for smaller governments and lower taxation.

Few readers will emerge from Money, Blood and Revolution with their preconceptions unscathed and a few policy makers may suffer more than superficial damage to their own ideas. Personally, I was very entertained by Cooper’s ability to link Captain Kirk to Copernicus, Darwin to the Declaration of Independence and the workings of the human heart to the ideas of Karl Marx and Adam Smith.  A jolly good read and renewed hope for a better world in one. How marvellous!

See also:
Review on Money, Blood and Revolution by The Economist