My good friend Rob Salmond has written an excellent post over at Policy Progress about the importance of the political left talking about economics.
If folk on the left are to challenge the caricature that they are economic illiterates swimming against the tide, we need – all of us – to confront economic issues much more directly.
Rob is of course right. But how has economics somehow become a dirty word to many on the left? It seems to me that the motivating drivers for the involvement of most on the left of politics are equality, fairness and social justice. In turn this seems to have meant for many that discussion focused on the direct mechanisms for achieving this through social policy. The point of course is that economics matters for those values as much as those social policy factors.
As someone who did not study economics to any great degree I have in the past found myself put off from studying economics, partly on the basis of buying into some of the stereotypes about where many economists are coming from. But as Rob (and others in the comments on the post) points out there is some great work underway, some of which has been discussed here, such as the work of Stiglitz and Sen on genuine progress indicators or Wilkinson and Pickett’s The Spirit Level. These people’s work can not be dismissed by the right, and it must be understood by the left.
I was also interested in Jordan’s comment on Rob’s post when he asked
how can we who do have an understanding of economic policy debates and principles and the implications for our politics and our societies, make that more exciting – to the extent it’s the main focus of debate and campaigning energy inside our political movements?
I don’t know the full answer to that question, but I am sure that a part of it is talking about economics as part of the package of progressive politics, rather than in isolation. The direct links need to be drawn between social progress, environmentally sound development and the economic ideas that underpin them. Its no different than anything else in politics- there needs to be a vision and a believable and relevant narrative to go with it.
In any case, for those who are interested there are a number of links in Rob’s post and the comments that go with it that provide loads of references to some exciting progressive economic ideas.
Why won’t my comment get on here?
First, thanks to Grant for the link, and I’m glad he liked my post at Policy Progress.
@Chris Trotter: I think your statement here betrays exactly the kind of stylised thinking that hamstrings the left. You say that you believe economics to be inherently right-leaning and therefore it should be rejected wholesale. Your premise is entirely false, as the catalogue of prominent, progressive economists cited by me and others shows. You also claim that “all Labour people need to know” is four things, none of which is “where do society’s resources come from, and how can we ensure that they keep on coming.” Any political philosophy that fails to even seek an answer to that question, as yours does not, is in big trouble.
Karl Marx had a lot to say on the subject of economics, production and ownership. Its certainly should be natural for the Left (and progressives) to be explicitly interested in economics.
How else can you fund the services and facilities that your citizens deserve if not with money and lots of it over extended periods of time?
Chris Trotter said:
Not sure how you can expect to know and understand all these things without using the language of economics.
God dammit who brought up Karl Marx
Haha I did but in my defence I will say that I was not the first poster in this thread to do so
Falafulu, I meant “fair” as in without biases. One of the strongest criticisms the left brook about the role of government is that it “distorts” markets etc. I could’ve been clearer. My point is that the behavioural approach permits a broader role for governments than the classical model which sees all interventions and diminishing the perfection attainable by individuals acting solely out of self interest.
That’s a rehash of the usual argument that I fear did us the very disservice Grant’s post addressed. I simply disagree. Not all economists aspire to dispossess the poor Chris. Merchant bankers on the other hand…
All good Loota it’s just that I don’t think you could regard Karl Marx as ‘left’ and if we got into a conversation about him it would be getting off the blog topic
Don’t worry about it, we have John Key to look after things like that for us
For now …
I don’t think “economic illiterates” is fair.
Following a decade with the best economic conditions this country has ever known we were left facing a decade of deficits in the tens of billions. I think “economic morons” is a better fit.
For as long as he wants to
When NACT decides that its time to sell Kiwibank I’m sure he’ll happily accept the new CEO position.
@Loota
considering his wealth and experience I don’t see why he’d want to lower himself
Which may change pretty quickly to see ya later NZ, when he starts going down in the polls. But don’t worry, he’s rich
– He’ll start a bright new career somewhere else 
johnbt – all the while you were cheering on English and Key pushing on for tax cuts which would have greatly worsened the position of the Crown
Finally now you have those tax cuts form them so I guess you would say they are not just economic morons for worsening our deficit position, but economic vandals.
@ Chris73, oh don’t you think that JK could negotiate an appropriate renumeration package “conmeasurate with his skills and experience”? A salary 10x what he is getting now wouldn’t be tempting?
*commensurate*
I must’ve been thinking of another word
@Spud
He better start going down the polls soon to try to make the next election even slightly interesting
Well, if you’re keen on that idea then get to work and make it happen!
@Spud
Can’t be done…hes well on his way to becoming NZs most beloved AND successful PM ever!
A big challenge is more interesting, unless you’re chicken, book book boook book book!
Loota…. Key must have been making more than ten times his current salary before going into politics. I do not believe that his current salary is that important other than to those he gives it away to.
Not chicken but I never start a challenge unless I’ve already won it
Richard Shaw said…
The failure to acknowledge the existence of social capital and the impact this has on Markets is one of the failures of the far right, the Austrian School of economics being one such nutty bunch.
The far right has not failed, Jesus! It is the leftist economic framework/thinking that has failed.
You should read Steve Keen’s article here on his blog:
The Creative Destruction of G8 Economics
Have you read the Hayek’s interview above that I linked to above? You should read it.
The other point here is that, it might be you that belong to a nutty bunch and not the Austrian School of Economic thoughts. It was Hayek and the Austrian School scholars who first pioneered the Complexity Theory. Economic system is a truly complex system and there is no surprise that current/mainstream economic theories fall over many times because it uses simple model to model a complex phenomena such as economics. This is why physicists have taken interest in the Austrian Economic framework is because of similarity between it and the work they do in large scale agent/component interactions that involve in particle physics. Even Stiglitz has mentioned this problem with current economic theories of trying to directly translate micro (single gas molecule) foundations into macro (gases ensemble), which is obviously false.
Here is a simple analogy:
Theory of collective opinion shifts: from smooth trends to abrupt swings
You should learn to differentiate economic framework that conform to reality and one that only works in the minds of fantasists.
Here’s an interesting little piece: Austrian vs. “Mainstream” Predictions
F.F. said:
Let me try that again: FF said –
Can’t see how your statement could possibly be correct as right wing free market ideology has been dominantly espoused by the US, UK and others for decades now and have been the basis for the creation of all major world wide economic institutions e.g. World Bank, IMF, WTO as well as the original GATT.
Just remember you said yourself that no actual free market economies exist anywhere in the world and so if you are talking hypothetical fantasy, yours is it.
Loota, yes, there is no complete free-market that exists anywhere but why some of you here blame free market for crises when it doesn’t exist?
What did you think about the points Steve Keen made in his blog article that I linked to in my previous message? How about Hayek’s interview? Did you read and think about what were highlighted in those articles you have simply bypassed them?
Quoth Raven, here is another interesting piece. Even Economic Nobel Laureates mainstream economists such as Krugman & Stiglitz were embarrassed by the recent crises.
Predicting Economic Crises With ‘Econophysics’
I feel sorry for students who are currently doing economic studies (worldwide), because they’re being taught nonsense (false economic theories).
@F.F
Just to back up what you said about the free market not existing, ‘Capitalism doesn’t exist’ quote from Fidel Castro. A very interesting quote because it actually doesn’t exist the state is involved to one extent or another in every economy in the world even America subsidises it’s food and has some tarrifs.
@ Falafulu Fisi ????
Stiglitz predicted this meltdown and the last Asian Crisis.
http://www.americablog.com/2009/07/joseph-stiglitz-predicted-global.html
later in the decade, he spoke out (without results) against repealing the Glass-Steagall Act, which regulated financial institutions and separated commercial from investment banking. Since at least 1990, Stiglitz has talked about the risks of securitizing mortgages, questioning whether markets and authorities would grow careless ”
Krugman didn’t predict the last but did call the correct direction for Malaysia during the Asian meltdown, that was to stop capital out flows correctly.
http://www.globalpolicy.org/component/content/article/216-global-taxes/45901.html (hird World Network August 30, 1998)
“The prominent American economist Paul Krugman has launched a high-profile campaign to get East Asian governments to introduce foreign exchange controls as the only way to get out of their economic crisis”
Which Malaysia did and later studies have shown this course of action was better for the people.
Richard, when someone is raising a concern, its not prediction, is it? That’s exactly what Stiglitz was doing. Stiglitz didn’t give any timing.
In fact, Stiglitz has admitted on his (YouTube video) lecture here earlier this year at the Institute for New Economic Thinking that he (himself) and other economists didn’t foresee the financial tsunami coming.
Joseph Stiglitz – An Agenda for Reforming Economic Theory
Stiglitz highlighted the falsity of current economic theories, but then again his is a post-modern Keynes, a fan of interventionists.
Fast forward, to about 10 minutes & 30 seconds in the video where he touched on incompatibility between Micro & Macro economics, where current economic theories just translate the behaviour of single molecule and assume that a collection/ensemble of them do describe the behaviour of gases, which is wrong. Properties of gases (ensemble of economic agents) are not the same as that of its components (single particle – individual economic agent). The system is greater than the sum of its parts, which is why the current Macro-economic theories are wrong to be based on Micro-economics. He also mentioned that system behaviour (gases as in Macro) can be addressed by using statistical mechanics, and the type of modelling that physicists have been doing in this area deals with system complexity, which was developed by Hayek & Austrian Scholars (less quantitative way), but now physicists have now quantified Hayek’s complex system theory today. The beauty of modelling it in this way is that it reproduced most of the real world economic observables that we witness today. There is no market/economic crashes that can occur according to current economic theories. But we have witnessed many times that they do occur in the real world. Well, the minority games physics model that I mentioned in my previous post, showed/exhibited market crashes when the model runs. It has reproduced the market/economic observables (stylized facts) that we see. Self-emergence & self-organization (proposed by Hayek) are being observed. Fat-tailed (non-Gaussian) is also observed. That’s why the foundation of macro theories are wrong because it is based on equilibrium (Gaussian), which in fact, real world economic data doesn’t show any Gaussian probability distribution at all. It showed skewed (non-gaussian or power-law) probability distribution. This amazing result is something that none of current mainstream economic theories can do or reproduce.
In free markets/capitalism, you’re allowed to fail. You guys are fixated with equating free markets/capitalism to success for every John Doe in the world.
Didier Sornette, the physicist mentioned in the article I linked to above in my previous post (Predicting Economic Crises With ‘Econophysics’) had made his predictions based on using complex system theory, by publishing them (refereed journal), before it happened.
#1) Econophysicist Predicts Date of Chinese Stock Market Collapse – Part 1
#2) Econophysicist Predicts Date of Chinese Stock Market Collapse – Part 2
Sornette’s pre-print is freely available.
Bubble Diagnosis and Prediction
of the 2005-2007 and 2008-2009 Chinese stock market bubbles
The above paper was submitted and published in Physica A (a statistical mechanics journal). I don’t know how robust is Sornette et al, log-periodic power law model, but I have seen other variants that have been published recently, which claimed (by their authors) to have improved over Sornette’s original model.
Physicist, Joe McCauley, has described current economic theories in his paper (Response to worrying trend in econophysics which appeared in Physica A) as text-books that are filled with cartoons (i.e., they’re a joke), because they don’t reflect anything in the real-world of economics. I agree with Prof. McCauley there and this is why I feel sorry for economic students of today, because they’re being fed/taught cartoons and nonsense at Universities around the world.
FF said
Because the proponents of the free market and of deregulation built and ran the crisis and near collapse of the world financial economy, and in the process sucked in hundreds of billions of public money for their own use.
Quite clever really.
But transparent to the rest of us, FF.
Krugman on how the US Government should intervene in their economic and employment crisis.
http://www.nytimes.com/2010/06/21/opinion/21krugman.html?hp
Loota, perhaps you’ve misinterpreted what I meant in my previous post. If you go back and read some of you guys’ comments from the beginning of the thread and you can see that some blamed crises on free markets. My point is that how can you blame free markets for failure when there is no free markets?
Loota, here is a quote from the Krugman’s interview that you linked to above:
The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.
The US Feds uses Dynamic Stochastic General Equilibrium (DSGE) and no doubt that the Congressional Budget Office uses it too to make economic prediction. DSGE has been found wanting and has been way off the mark in its prediction most of the time and it is unbelievable that Krugman is using a model prediction that is based on the now debunked neoclassical economics to make an online opinion hoping that the authorities would read his piece and adopt it (there is no doubt that they do). It is synonymous to crossing a busy street blind-folded. Oh, look, but he (& Stiglitz) are the new Keynes of today. Keynes framework had been a failure in the past and it is still today as the say goes, you can’t teach an old dog new tricks.
Here is a quote from Physicist Joe McCauley from his paper, Response to Worrying Trends in Econophysics (pre-print freely available):
Prof. McCauley Quoted…
There is little or nothing in existing micro- or macroeconomics texts [9,46,47] that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way. Their only (once-) scientific model so far, the neo-classical one, has been falsified.
What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work [48,49]: were it engineering, the bridge would collapse. The reigning economic theory, based on the assumptions of optimizing behavior with infinite foresight, will be displaced by econophysics (where noise rather than foresight reigns supreme), meaning empirically based modelling where one asks not what we can do for the data (give it a massage), but instead asks what can we learn from the data about how markets really work.
Existing standard economics texts are filled with scads of graphs [46,47], but those graphs are merely cartoons because they don’t represent real data, they represent only the falsified expectations of neoclassical equilibrium theory [4]. No existing economic model provides us with a zeroth order starting point for understanding how real markets function. No current economics model or idea provides a starting point for building an interesting falsifiable market model. The future economics theory/econophysics texts will be filled with histograms, time series, and with graphs with big error bars, all representing real markets. They will look more like nuclear physics data (few data points, big error bars) than like the smooth curves in the existing economics texts. The aim will be to try to understand how markets work, not to present an irrelevant model about how a real market ideally should (but cannot) behave.
I know that Prof. McCauley’s comment is directed at mainstream economists (Stiglitz & Krugman, et al) for teaching cartoons to economic students. You can really see that Stiglitz is still advocating for improvement of Dynamic Stochastic General Equilibrium (DSGE) model and not abandoning it (see his video lecture at the Institute for New Economic Thinking I linked to above).
It is a joke really, because that’s exactly the point made by Prof. McCauley, in which he stated that : The aim will be to try to understand how markets work, not to present an irrelevant model about how a real market ideally should (but cannot) behave. The DSGE starts with how the market should work. Prof McCauley suggested to economic schools to revise their curriculums. Meaning that it should be overhauled rather than trying to make improvements to old models that have been found wanting (& useless) based on false assumptions hoping that they will become better models.
Such attempts in trying to modify unworkable old models will only prolong the teaching of cartoons to economic students of the world today. Guess what, these cartoon economists will come out and work in influential places (e.g., government) which there is no doubt they will continue to give cartoon advises based on their cartoon knowledge of how the real markets (economic system) is supposed to work.
Hi FF, it seems to me that those posters are talking about under-regulation, the systematic removal of regulation (e.g. Glass-Steigall) and regulators captive to industry not doing their jobs. OK they use the catch phrase ‘free markets’ to capture that, which may not be exactly correct academically but points in the correct direction.
I am still confused as to why you would espouse the perfection of the free market when – there are none.
Well no I can’t accept this conclusion as being generally meaningful unless it has been shown that the DSGE method fails to a material degree much of the time and that there is a substantially better forecasting method that they should be using right now which would have produced consistently more reliable results over the last several years.
I have to say I take little heed of the ‘debunked neoclassical economics’ phraseology – that’s academic speak suitable for academic conferences where one theoretical faction is trying to have one over another theoretical faction. Now McCauley’s quote makes a good point: the undergrad text books are full of pretend ideal situations. BUT this is the same for undergrad texts of virtually all disciplines! No revelation here. The myriad of exceptions, qualifications, alternatives to those ideal situations is really only delved into in postgrad work.
As for econophysicists predicting the bust of the Chinese stock market – I know technical analysis guys with rulers and graph paper (or the computer equivalents of) who predict market events like this. Again does that make it particularly wowing?
As for complex systems and quantum derived theories of economics – I accept they hold validity: however most of the time in the real world classical Newtonian physics gets 99.8% of the job done, except for the times you are working at scales which don’t matter to most people.
(Mind you I am typing this on a computer with a 65nm SOI built processor whose behaviour cannot be predicted by Newtonian physics so you do need some of that…)
One conclusion that I will draw is that Stiglitz and Krugman annoy the hell out of some theoretical economists because they (Stiglitz and Krugman) dismantle the ivory tower ‘only we are qualified enough to get it’ academic mystery out of their disciplines and reduce it to (to the theoreticians at least) an unbearable level of common-sense applicability which even a newspaper reader will understand.
Again on the weaknesses of the DSGE as a predictive method and your position that it shows how weak the neo-classical position is, one of your links says this:
(My highlight)
which tells me that anyone would have trouble coming up with substantially better predictive methods.
Loota said…
Well no I can’t accept this conclusion as being generally meaningful unless it has been shown that the DSGE method fails to a material degree much of the time and that there is a substantially better forecasting method that they should be using right now which would have produced consistently more reliable results over the last several years.
DSGE has been found out to be exactly that? Useless. It’s been discussed over many times on the net and in many publications. The argument is not coming up with better models. That should be left to the market itself and there is no doubt that private industries have been better at doing this with their proprietary models and you have to look no further than physicists and mathematicians who are involved in “Renaissance Technologies Funds” (a Wall St darling). The issue is using wrong/inefficient models to make policies & interfere in the markets where the inventors (& proponents) of those models are not willing to bet on those models themselves. Because if they had, they wouldn’t be working at the Feds would they? They would have quit their daily job to use those models to become millionaires. Hey but they’re so keen on using those models to interfere thinking that they know better? Look what’s happening over the last 7 or 8 decades.
Loota said…
that’s academic speak suitable for academic conferences where one theoretical faction is trying to have one over another theoretical faction.
There is a brilliant comment from objectivist that says, some people use their brain (which truly exists) to deny existence. Everything is academic in this world, whether you like it or not, it is reality. Economists who are working in government or private sector didn’t acquire their knowledge by psychic dreams, but they learn it from academics. Engineers who built the computers that you and I use to post message here acquired knowledge which can be traced all the way back to academic inventions. There is hardly anything invented by psychics. I mean knowledge just acquired via psychic dreams. Knowledge has been acquired via academic study. I often find it that people use to say, something like, oh, that’s too academic. It is an attempt to evade serious debate as somehow, being academic is perhaps less useful. Keynes, Stiglitz, Krugman, et al including other scholars from other fields are all academics and their knowledge and contributions didn’t arrive via psychic dreams. It involved serious & critical thinking. The data & observations are the judge/jury and not the humans or model inventors. Well real world observations have gone against mainstream economics.
You said…
As for econophysicists predicting the bust of the Chinese stock market – I know technical analysis guys with rulers and graph paper (or the computer equivalents of) who predict market events like this. Again does that make it particularly wowing?
Sornette’s group has been working with physicists at Renaissance Technology (RT) for a number of years. Look at the profits that they have made. They have managed to consistently beat the market more often than they lose. RT is expected to be the biggest fund manager in the next few years with projected assets to be over $100 billions.
Renaissance hedge fund: Only scientists need apply
Loota said…
As for complex systems and quantum derived theories of economics – I accept they hold validity: however most of the time in the real world classical Newtonian physics gets 99.8% of the job done, except for the times you are working at scales which don’t matter to most people.
No, that’s not the argument that’s been made by scholars (both economics & physics). The argument is about the unpreparedness when a financial tsunami arrives. This unpreparedness stems from using wrong theories. Remember, it is the tsunami that’s matter rather than calm period, because all the benefits that were gained during a calm period (as you stated 99%) can be wiped off in just a very short period of time. The analogy to Newtonian physics is irrelevant because Newton physics works 100% in classical domain for all time.
We don’t live in a deterministic Newtonian type economic environment, but a system that adapts and changes all the time, so managing rare event risks is important. The argument that we should ignore the rare events because what we have works 99% of the time is what has got the world by surprised in the financial tsunami of recent years. It is ignorant and suicidal. Mainstream economic theories treat these as outliers & completely ignore them but actually rare events are not outliers at all.
Hi F.F., thanks for your in-depth response. It is true that it is the extraordinary event, not the steady state norm, which deserves special attention. The only other thing I will comment on at this stage is your statement:
Academia’s favourite fad theorem of the moment != Underlying reality
You will also know better than most I think that academia can be ruled by politics, by egos, by feuds, by commercial self-interest and by favouritism, just like any other industry. Perhaps even more so on some counts.
@FF
1. A disclaimer: I’m no expert on this. But, then again, neither are you. And this is a blog comments box…
2. I haven’t read all your comments. It’s late. It’s a long thread. And your points are long and often inchoate. Sorry in advance if I’ve missed something.
3. Econophysics is most definitely not solely a product of the economic right. Nor does it lead inevitably to free-market prescriptions. See, for example, the work of Barkley Rosser.
4. Econophysics is also not beyond critique. For example, see here.
5. Krugman, along with a bunch of other left-leaning economists, called the housing bubble and bust. What they missed was the subsequent financial contagion. Mark Thorma (with Rossers help) has a handy index of those who could plausibly claim to have predicited the GFC in advance. There’s a couple of Austrians on it. There’s also a bunch of left leaning heterodox economists too. And at least two orthodox members of the profession.
6. Predicting an event in advance, while it may seem like the gold standard, isn’t quite all it seems. From astrologers to economists, all manner of people will predict large negative events in advance. And sometimes they’ll be right – for the same reason that broken clocks will tell the right time twice a day. (You’ll be familiar with the old joke that economists have predicted 9 of the last 5 recessions). Because of this, finding someone who predicted some Chinese stock market crisis, or something similar, in advance, isn’t necessarily as impressive as it might seem at first glance. What’s really necessary is plausible explanation of causal mechanisms. I, personally, don’t think Austrian economics does a great job of this for the GFC. OTOH Shiller – an orthodox economist – does offer a pretty cogent explanation.
7. There is not, nor could there ever be, any such thing as purely free-markets. Markets are embedded in institutions; they need to be. If they weren’t (if there was no contract law, nor property rights) they couldn’t possibly function. Moreover, there are plenty of good reasons to believe that even with absolutely minimal government intervention markets would still fail (asymmetric information, systematic irrationalities, collective action dilemmas, etc.) In other words, your contention that shrinking the state would solve the problem of boom and bust, is really, really unconvincing. Also, it’s worth noting that (a) the GFC was often at it’s most savage in the least regulated parts of the economy (particularly the shadow banking sector) and (b) the GFC was often less intense in countries with well regulated banks – both points which rather belie your claim that it was teh government wot done it.
Ok – sorry in advance for not replying to any subsequent comments you might make. I need to rest and I am most definitely not getting XKCD’d on this one.
Everyone else: if you’re interested in the intersection between economics and progressive thought, you might enjoy Christ Hayes’ article in the Nation: the Hip Heterodoxy.
Thanx for that terence.
“FF said
Loota, yes, there is no complete free-market that exists anywhere but why some of you here blame free market for crises when it doesn’t exist?
“Because the proponents of the free market and of deregulation built and ran the crisis and near collapse of the world financial economy, and in the process sucked in hundreds of billions of public money for their own use.”
Oh please don’t embarass yourself spouting that obviously false nonsense.What free,deregulated market?Where? What we have had nearly everywhere for the best part of the last hundred is BIGGER State involvement and regulation of our affairs…both economic and social.The result is predictable….chaos,stagnation and collaspe.
A “free market” is simplyan abstraction of politically free people engaging in capitalist acts with other consenting people for mutral gain,not just in economics (which is only a small part of the whole)but in our personal and social relationships too.We are doing it right now on this blog with no need of State interferance.
Those who oppose free markets are really revealing themselves as enemies of freedom itself…and should be exposed and shamed accordingly
And they have no business turning up at ANZAC day ceremonies either…what they stand for is it total conflict with what our soldiers fought and died to defend.
LOLz
I think someone here is saying that if you don’t support Rogernomics you don’t deserve to go to Anzac Services
Gotta go clean the coffee off my PC screen now