Other Economists in the Room

Well, I read every word of Paul Krugman's article about the failure of Economics as a discipline and of economists as a group, and I don't disagree with any of it, but he is missing out on some big issues that also need to be discussed and understood before we actually know what is going on in our world.

1. English majors understand human nature better than economists do. If, as Krugman said, "homo economicus" is perfectly rational, where did the folks who came up with this simplistic idea go to college, and didn't they read, say, Shakespeare, Locke, Rousseau, Hobbes, Dickens, Trollope, Proust, Zola, or even Freud? To suppose at this late date that people are rational in anything, but especially in consideration of their own self-interest, is to be painfully, gaspingly ignorant. The works of all of these writers are full of characters who act irrationally -- who are greedy and cruel and selfish and angry when it would be far more pleasant and healthy to be a "rational actor." Emile Zola, in particular, anatomized our current era of irrational economic misery between 1871 and 1893, in his Rougon-Maquart series. In "The Kill" and "The Belly of Paris," he wrote about wretched excess. In "The Ladies' Paradise," he wrote about Amazon.com driving independent booksellers out of business. In "Money," he wrote about financial speculation. In "The Debacle," he wrote about the stupid wars we get ourselves into. Go read one -- you will be amazed that plus ca change, plus c'est le meme chose, no matter how economists feel that they are reinventing the world.
2. Is human nature basically good or evil? No economist can embark upon his profession without considering this question, and yet they all seem to. And they all seem to think human nature is basically good, or they wouldn't be surprised by the effects of deregulation. Have none of these guys been to Naples or Moscow? Or even seen a James Cagney movie? There can never be such a thing as a free market, because it is human nature to cheat, monopolize, and buy off others so as to corner the market. This is what leads people like me to feel that economists can hardly be so simple-minded as they appear -- they must be spouting this junk just to suck up to tyrants. If there is an unregulated free market, then everything must be for sale, including lives, children, bodily organs, endangered species, the air we breathe, and the planet earth. The key thought here is that the free market puts all of these things up for sale, and quite often what the free market values little (the ozone layer, child sex workers), humans value very much. If an economist is on the side of the free market in this instance, then he is a fool or a monster. Or at least an ignoramus.
3. Krugman's piece focuses almost entirely on finance. Keynes is his model. But there is something more going on with economics than finance, and it is production. If you want to know what's happened to production in the US in the last generation, I suggest you read Marx. My last reading of Marx took place in Mrs. Ticknor's Social Studies class in 1962, when I did my report on "The Communist Manifesto" and kept misspelling the word "bourgeois," but I never forgot one piece of analysis, and that is that as the workers earn more money for their labor, the owners export the factories to the periphery of the industrial world in order to keep wages down. This perennial cycle means that the workers can never afford what they produce, and so the market for their goods is always somewhere else. Welcome to the race to the bottom. Do any of these economists care about actual goods, or is gambling their only idea of economic activity? If the workings of finance is the only thing they think about then of course they are seduced by mathematical formulas. So are guys who read the Daily Racing Form. That can be a life work, too. And more elegant, if you ask me.
4. Speaking of goods, economists who have deigned to think about manufacturing have always resisted calculating the costs of raw materials by calling them "externals." For example, if I come to your country with my enormously expensive army and I steal, or attempt to steal, your oil, in order to make it into gasoline and blow ever more pollution of all kinds into the air, then the cost of the war (in lives, money, social, and environmental damage), the moral cost of the theft of someone else's resource, and the ultimate cost to the planet and its living beings of global warming will not, according to economics, be factored into the cost of the oil, because those things are "externals" and are considered to be free. Well, they are free, to the shareholders of Exxon, but they are not free to the planet. You would think that economists, as human beings, would look around once in a while and say, "Gosh, something 'external' is going on." But they don't seem to.
5. Who's paying these guys? One of the profound effects of economics in our day is that the people with the money and the power have embraced the guilt-free, external-less, everything-will-turn-out-okay-in-the-end philosophy of economics in order to justify their own evil works. And the economists, for the most part, have sucked up to that money. Aspen Institute? Let me in. Hoover Institution? That's not located in Kiev, is it? Oh, right -- Palo Alto. The reciprocal back patting, mutual admiration, and pocket lining of these economists and their friends in high places is never-ending and destructive. It is called "corruption." Naomi Klein wrote about some egregious examples in The Shock Doctrine. But don't tell Greenspan that he's an item of corrupt vermin skittering around the old boy's club -- he thinks of himself as an intellectual. Unless and until these economists look within (do they have a "within"?) and understand the destruction they have caused, they will continue to tell an eager audience (the ruling class) that everything is fine, or soon will be, or ought to be, or...whatever. What has created our mess is arrogant no-nothingism at the highest levels, and as long as that obtains, there is no hope for the rest of us.

Comments

[Mikeikon]

Come to think of it, this article reminds me a lot of a novel written by the GMU economist, Russ Roberts, "The Invisible Heart," which begins by contrasting the views of a literature and an economics professor.

You can read a few chapters on his web site: http://www.invisibleheart.com/Iheart/ISampleC1.html

It's a good introduction to the economic way of thinking. There is a common misconception that economics is only concerned with "money." In fact, economics is a social science concerned with human perception of value in all forms. Good economists look at /everything/.

[Mikeikon]

Jane-- Economists believe people ARE selfish. That's the reason WHY free markets work.

[Edgy]

Thank you Jane, this is one of the best postings I have ever read on The Huffington Post and one of the reasons that Huff PO is my homepage.

Thank you for telling it like it is!

[guerilla]

Reply by Art Carden and Steven Horowitz (Economists) at Forbes.
http://www.forbes.com/2009/09/11/economists-free-market-jane-smiley-opinions-contributors-capitalism.html

[Scott90]

(continued from previous comment)

4. This claim is outright false. Externalities are of central importance to economists, and finding ways of internalizing them represent major problems to solve. However, stopping there gives this argument too much credit. This fourth point is all a bunch of histrionic hand-waving intended to paint economists as immoral shysters who love money too much to care.

5. Who is paying economists? Government. Educational institutions. Think-tanks. Non-profits. What is your point, exactly? You seem to be begging the question here.

[Scott90]

I'll respond to each point in turn.

1. "Rational" in economics parlance does not mean "nice" or "pleasant" or "unselfish" or any of the other things that Jane Smiley seems to think that it means. It doesn't even necessarily mean a logical thought process. Rational in these terms means that a person uses reasoning to come to a decision. Irrational would mean that decisions are made at random, without regard to a person's own desires. This is a straw man, but I'll concede that Jane Smiley probably just didn't know the terminology.

2. Whether human nature is good or evil is up to the philosophers. Economists do not concern themselves with such questions. Instead, they look at how incentives affect actors in the market. For example, if financial institutions know that the government will step in to rescue them, this acts as an incentive for ever more risky investments. This phenomenon is known as moral hazard and is something that many economists warned about long before the crash and the bailouts ever occured.

3. What you describe here is, in essence, the good old pauper-labor argument. To understand why this is false, you first have to understand comparative advantage, which becomes self-evidently true when you start to look at trade in any depth. Do a search on "Pauper-Labor Argument" for logical and mathematical refutations of this idea. Still, I've proven your claim false already, in that it should be obvious that economists do think about these issues.

[Steven Duke]

The "Chicago School of Economics" has destroyed everything it has ever touched. the Krugman article talked of the divide among economists as the same as the rest of the nation after the 70's liberalism was the enemy and science took a back seat to ideology. Canards and Conflations took over the "conventional wisdom" and what we have now is the refusal of those who sold this old/new"economic theory" to concede to its failure; again. The complete unwillingness of those in charge to recognize that it was only ever an elaborate scheme to defraud. Ms. Smiley gives an incredible indictment of what has been served up to us and she is accurate in doing so. It seems to miss the broader point that Milton Friedman and what came to rule the economics profession of the last 1/3 of the century didn't just dismiss what was learned in the early 20th century, but outright ridiculed it and thus even with the repeal of legislation that protected us form this calamity leading to the exact same problems the legislation was there to prevent the ideologues(most of whom were never even taught and have no understanding of the theories they are ridiculing)Refuse reality. Sound familiar?

[norkas]

I coul not read a book untill i was 21 years old because of a eye problem that was finally corrected.

I went 2 years to high school and knew it was a waste for me because reading was a the norm to pass. I spend every other weekend at Barnes and Noble.I have been in my own business for over 34 years and will be launching a internet site globally .

There is a school called street sense that does not include allot that is written above. I know lawyers who wentt to harvard that are morons and todays lawfirms have learned the hard way that it is not just education but a combination of gut street sense that makes you a big sucess.

Perhaps we can call this commonsense that is not taught in schools. I know many businessman besides myseld that predicted the demise of the real eatate and the stock market while many very educated so called economist bought into the never ending boom.

I often listen more to sucessful businessman about their opnions about economics and smart solutions then economist. That is not to say there are not brillant economist because there are more then a few.

I know many businessman without any education who have suceeded in business globally and have great answers to what some would say would be difficult soltions

KISS = KEEP IT SIMPLE STUPID should be appled to any articile on economics

[JanusDaniels]

Ms. Smiley, I've read your work, and respect it and you. I've also read Krugman's article again, and truly believe that you can answer your questions by a careful reread of it, not to mention a look at any of his books.

[traveller77]

This is a profoundly wise, sensible article. I've struggled with the same disconnects myself. I am grateful to discover here, that I am not alone in seeing so many naked emperors parading around. I'm putting you on my personal short list with Naomi Klein and Mat Tabbi as a person I need to read more of; this very week, no matter what.

tt77

[schatsie]

agree with you entirely... The subtext was missing from some of the other articles and I plan on reading Shock Doctrine now...

[pencilpusher]

Good argument for a liberal education, Jane, but also a good argument for that liberal education including economics. If if was, you would understand that the term "rational" is used in a different way in economics. Economists use the term to mean that given the same circumstances, a person will make the same decision every time. They may make irrational decisions, but they make the same irrational decision every time they are faced with the same conditions. Microeconomics 101.

[DuganS1]

"This perennial cycle means that the workers can never afford what they produce, and so the market for their goods is always somewhere else."

Employment in the manufacturing sector makes up a small percentage of total employment in the US. Second, the cost of manufactured goods is very small relative to incomes. In Northern Virginia where I live, for example, the median income is like $65k per household. Those median folks can walk into a Walmart, Target, Macy's, Best Buy, etc and buy all kinds of consumer goods with no problem. The problem in metro areas and suburbs is the cost of real estate or rent. Manufactured consumer goods are incredibly cheap to such folks. The folks in metro and suburban areas that make out the best are those that bought their homes before the housing boom, so have avoided the substantial increase in real estate and rental prices altogether (except for increased property taxes, yet off-set by refinancing to much lower interest rates). Those folks are made up for the most part by the affluent baby boomers.

[DiogenesOfAlaska]

If the market for what the young produce is the baby boomers, then the statement above is still true.

[Meteor]

While Jane blows Krugman and "arrogant no-nothingism at the highest levels" out of the water, she makes a great case for a liberal education.

"Did he say liberal?"

[generationyes]

:) Yes. Yes, she did.

[memi]

Yes! Without a solid liberal education that includes heavy sprinklings of literature masterpieces, ancient and modern, the "Economists" will continue to think of their theories as infallible and ultra-rational. Perhaps, together with a Tale of Two Cities, Plato's Republic, Remermbrance of Things Past, Le Miserable, the Brontes, Dickens, Sophocles and Kazantzakis, the illustrious professionally bankrupt Wall Street 'economists' [and I am excluding from this Paul Krugman whom I truly admire and Ms Arianna Huffington who graduated from Cambridge University with her Masters in Economics and her columns here shine with that rare knowledgeable commentary] should also purchase their copy of Crime and Punishment!...

[Mikeikon]

Wait... why are we basing our understanding of human nature on works of fiction?

[WilliamP]

I think there are a lot of economists who do work on these issues. What Krugman is saying, I think, is that many work with models that don't accurately account for behavior, externalities, etc. I think he is saying that economic theory is missing these issues.

[JayeSF]

This may be true..however, I have heard numerous interviews with him on NPR where he has been asked if economists should take into account the fact that the natural resources of ththis planet are limited....and he always either ignores or punts the question...

At this point, Krugman's value from hereon in is probably as a Political Commentator more than as an Economist. In some ways, the guy is missing the boat in the latter personification.

[Mikeikon]

Economics does take limited resources into account. It's called the supply and demand. It's the price system. If there's less of something and people value it, it will be more expensive.

[neroden]

Jane, regarding #3: talk to some economists.

"Externalities" are considered a *very bad thing* by competent economists, and even many of the incompetent ones. Krugman will be the first to tell you that one of the top goals of governement policy should be to "internalize externalities", which means, make the people releasing the pollution pay for the costs of the pollution; make the people buying the oil pay for the costs to the people where the oil is being extracted. Et cetera. This is the *entire idea* behind "cap and trade" and "carbon taxes", both of which have gotten horribly watered down from what honest economists want.

If you see an economist who doesn't support pollution taxes, that's a crooked bought-and-paid-for economist, period -- it's actually an easy way to identify a crooked economist.

The concept is ancient ahd has been economic "standard doctrine" since at least the 17th century. I guess Krugman didn't manage to get in a section about the so-called economists who didn't believe in that, into his article. Maybe the article was reaching its word count limit.

[annieR]

We are called un-American if we don't equate capitalism with democracy. Democracy should constrain capitalism, but sadly, it's the other way around.

[generationyes]

Cogently put.

[Mikeikon]

So whatever 51% of any given population want--no matter how much it violates the rights of the other 49%--should be made into law?

[johninoregon]

Smiley's essay is one of the best I have ever read on any subject. It deserves to be a classic and should be distributed as widely as possible--­-particula­ry among economists. It will be interesting to see the pained, angry, defensive responses from members of that profession.