Should Economists Be Sued for Malpractice?

(This is for my friend, Obey, in partial fulfillment of his request.)

From Paul Krugman yesterday in an article about Fiscal Scare Tactics:

 The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

How did it come to pass that many people cannot tell the difference between cynical posturing and serious economic argument? I lay much of the blame at the feet of my own discipline, but how did the discipline of economics manage to accomplish this potentially tragic result?

Many years ago my working hypothesis assigned blame to Paul Samuelson (may he rest in peace) and the Cowles Commission on Research in Economics (1951); Paul because he was among the first to use the calculus of optimization to describe economic theory and formulate testable hypotheses about relationships among economic variables (in Foundations of Economic Analysis, 1947); the Cowles Commission because it seemed to be the most obvious point at which the physicists moved into economics and mathematized it. Hicks’ Value and Capital (1939) preceded Samuelson, but the post-WW II timing of Samuelson and Cowles (when military interests were dominant and operations research methods were the newest and next best thing to sliced bread) represented a powerful confluence of method and madness.

I absolved Samuelson rather quickly. One has only to read him to know that he was about way more than the math. And eventually, I realized it was silly to think that mathematizing what had once been a major component of moral philosophy would be enough to render economics insular and, to many, uninteresting or incomprehensible. Of course, it helped that economics became incomprehensible to anyone scoring less than 700 on the math GREs. It was necessary, but not sufficient. One has also to divorce economics from moral content to arrive at a state where “cynical posturing” is indistinguishable from “serious economic argument.”

So how did that happen?

I think we can lay some of the blame for the excision of economics from the body of moral philosophy at the feet of Lionel Robbins (may he rest in peace), who asserted that “economics is fundamentally distinct from Ethics” in his Essay on the Nature and Significance of Economic Science published in 1935.

Economics is neutral between ends. Economics cannot pronounce on the ultimate validity of judgment between ends....[Economics] is incapable of deciding as between the desirability of different ends.

It was a position taken earlier by John Neville Keynes (Maynard’s father) and by Pigou, but Robbins influence may have been greater because of the timing. The book was republished in 1948 just as mathematical momentum was building. It is probably also significant that Robbins’ pronouncement about the impossibility of interpersonal comparisons of utility gained widespread and rather uncritical acceptance among most economists even today. But that is a technical point better left to another blog.

Of course, all of this was unfolding in a world that had come to view science and the scientific method as the sole road to Truth and Beauty. Mathematization elevated economics above the other social sciences because it rested on magical mathematical foundations. Scientific rigor was ours!

The effect of this was to relegate discussions of economic welfare to narrow corners of discourse grounded in desolate Edgeworth boxes where the emphasis was on relative prices, trades to zero sum optima, and convex preferences with little or no attention paid to why person A started with so few resources relative to person B. The joys of being in the “core of the economy” were celebrated even if being situated at that efficient bliss point left person A holding only a few percentage points of total output while person B held all the rest.

Within the ever-popular Paretian framework, there was no possibility that person B might care about person A’s relative lack of resources, that B might be willing to give up something, transfer it to A to make A materially better off, while allowing B to become (at least in moral utility space) much better off. Or that B might be willing to tolerate some inefficiency in order to make A better off. Kaldor-Hicks introduced even more profound and possibly unjust principles, but that is another blog, too.

Back to my somewhat simplified story: economics was mathematized and divorced from moral philosophy, but it was the timing that mattered. The Great Depression had concentrated both policy and political interest on distributional aspects of allegedly efficient allocations. The events leading up to the Depression demonstrated the lie of market efficiency, at least in financial markets. And it showed that what happened at the top of the economic and social pyramid had dire consequences for the bottom of the pyramid and for the wealth of the nation as a whole (something that apparently would not have surprised Adam Smith). The Great Depression caused many to doubt the value of capitalism, except, of course, investment bankers who knew that speculation (as opposed to long-term investment) was quite lucrative as long as they got out before the crash or, as they have recently learned, as long as they can induce the taxpayers of the US to provide single-payer credit default insurance.

Because of the Depression, John Maynard Keynes’ (at the time) rather radical thoughts on employment, money, and interest increasingly gained acceptance. World War II provided the massive Keynesian stimulus needed to haul us out of depression and to cement Keynes ideas about the roles that government could and should play both during economic downturns and to prevent them. Of course, the increased regulation and taxation that accompanies such policies represented a major threat to business as usual particularly in financial markets where the lure of speculative gains is always irresistible.

Keynes, who advocated that government play a role in moderating the effects of peaks and  troughs in the business cycle through regulation of investment banking and automatic demand stabilizers (for example, unemployment compensation and jobs creation through public works) became conflated (perhaps intentionally) with “socialism” and “communism.” When Lauri Tarshis tried to write about Keynesian economics in his 1947 textbook, he was effectively silenced in much the same way and by many of the same people who were so effective at silencing Samuelson on military spending. Samuelson’s text “contained no more than a few words on American defense spending, and none on its size in relation to the federal budget or its effect on the economy.” The Right would paint them as “red” and the Board of Regents of their universities would bring pressure to bear for writing subversive textbooks. 

Economics, mathematized and divorced from moral philosophy, was effectively neutered after WW II, at the point when its relevance to “serious economic argument” might have been established and developed. The outcome was perfectly aligned with market forces that would continue to shift the national narrative in ways that would finally succeed in convincing people that “government is the problem”. It culminated in repeal of Great Depression era regulation, thereby freeing investment bankers for unfettered speculative gains supported by a seemingly unfettered single-payer credit default safety net.

Now add to this the promotion and tenure policies at even second rate economics departments that require and only reward publication in journals that favor morally vacant, mathematically rigorous, theoretically obtuse existence proofs that more often than not bear no relation to reality as we know it. One is then left with an economics literature that few people, including some who have majored in economics as undergrads, can truly understand, either in its content or in its relevance to the important moral and economic issues that confront us today.

It is no wonder that many people cannot “tell the difference between cynical posturing and serious economic argument.” This is a resounding indictment of economists and the economics profession. The market supported and promoted it. We as a profession benefited from it with higher salaries and consulting fees. Meanwhile, the “tragic consequences” of our failure include  a country that inefficiently spends twice as much as any other developed country on health while leaving roughly 20% of the population with no cover, a 10% unemployment rate, and a growing home mortgage foreclosure rate, all while providing single-payer credit default insurance, financed by low and middle income taxpayers, to the richest portion of the population, the guys who ran us into the ditch; the guys who cannot be taxed for fear they will cease to provide us with the dubious benefits of their financial expertise and acumen.

We appear to be at a political impasse because the idea that “government is the problem” has become entrenched. A moral philosophy pretending to be a science devoid of normative judgment has aided and abetted that idea by elevating efficiency above any other possible moral or even economic consideration. The result is that many in the US and in the world who lack the math acumen to appreciate the subtleties of economic theory stand enthralled by sound bites derived from a handful of dead economists and one dead president.

Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote.

If economists were physicians, we would be sued for malpractice.

Comments

[Dimitrios Diamantaras]

While I agree with the general thrust of this post, I must point out that there are whole fields of economics that use mathematical techniques to investigate moral philosophy questions as they arise in economics: check out the journal Social Choice and Welfare, for instance. Based on this kind of analysis one then uses mechanism design theory to harness the power of incentives in the service of moral values, embedded mathematically in social choice functions. While the majority of the profession does not seem to think along these lines, there are those of us who do, and yes, we use a lot of math, as it is a powerful tool to help us address difficult questions.
I am building a site at http://cogiddo.com to elaborate more on this, and I have a book recently out, mentioned there, but there are plenty of other sources to look for what I am talking about on the web and in an library. One blog that explicitly addresses mechanism design is http://cheeptalk.wordpress.com/ .

[Peter Kurze]

I don't disagree in the main. As a non-initiate, it surprises me that anyone can summon the effort to join a fraternity whose primary characteristic seems to be that no one agrees on fundamentals. That said, I think you lay too much blame on your profession. It's like blaming physicists for the notion of mutually assured destruction. I think that you could at least as easily blame the advertising industry, or the legions of political scientists who study the science of herding voters into pens on the appointed day. Ultimately though, and I say this with sadness, the blame lies with the people who opt for easy answers to shallow questions. Moral philosophy, in the end, is hard.

[Maxine Udall (girl economist)]

Thank you for weighing in, Dimitrios. Of course, you are right. There is always a danger when one oversimplifies and constrains oneself to ~1500 words, that something or someone will get left out or misrepresented. As you say, "the majority of the profession does not seem to think along these lines," which was the point of the blog. I knew when I wrote it that I was doing a disservice to people in your area and to behavioral economists and economic historians and historians of economic thought and political economists and probably others. I apologize for it and will attempt to balance with a blog on the minority at some point in the near future. :-)

[Maxine Udall (girl economist)]

Peter, Thank you so much for your comment. I thought long and hard about the issues you raise before I wrote the blog. If I diffuse blame, I can't hope to persuade at least some economists that we must do a better job of translating econ out to the public and that we must return to being a discipline that includes normative analysis (beyond what currently passes for welfare economics). So, yes, I laid a lot of blame on my profession. There is a lot we could have done and could still do to help non-economist voters, policy makers, politicians, and journalists to understand and participate meaningfully in reasoned, informed political and economic discourse about economic growth and development, human capital formation, finance, jobs creation, etc. Until we do it, I fear I must occasionally weigh in (albeit a tad prophetically). :-)

[Russ Nelson]

Violence is, to my mind, the ultimate source of immorality. Morality, therefore, comes from avoiding aggression. But anything a government does (EXCEPT the reduction of aggression) starts with aggression, since the only thing that distinguishes big government from big business is its monopoly on violence. Therefore, the only possible moral stand is to treat government as the source of immorality.

So, given a dislike of violence, government is the problem.

[Chris Burfield]

I long for the days of more normative discussions within the field of economics. I'm a masters in economics student and the other day my professor quoted Pigou, something to the effect that the markets may be distribute efficiently but it may still be disgustingly efficient. I reacted to the normative part of that quote and the professor responded by saying that economics is positive. Economics started off as both a normative and positive field of thought and I think it should return to that. If you focus solely on one or the other you get lost.

[Maxine Udall (girl economist)]

I feel for you, Chris. I went through exactly the same thing in grad school. Now that I teach, I find that many of my students are more moved by and interested in the normative aspects of economics. Maybe in time the market for economic ideas will correct for this. In the meantime, keep thinking about and reading about the normative issues. There is a lot more out there than you might think from my blog. Amartya Sen's writings would be a good place for you to start, but there are many more.

[rjs]

hey maxine, did you know this post was linked to by the wall street journal?

http://blogs.wsj.com/economics/2010/02/08/secondary-sources-taxis-and-rates-jobs-economist-malpractice/

[Maxine Udall (girl economist)]

rjs, thanks for letting me know.

[Charles Barry]

I'm sorry, but what is your argument?

You start off with a Krugman quote, you point the blame at maths (and a lack of "moral philosophy") and then you segway into just about any political criticism you can throw at the profession.

Is your argument that the maths is too difficult, too inaccessible? If so, so what? Many things in life are hard and require years of study. The principles behind bridge building or fluid dynamics are difficult and hard for engineers to understand. Why should a similarly technical profession such as economics be any different?

Is your argument that an ideology that "government is the problem" has clogged the arteries of US politics? If so, that's a political, ideological issue that has little to do with economics. Instead, that is a dogma spun by self-centred ideologues and special interests to the point of destruction. Your points about healthcare or recent economic events are similarly confused - these are fundamentally social and political issues, not ones of economics.

Is your argument that the maths involved is too focused on self-interested rationality? If so, as a economics grad student, you should know the reason why we assume that. For every Jesus of Nazareth there is a Gordon Gecko, and on average we can assume that the two cancel each other out! And for every efficient markets ideologue you find, you can find a behavioural finance guy in a university. The alternatives are out there, and they came from economics and its partner subjects.

There is a irony in your citing of Keynes as a great economics hero when his body of work goes against some of the many points you are making - Keynes developed maths of the fiscal multiplier and the AD/AS system that is the bedrock of macro analysis. Keynes was also a patriarch with a firm belief in the control of the government by a ruling elite.

Economics is a quantitative science, and maths is its ideal partner. Moral philosophy is a subject of qualitative discussion. If you want moral philosophy, go to a philosophy book. If you want economic analysis, go to an economics book. If you want politics, turn on the tv. But don't go looking for one of these things expecting other things.

[Maxine Udall (girl economist)]

Charles, I don't think we're going to see eye to eye on this, but thanks for your comments.

[Peter Kurze]

I've been thinking about this some more and for me there are things I hear all of the time that just don't add up. Fundamentally, it seems absolutely true that markets really do work, but it doesn't seem that anyone really wants to confront the implications of that squarely. We've been living with this notion that if we each pursue our self-interest we can achieve the optimal collective outcome. It's an attractive notion because it frees us from any greater responsibility for our choices both individually and collectively. I think it's working out as we might have expected, if not as we had hoped. The sum of our individual pursuit of self-interest turns out to be a great collective of selfishness where education is under-resourced, prison populations swell, and social cohesion deteriorates. I just don't understand why anyone is surprised by this.

It all seems so unnecessary. So much of the political posturing seems to be geared towards making sure that we're not being taken advantage of by some malingerers and yet our economy is far more constrained by limits of consumption than limits of production. Is there really a credible case to be made that this is the best we can do?

[Maxine Udall (girl economist)]

Peter, thank you for your thoughtful reflection. I've written elsewhere in the blog about the good things that come from properly functioning markets, among which is efficiency, but also trust, commitment, and to some extent fairness. I've noted the characteristics of properly functioning markets and that some markets do not conform to those characteristics, notably health and finance. Finance is an obvious case where we could do better. There is also clear evidence in health, where market failure is the norm, that we could do better, that we are inefficient. We spend twice as much as any other developed country with the possible exception of Switzerland where we spend almost twice as much. We fail to cover roughly 20% of the population and we have some of the worst health indicators among OECD countries including very poor (read costly) management of chronic diseases and very high rates of use of high tech diagnostic procedures (read MRI, CT). Someone will now weigh in and say that if only we would implement tort reform, use of revenue generating MRI/CT scans would decline. It's hard to see why they would when money can be made from them (unless docs are different from everyone else and motivated purely by altruism). Implement tort reform and their margin on procedures should increase since it should reduce their bottom line. Anyhow, I don't want to argue about this, just provide you an obvious example of a "credible case" that we could do better. Finance, the other credible case, should be self-evident.

Thank you for commenting.

[rjs]

maxine: you may be interested in this essay linked to by tyler cohen:
http://www.marginalrevolution.com/marginalrevolution/2010/02/economists-have-no-clothes.html

http://www.rmm-journal.de/downloads/010_buchanan.pdf

[Maxine Udall (girl economist)]

rjs, thanks. Interesting. I'm starting to remember why I was drawn to a mathematized pseudo-science. Maybe it IS better to keep econ separate from moral philosophy. :-)

I'll have to think about this. Thanks.

[Peter T]

This is perhaps a little off topic, but one of the things that puzzles me is the focus of economics on markets, when we plainly in practice do not rely on them for more than a fraction of our economic needs.

Various estimates put the total goods and services produced in the household sector at a third of the total economy. A large fraction of the rest is in the hands of various levels of government, or in the non-profit sector. And that part within firms is not traded - few companies have an internal market for, say, accounting. I recognise there are overlaps (governments and households buy goods in the market, firms can outsource and so on), but any way I do the arithmetic, the market has to less than a third of total economic activity. Maybe the maths has to do with the fact that only markets can be modelled?

[Maxine Udall (girl economist)]

Peter, I hope you're majoring in econ if you're a student. Why do we measure output the way we do? Why do we treat the output of women in childbearing and lactation as zero? Why do we treat parental (usually maternal) time inputs to children's health and welfare and the child health and welfare produced as of zero value? Why is housework not counted unless done by a paid employee? Why when we calculate gender specific productivity losses do we assume that if women are paid 80 cents on the male dollar for the same job, they must be 20% less productive? And what distortions does this introduce into our society and our economy? I don't think the answer is "the maths" and what they can or cannot model.

Here's a link to a blog that contains a link to the Sarkozy-Stiglitz-Sen Well-Being Report: http://ipezone.blogspot.com/2009/09/out-now-sarkozy-stiglitz-sen-well-being.html . I couldn't get the report's link to load, but I downloaded it a while back from the same link so I hope it will work for you. The report is a step in the right direction.

To attempt to answer your question: maybe our understanding of what a market is and what a market does is evolving; maybe it's time for a modern day Adam Smith to come along and move us to the next level of understanding, to unify the wealth of nations and moral sentiments, to lay the groundwork for new theory that takes account of the many, many variables all changing at once at the macro and the micro levels, the complex interconnections and interdependencies that generate animal spirits and fat tails and well-being, that incorporates all the stuff that right now resides in the error terms of our equations, and that makes "the maths" so limited. I think we need a Hari Seldon of economics. :-)

Thanks for your comment, Peter.

[The Raven]

Seems to me I covered some of this ground in a blog post entitled Ethics and the Discipline of Economics a few months ago. I take a somewhat different tack, though. It seems to me that the formerly-dominant school of economics has taken leave of basic scientific ethics, and thereby forfeited its scientific accuracy, and its claim to scientific authority.

Ref: http://adviceunasked.blogspot.com/2009/09/ethics-and-discipline-of-economics.html

[Maxine Udall (girl economist)]

Raven, Very nicely put. I think you made a better case for putting ethics and econ together than I did. Doing it to improve the science is probably as important if not more important than doing it to improve the public discourse. Or maybe it's the same thing. Thanks for sharing.

[Peter T]

Maxine

thanks for the feedback. No, I'm not a student - I'm a retired bureaucrat.

I take all your points about eg child-rearing. I was being a bit simplistic in relating directly to the "maths". My thought is that:

- the whole social complex is too large and too poorly understood to be modelled (and my mathematical friends tell me that it is likely that systems of this complexity cannot be modelled mathematically).

- economics set out to try, not understanding this (thinking that, if we could do it for physics, then we could do it for human society).

- when this did not work, it retreated to ever more recondite argument about things that sounded plausible, and looked like they should work. This has parallels in other disciplines (Chomsky's grand linguistic theory does not work, even though it starts from an observably true set of facts - which does not stop it dominating the field).

- my background tells me that when something cannot work, best to stop trying it, rather than persist (no scientist tries to build a perpetual motion machine - they KNOW it can't be done). Some strong social drivers prevent this happening in economics - not least the way the practice has woven itself into our social and political life.

One possible way foward would be to accept economics a a discipline like history - where one accepts that there are limits to the knowable and focuses on building up knowledge increment by increment, occasionally stepping back to synthesise. Much of the best economics I have read is economic history.

I guess I am more interested in the social drivers than the actual practice.

[The Raven]

Well, thank you for reading my article, and thank you for the kind words.

Are you aware of John Quiggin's *Zombie Economics?* He's written a whole book on economic ideas which by rights would be buried and yet...keep...walking...on. I believe it's at his publisher now; a good part of his draft is online at:
http://zombiecon.wikidot.com/

[Maxine Udall (girl economist)]

Peter, yes, that is what I was saying, perhaps obtusely, in the last paragraph of my reply to you. I happen to think the math is extremely useful as long as one keeps it in perspective and does occasional reality checks as you seem to suggest. I also tend to agree with you that the best economics and the best economists have a strong grounding in economic history and use it to inform their thought and their models. When thought or theory is abandoned because there is no math that fits it (Brad Delong has a good example here: http://delong.typepad.com/sdj/2010/02/economic-theory-and-economic-history.html), we have IMHO abandoned the right to call ourselves scientists. That we exclude or ignore the fire bearers attempting to point to the missing pieces because there is no math that fits that piece is shortsighted and shameful. That we appear not to be able to convey to the general public enough knowledge about our discipline to enable them to recognize and engage in reasoned political discourse...well, I've already written about that. :-)

To be clear, I love economics, all of it, the math, the theory, the history, the thought. It gives me no pleasure to point out our shortcomings.

Thank you for another thoughtful comment, P.

[Maxine Udall (girl economist)]

Raven, I was not aware. Thanks for the link. (Laffing out loud (at trickle down)). :-)

[Peter Kurze]

Maxine, Thank you for taking the time to respond to comments. I agree with you completely about health care and finance. In my last comment I was trying to get to a larger question about how the models we adopt constrain the world we can imagine and build for ourselves. I don't think I put it very clearly, but a lot of the subsequent conversation seemed to head down that road anyway.

Raven, I liked your post very much.

[Maxine Udall (girl economist)]

Peter K, "...how the models we adopt constrain the world we can imagine and build for ourselves." This is a really nice, concise way of describing models and modeling when it becomes a constraint rather than a tool to extend knowledge. Better than I could have said it. Thank you.