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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    thanx, maxine; that's certainly better than my snarky comments on krugman's blog...

    Thx, I was hoping you would pick up on Wladman's work. It still amazes me how many bright people, educated at the same institutions, can look at the same data and reach totally different conclusions. Is there any other realistic way to explain this other than people making normative judgments?


    Some ramblings triggered by your essay, which I enjoyed immensely.

    Regarding the Science of Economics - I would suggest that Econ lies at the intersection of Anthropology and Psychology and is “scientific” only in the sense that Descriptive Biology is scientific – i.e. it benefits from careful observation.

    You may recall in The Ugly American how Eugene Burdick describes giving advice to a developing country. “Raise the price of rice and the production of rice will go up.” They raised the price of rice and production went down. When interviewed farmers explained “I used to need to raise more rice to support my family. Now that it sells for more, I can raise less.”

    Thus Economics is a way of describing the functioning of a set of institutions and cultural values. Institutions and cultural values change from time to time and differ from location to location. In Finance – somewhat related to Econ - you can calculate the probability that a stock will change in value by 10%, but you must first assume that the mind set of today's investing public is the same as the mind set from which your data sample set is drawn. And guess what – mind sets change. Same deal with macro economic models.

    While one can assume that people act to maximize their interest, in my experience people act out of emotion without too much real focus on their interest cf. “What's the matter with Kansas?”

    While the trajectory from Earth to Moon is knowable and can be calculated, the trajectory from depression to good times is not. If you tried to promote a computer program that would tell you the outcome of an election you would be seen as a knave. Elections and economics are not computable. Oh those pesky Animal Spirits – you just can't compute when a baby deer will spook and run away.

    Of course, equations that restate the idea that the whole is equal to the sum of the parts are valid, but they are not predictive. If we have a surplus here it must be that we have a deficit there. Ho hum.

    And I am not trying to be a fatalist – good judgment is still good judgment, but there are no guarantees and no mathematical solutions.

    Disclaimer – my education is in one of the “physical sciences”., but I am reasonably fluent in the math used in Finance and Economics.

    For an extended time I had a computer programming company. I have done my share of economics calculations. Salesmen take the results of computer calculations and use them to create an aura of authenticity to the things they want to promote – and unsophisticated people apparently think that if you take an idea and wrap it in mystery, somehow the idea becomes valid.

    Regarding normative – my mother (b 1899) used to complain that economics had gotten off track. According to her, when she studied econ (she had an MS from Smith) it was taught as having 2 components – (1) how to maximize production; and (2) how to determine the fair and proper way to divide the results. She complained that part 2 had been lost somewhere. She may have been biased being the daughter of a clergyman.

    She and many others have trouble seeing Pareto optimality as being the answer to question 2, for the reasons advance by Amartya Sen and also for reasons advanced by religious figures who would like to believe that we have some interest in helping one another.

    As an aside – I just saw “My name is Khan” - it should be required viewing for all US citizens curious to see how a part of the world sees the white population of the US.

    And yes, there is a sub-field for non-normative. Just as doctors know what constitutes poison, and leave it to judges to decide where it should be used, it is ok to have some specialized sub-field of economic study that ignores values, and attempts to understand how changing x modifies y given our current set of values and institutions.

    As regards "Well, if you make a normative judgment then you are not a real economist." - apparently he identifies the whole field with what I consider to be a sub-field.


    Would not ANY "solution" take for granted some normative assumptions - about the equivalence of winners and losers, the acceptability of different forms of compensation (if any), the validity of combining material wealth and psychological well-being into a single calculation (most religious thinkers would dispute this), and much more?

    I think the economist in question made lots of normative judgements - he just did not know what he was doing.

    Peter: “I think the economist in question made lots of normative judgements - he just did not know what he was doing.”

    Exactly! In fact, in trying to be non-normative (if in fact that is what they are trying to do) all that those economists do is switch to being blindly, extremely normative for the “Dark Side”. Though, as many others have pointed out before, as it is predominately that Dark Side that is paying them, perhaps they are not quite all that unconscious of what they are doing.

    Incidentally, for a look at the positive economic worth of some good social values have a look at Washington’s Blog article on trust at:

    This is all actually quite old stuff that my lecturers discussed many decades ago. In fact, trust in transactions was often given as the single most important reason why Western Europe was wealthy and dominated the world (this was a lot of decades ago) whereas, say, Turkey, Iraq and Iran, which had looked much more promising a thousand years ago, were neither successful nor nice places to live.

    Stephen Heyer

    When I was a young pup, Milton Friedman and John Kenneth Galbraith, both acting as public intellectuals, argued at length over the place of normative assessments in economics. Galbraith argued the Economics should encompasss what he tried to do in his books, such as the New Industrial State, in the tradition of Veblen; that is, Galbraith argued that Economists should use judgement to critique results and the overall institutional system and outcome. Friedman and the Chicago boys (including my old teacher, Demsetz) argued that Galbraith had no methodological justification to distinguish his critique from an arbitrary expression of his personal tastes. Friedman's "positive economics" won the day.

    From Pareto to the Lucas Critique, the right-wing in Economics has enjoyed its greatest triumphs fighting on the methodological flank. But, this intellectual history has neither freed economists to be value-neutral, nor done much to enhance the quality of the technical project.

    Brad DeLong wrote, in the last piece you linked to: "What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course . . . was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT."

    That's pretty damning, coming from an economist, who has spent most of his blogging history, asking why we cannot have a better press corps.

    Far from protecting the technical project, these methodological committments to a value-neutrality, as advocated by the Right, have impoverished and undermined Economics. And, it is the Right, reactionaries and authoritarians-disguised-as-libertarians, who press hardest for Pareto-optimality, the efficient-market-hypothesis, rational-expectations, and the rest, and it is all hypocrisy and rot, in the end.

    Economics, as a science, must seek to understand function and mechanism. As such, it must reject doctrines of meaning and ritual symbolism, just as chemistry rejected alchemy and astronomy shed astrology.

    Yet, those, who campaign hardest out-of-doors for an ideology of "free markets", and legitimate a mad macroeconomics of "business confidence" in the op-ed pages, come within the walls of the academy to parse hard and fast against values?

    I think both Friedman and Galbraith were BOTH very wrong. You don't have to take sides on their dispute. To put it in philosophical terms, Galbraith was a Sophist and Friedman a Platonist. We need much more empiricism than that. But it is correct to point out that empiricism is not value free, what we measure is what we value.

    I liked the post and the links but missed the reason for the link to Krugman. He does use the same words 'morality play' but seems to be using them in a very different sense from what you write about. Could you please explain the connection because I just don't see it.

    reason: ". . . Galbraith was a Sophist and Friedman a Platonist. We need much more empiricism . . ."

    Yes, yes, and yes.

    The better angel of Galbraith's nature wanted, but failed, to be an effective heir to institutionalism. It was the loss of institutionalist approaches, (including their laborious search for facts and appreciation for complexity), in the wake of Keynes' technical insight, and Samuelson's elegant Euclidean theorems, which left Economics so vulnerable to Friedman's neo-platonic approach.

    Friedman succeeded, not because a majority of economists adopted his right-wing ideological viewpoint -- they didn't -- but because Economics largely accepted his* viewpoint on methodological questions, including but not limited to the jagged boundary separating normative from positive economics.

    [*I'm using him as a representative agent for a whole movement; I don't mean just *his* personal viewpoint or methodological contributions.]

    Far from making economics a "hard science", the tendency has been to legitimate a macroeconomic empiricism of "stylized facts" and inconclusive pseudo-experiments married to a theoretical scholasticism. I really don't see how the enthusiasm for the rational expectations revolution or DSGE models can otherwise be explained. Arrow-Debreu-McKenzie was a brilliant, capstone accomplishment, but any sensible person could see that it was a dead-end, instructive mainly for the constrasts between the model and the observable economy: the dialectic of economics had to move into antithesis. Which it did, despite heavy resistance, in some microeconomic fields; but macro after 1980 went wholehog into the Platonic Cave, never to see the light of day again, herded there by methodological critiques that celebrated "full rationality" and the like, while attacking the "loose ends" and kludges of a Keynesian macro-economics, which needed more mechanism and conflict, not the fairy princess of representative agent microfoundations.

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