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sanity,
humanity and science
post-autistic economics
review
Issue no. 18; February 5, 2003
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In this issue:
-
Esther-Mirjam
Sent
Pleas for Pluralism
- Ana Maria Bianchi
Policy-Relevance in the Latin American
School of Economics
-
Steve Cohn
Common Ground Critiques of Neoclassical
Principles Texts
- Jamie Morgan
How Reality Ate Itself: Orthodoxy, Economy &
Trust
- Peter Wynarczyk
Austrian Economics and the Post-Autistic Economics
Challenge
- Comment:
Wolff replies to
Perino on the Absurdity of “Efficiency”
- PAE economists in the news: Joseph
Stiglitz, Michael Bernstein,
Steve Keen, Neva Goodwin, Deirdre
McCloskey, Stephen Ziliak, Bruce Caldwell,
Vernon Smith, Daniel Kahneman
Pleas for Pluralism
Esther-Mirjam Sent (University of Notre Dame, US, and Netherlands Institute for Advanced
Study in the Humanities
and Social Sciences (NIAS))
Pleas
The
first stage of the movement that led to the establishment the Post-Autistic
Economics Network involved a group of economics
students in France publishing a petition in June 2000 under the banner
“autisme-économie.”1 Their plea was supported by an appeal
from some economics teachers in France. The second stage was launched in
September 2000 by the appearance of the first issue of the email newsletter
you find in your inbox. By its second issue, the Post-Autistic Economics
Newsletter had subscribers from 36 countries, and it currently has over 5000
subscribers from over 100 countries. In November of 2000 http://www.paecon.net went in the air,
ushering in further international interest. In 2001, 27 economics Ph.D.
students at Cambridge University in England who have come to be known as the
“Cambridge 27” issued a petition entitled “Opening Up Economics.” The third
stage is where we are now and at which this contribution carefully considers
pleas for pluralism that have featured prominently during the previous two
stages, as well as before the establishment of the Post-Autistic Economics
Network. As Wade Hands (1997b, 194) observes: “The plea for pluralism in
economics has been a frequent refrain throughout the history of modern
economic thought. This refrain has usually been voiced by those who were
outside, or critical of, the mainstream in modern economics.”
Eight
years before the first stage mentioned in the previous paragraph, in 1992, a
group of economists issued a “Plea for a Pluralistic and Rigorous Economics”
in an advertisement in the American
Economic Review, calling for “a new spirit of pluralism in economics,
involving critical conversation and tolerant communication between different
approaches. Such pluralism should not undermine the standards of rigor; an
economics that requires itself to face all the arguments will be a more, not
a less, rigorous science.”2 The announcement had been organized by
Geoffrey Hodgson, Uskali Mäki, and D. McCloskey, and signed by forty-four
illustrious names amongst which were Nobel laureates Franco Modigliani, Paul
Samuelson, Herbert Simon, and Jan Tinbergen.
In
1993, the International Confederation of Associations for Pluralism in
Economics (ICAPE) was founded as a “consortium of over 30 groups in
economics” that “seeks to foster intellectual pluralism and a sense of
collective purpose and strength.”3 Its 1997 resource list
contained 30 professional associations, 32 academic and policy journals, 11
publishers, 16 departments, 16 centers, and 9 special projects, not all of
which were formally affiliated with ICAPE. The consortium’s statement of
purpose suggests: “There is a need for greater diversity in theory and method
in economic science. A new spirit of pluralism will foster a more critical
and constructive conversation among practitioners of different approaches.
Such pluralism will strengthen standards of scientific inquiry in the
crucible of competitive exchange.” ICAPE’s first conference on “The Future of
Heterodox Economics” will be held during the Summer of 2003.
The “autisme-économie” petition mentioned before, published in 2000, favored
a pluralism of approaches in economics.4 The French students
wrote: “We want a pluralism of approaches, adapted to the complexity of the
objects and to the uncertainty surrounding most of the big questions in
economics….” The petition of the economics teachers in France also stressed
the need for pluralism, focusing mostly on theories.5 They
concluded: “Pluralism must be part of the basic culture of the economist.
People in their research should be free to develop the type and direction of
thinking to which their convictions and field of interest lead them. In a
rapidly evolving and evermore complex world, it is impossible to avoid and
dangerous to discourage alternative representations.”
The proposal for reforming economics entitled “Opening Up Economics” issued
by the “Cambridge 27” in 2001, ends as follows: “We are not arguing against
mainstream methods, but believe in a pluralism of methods and approaches
justified by debate. Pluralism as a default implies that alternative economic
work is not simply tolerated, but that the material and social conditions for
its flourishing are met, to the same extent as is currently the case for
mainstream economics. That is what we mean when we refer to an ‘opening up’
of economics.”6
Implicit in all these appeals is the observation that economics lacks
pluralism. The pleas are defended by means of an assortment of arguments,
such as discussions of the complexity of the economy, evaluations of the
restrictions inherent in modeling, and assessments of the cognitive
limitations on the part of economists. The advertisement in the American Economic Review also employs
a reflexive strategy: “Economists today enforce a monopoly of method or core
assumptions, often defended on no better ground than it constitutes the
‘mainstream’. Economists will advocate free competition, but will not
practice it in the marketplace of ideas.”7 The remainder of this
contribution highlights some problems with the pleas for pluralism, in an
effort to open up ways for strengthening them further.
Pluralism?
Since
pluralism itself is a reflexive doctrine — there can be more than one kind of
pluralism — problems occur in using pluralism as an organizing principle.
First, the nature of pluralism in the various pleas differs. A distinction
needs to be made among theories, methods, methodologies, approaches,
perspectives, models, explanations, and so on (see, e.g., Salanti and
Screpanti 1997). Whereas the French students stress approaches, their
teachers focus more on theories, and the British students emphasize methods
and approaches. Somewhat troublingly, ICAPE’s statement of purpose appears to
confuse methods and methodologies, for instance when it notes: “One
conspicuous consequence of the homogenization of economics has been a loss of
methodological pluralism.” Now, pluralism about methodologies involves
adopting a pluralistic position towards one’s own understanding of the
multifaceted enterprise of economics, borrowing from a wide variety of
“shelves,” including history, literary criticism, philosophy, and sociology
(see, e.g., Hands 2001). This is not what ICAPE’s reference to methodological
pluralism intends to address. Instead, it is concerned with pluralism about
methods, which involves types of models, reasoning, and so on upon which
economics relies (see, e.g., Dow 1997, 2002).
Second, the source of pluralism varies. It could be ontological,
epistemological, pragmatic, historical, sociological, heuristical, political,
and so on (see, e.g., Salanti and Screpanti 1997). Whereas the French
students focus on complexity and uncertainty, their teachers emphasize a wide
range of contextual matters, and the British students are not explicit about
the source of pluralism. Let us take a closer look at the mechanisms outlined
by the teachers: “Pluralism is not just a matter of ideology, that is of
different prejudices or visions to which one is committed to expressing.
Instead the existence of different theories is also explained by the nature
of the assumed hypotheses, by the questions asked, by the choice of a
temporal spectrum, by the boundaries of problems studied, and, not least, by
the institutional and historical context.” The argument that theories vary
across different scientific contexts (domains, times, interests, et cetera)
raises the question whether for every phenomenon, question, and so on there
would be a single, best account. If so, then this view seems to reduce to
monism, which foreshadows the arguments of the subsequent sections. Before
moving there, we will make one more observation concerning pluralism.
Third, not much thought seems to have been given as to the classification of
pluralism. The various objects of pluralism could be translatable or not and
might be compatible or not. Reflexivity concerns should keep one from casting
the classification in terms of complements and substitutes (see, e.g., Mäki
1999). The French students, their teachers, and the British students all seem
to view heterodox and neoclassical economics as neither translatable nor
compatible. This, again, introduces the possibility of a reduction to monism,
as elaborated in the following sections.
Monism!
Most
importantly, despite these apparent appeals to pluralism, upon closer
scrutiny, the pleas seem to be inspired my monism about theories. This
motivation is evidenced, for example by the observation that the first
conference of the International Confederation of Associations for Pluralism
in Economics (ICAPE) is on the future of heterodox economics, while orthodox
economics is considered to be “vapid, exclusionist, and detached from its
social and political milieu.” The French students write about neoclassical
economics: “We no longer want to have this autistic science imposed on us.”
And their teachers concur: “Neoclassicalism’s fiction of a ‘rational’
representative agent, its reliance on the notion of equilibrium, and its
insistence that prices constitute the main (if not unique) determinant of market
behavior are at odds with our own beliefs.”
Using a label introduced by Ronald Giere (forthcoming), the appeals to
pluralism on the part of heterodox economics may be seen as an instance of strategic
pluralism. Though advocacy of pluralism by the French students, their
teachers, and the British students may be couched in metaphysical or
epistemological terms, could be primarily inspired by efforts to achieve
professional power and dominance. John Davis (1997, 209; original emphasis),
therefore, concludes that the motivation of heterodox economists “is not that
their own theoretical approaches are also
correct — a theoretical pluralist view — but rather than neoclassical
economics is mistaken and misguided in its most basic assumptions, and that
their own approaches remedy the deficiencies of neoclassicism — a theoretical
monist view.”
Also against the spirit of pluralism, heterodox economists appear to be
offering a rather monist reading of the mainstream. The French students
“oppose the uncontrolled use of mathematics,” their teachers “denounce the
naïve and abusive conflation that is often made between scientificity and the
use of mathematics,” and the British students dispute the “commitment to
formal modes of reasoning that must be employed for research to be considered
valid.” Which mathematical formalism do they oppose (see, e.g., Hands and
Mirowski 1998; Mirowski and Hands 1998)? Is it that of the University of
Chicago Economics Department (in particular Milton Friedman and George
Stigler), of the Cowles Commission at the University of Chicago (especially
Kenneth Arrow and Gerard Debreu), or of the Massachusetts Institute of
Technology (most notably Paul Samuelson)? Or is it the mathematical formalism
of the game theoretic approach of John von Neumann and Oskar Morgenstern, or
of John Nash? And how about efforts to incorporate bounded rationality
approaches, behavioral insights, chaos theory, complexity approaches, and
experimental methods? As Sheila Dow (2002, 7) suggests: “[M]ainstream
economics gives the appearance of a moderate form of pluralism.” By
monistically equating orthodox economics with mathematical formalism,
therefore, heterodox economists ignore the fragmentation of the mainstream
and manoeuvre themselves in a vulnerable position.
Concluding
Comments
If
heterodox economists are serious about their advocacy of pluralism, as we
hope they are, they need to carefully consider the nature, source, and
classification of pluralism.8 And they need to confront the charge
that pluralism inevitably leads to an “anything goes” view. They also need to
beware of sliding into monism. For instance, an ontological perspective that
stresses the patchiness of the world runs the risk of being reduced to monism
because it might be consistent with the idea that for every phenomenon there
is a single, best account. An epistemological view that involves the hedging
of bets may reduce to monism if the long-term goal is a single comprehensive
account. An epistemological view that relies on the cognitive limitations of
economists may reduce to monism if the limitations are merely delaying the
development of a single, complete, and correct theory. If heterodox
economists desire pluralism, they need to honor its spirit when offering
interpretations of the mainstream. If heterodox economists employ appeals to
pluralism strategically in an effort to achieve monism, they leave themselves
vulnerable to criticism. Finally, they need to ensure, as stressed by the British
students, that the material and social conditions for the flourishing of
pluralism are met.
Notes
1. A brief history of the
Post-Autistic Economics Network is available at http://www.paecon.net/.
2. The advertisement appeared in American
Economic Review 82 (2): xxv.
3. Information on ICAPE can be found at http://www.econ.tcu.edu/econ/icare/main.html.
4. The text of the French students’ petition is available at http://www.btinternet.com/~pae_news/texts/a-e-petition.htm.
5. The text of the professors’ petition circulated in France can be found at
http://www.btinternet.com/~pae_news/texts/Fr-t-petition.htm.
6. The open letter of the 27 Ph.D. students at Cambridge University may be
accessed at http://www.btinternet.com/~pae_news/Camproposal.htm.
7. One of the organizers of the plea, Uskali Mäki (1999), clarifies that some
economists who are supporters of free market (object-)economics refused to
sign, whereas some economists who are less enthusiastic about free market
(object-)economics did sign. He conjectures that “when economists talk about
the ‘free market’ of ideas, they do not use the expression in the sense in
which it appears in their theories of the goods market” (504). This enables
consistency, but eliminates full self-referentiality.
8. Some of these observations draw on a very insightful list of questions
about scientific pluralism that was drawn up by Stephen Kellert, Helen
Longino, and Kenneth Waters in preparation for a workshop on scientific
pluralism. The list is available at http://www.mcps.umn.edu/pluralism/outstanding_questions.html.
References
Davis, John B. (1997),
“Comment”, in Salanti and Screpanti 1997, 207-11.
Dow, Sheila C. (1997), “Methodological Pluralism and Pluralism of Method”, in
Salanti and Screpanti 1997, 89-99.
———. (2002), “Pluralism in Economics”, Paper presented at the Annual
Conference of the Association of
Institutional and Political Economics, 29 November 2002.
Giere, Ronald N. (forthcoming), “Perspectival Pluralism”, in Stephen Kellert,
Helen Longino, and C.
Kenneth Waters (eds.), Scientific
Pluralism, Minnesota Studies in the Philosophy of Science.
Hands, D. Wade (1997), “Frank Knight’s Pluralism”, in Salanti and Screpanti
1997, 194-206.
——— (2001), Reflection Without Rules:
Economic Methodology and Contemporary Science Theory.
Cambridge: Cambridge University Press.
Hands, D. Wade and Philip Mirowski (1998), “Harold
Hotelling and the Neoclassical Dream” in Roger
Backhouse, Daniel Hausman, Uskali Mäki, and Andrea Salanti
(eds.), Economics and Methodology:
Crossing Boundaries. London: Macmillan, 322-97
Mäki, Uskali (1999), “Science as a Free Market: A Reflexivity Test in
an Economics of Economics”,
Perspectives
on Science 7 (4): 486-509.
Mirowski, Philip and D. Wade Hands (1998), “A Paradox of Budgets: The Postwar
Stabilization of American
Neoclassical Demand Theory”, in Morgan and Rutherford
1998, 260-92.
Morgan, Mary S. and Malcolm Rutherford (eds.) (1998), From Interwar Pluralism to Postwar Neoclassicism,
Annual Supplement to Volume 30, History of Political
Economy. Durham: Duke University Press.
Salanti, Andrea, and Ernesto Screpanti (eds.) (1997), Pluralism in Economics: New Perspectives in
History and Methodology. Cheltenham, UK: Edward Elgar.
______________________________
Esther-Mirjam
Sent is the author of The Evolving
Rationality of Rational Expectations (Cambridge: Cambridge University
Press, 1998) and the editor (with Philip Mirowski) of Science Bought and
Sold (Chicago: University of Chicago Press, 2002). She may be contacted at sent.2@nd.edu.
______________________________
SUGGESTED CITATION:
Esther-Mirjam Sent, “Pleas for Pluralism”, post-autistic economics
review, issue no. 18, February 4, 2003, article 1. http://www.btinternet.com/~pae_news/review/issue18.htm
Concern with Policy-Relevance in the
Latin American School of
Economics
Ana Maria Bianchi (Universidade de Sao Paulo, Brazil)
As I understand it, one of the main goals of the post-autistic movement is to
stimulate the economics profession to transcend autism and communicate with
the rest of the world, non-economists included. One of the ways of attaining
this goal is to look back at the history of economic ideas, which is full of
interesting episodes that can help us to understand what happened in the past
and what is going on today. Historical reconstruction may attract our
attention to some currents of thoughts which developed outside the mainstream
of the profession and were never made part of the academic textbooks,
although they brought up significant new perspectives on the functioning of
the economic systems.
In this connection, it is worth recalling the episode that concerns the
building of the Latin American School of Economics in midst 20th
century. This school of thought originated in the United Nations Economic
Commission for Latin America and Caribe (ECLAC), founded in 1948. Its best
known leader is the Argentinean economist Raul Prebisch. After holding
important executive positions in the Central Bank of his country, Prebisch
taught economics at the University of Buenos Aires and soon after joined the
ECLAC staff, where he stayed for 15 years. His conception of the growth
processes in Latin America was developed in several essays published by the
ECLAC1 and became the basis of what is now known as the Latin American school. Under
the leadership of Prebisch, the institution became a think tank for a whole
generation of heterodox economists and social scientists in general, the
so-called cepalinos, whose ideas provided theoretical justification
for the economic development of Latin America countries during the second
half of the twentieth century.
The main thesis advocated by the Latin American School was that the
“peripheral” countries, which specialized in exporting raw materials and
primary products in general to the “central” industrialized countries,
suffered from a long-term decline in their terms of trade. The benefits of
external trade were unequally shared by these two groups of countries, the
producers of manufactures, on the one hand, and the producers of raw materials
and primary goods, on the other. Due to this asymmetrical relationship in
their foreign trade peripheral countries faced a vicious circle of low
productivity and low rate of savings. Regarding the central countries, market
imperfections such as rigidity of wages and monopolistic conditions were such
that the gains in productivity derived from technological improvements did
not result in decreasing prices for industrial goods exported to Latin
America and peripheral countries in general. The balance of payments deficits
were detrimental to Latin American´s economic growth, as receipts deriving
from exportations did not create the import capacity needed to provide the
region with the capital goods that it required to develop its industrial
sector.
In order to overcome this situation, Latin American countries should protect
their foreign trade and concentrate on the production of an array of formerly
imported manufactured goods. Import substitution was a necessary condition
for peripheral growth, in association with structural reforms in the economy.
The focus should be placed on the strengthening of the domestic market, which
was seen as the crucial element of an inward-looking model of development.
Exportations were still necessary because they would guarantee the foreign
exchange needed for importing capital goods, but the hallmark of the cepalinos´s
conception was the focus on the domestic market. Within Latin America,
economic integration between countries would allow them to take advantage of
economies of scale, in the sense of providing larger markets and favouring
the dissemination of modern technologies.
These were, in a nutshell, the main theses defended by the cepalinos,
who worked hard to gather statistical data about Latin America
countries and their patterns of foreign trade. It its important to notice that this was not a widespread
procedure in the 1940s and 1950s. On the contrary, in many economic texts,
mostly those meant for a lay audience, there was no systematic concern with
the role of statistical evidence in economic analysis. The cepalinos
prompted a break from the prevalent discursive style. Concern with the
empirical support of economic theses was present in the very spirit that
presided over the conception of the ECLAC. The entity´s staff was put in
charge of assembling statistical data about Latin America, in order to
compensate for the chronic deficiency, and they did the best they could do in
this area.
Another important point about the cepalinos is the fact that they were
severe critics of the conventional theory of international trade, both in its
Ricardian and neoclassical versions. In a late interview, Prebisch
(1987) stated that, although he was raised in the neoclassical tradition, the
Great Depression forced him to review his ideas. Already in his writings as a
member of the ECLAC staff, he argued that the main mistake of neoclassical
economics was to attribute a general character to something that was
geographically circumscribed. From the viewpoint of the periphery, conventional
economics suffered from a “false sense of universality”, as its general laws
did not apply to the world economy as a whole. The international division of
labor which this theory pictured as a “natural” outcome of the world system
of trade was of much greater benefit to central than to peripheral countries.
A new investigative effort was thus necessary for a correct interpretation of
Latin American problems, one that would bear in mind the need to tailor the
neoclassical theory to the specific conditions of peripheral economies. This
did not mean, however, that the new generations of Latin American economists
had to start all over again, building a completely different economic theory.
On the contrary, they had to learn neoclassical economics before being able
to make the necessary adaptations2
Prebisch and the cepalinos were influenced by the German Historical
School, especially its forerunner Friedrich List, from whom they borrowed the
“infant industry” argument. According to this argument, a potential manufacturer
in a developing country, faced with an initial period of high costs, should
be put under State protection. Temporary intervention would make entry into
the new industry profitable provided that, on the longer term, its production
costs would decline below the imported cost. This argument was combined with
an appeal for import-substitution industrialization as the only way out of
poverty and underdevelopment. Although not an end in itself,
industrialization was the principal mechanism at the disposal of peripheral
countries to obtain a share of the productivity gains achieved through
technological progress. In this scenario a major role was attributed to the
state, which should provide protection for the newborn domestic industries.
The cepalinos also placed great emphasis on economic programming and
planning techniques. The development process should follow an orderly
strategy, and it could not be conceived as the spontaneous process which
characterized it during the nineteenth century.
On the empirical counterpart of this ideological and institutional movement,
the cepalinos succeeded in mobilizing the energies necessary to give a
new impulse to the state-led industrialization process. Industrialization
through import substitution had begun earlier in countries such as Brazil,
Argentina and Chile, but it gained a new momentum with the diffusion of
structuralist ideas and policies. Burger (1999) claims that with the ECLAC
industrial policies came to represent a logical continuation of this early
process, systematized into a more coherent body of ideas.
All in all, this industrialization model worked in Latin America, if by
“working” we mean driving the per capita output for a quite extensive period
of time. During the three decades that followed World War II, Latin America
saw a continuous growth of its industrial product, its gross domestic
product, and its per capita income.
Between 1950 and 1978, Latin America´s gross domestic product grew at
an annual rate of 5,5%, a rhythm that far exceeded the world average. The
Latin American industrial product was multiplied by six in the same time
period, growing at rates far superior to the population growth, which grew
2,8% a year. The continent as a
whole exhibited a persistent growth of its GNP per capita of about 2,6% a
year.
Yet the
import-substitution industrialization model had shortcomings and the cepalinos
quickly came to acknowledge this fact. In a book published in 1971, called Change
and Development, Prebisch pointed out to the limitations of this model as
it had actually evolved. Latin American economies, he claimed, could no
longer continue to rely on import substitution alone. Rather than
concentrating on the production of basic goods for general consumption, the
newly created industries had tended to concentrate on the production of
consumption goods that benefited a small portion of the urban consumers. The
industrialization model adopted by the Latin America countries produced
growth but failed to produce equity, as it was unable to absorb the excess
labor force, marginalizing large masses of people from its benefits.
In this
sense, the import-substitution model adopted by Latin America after World War
II was inefficient in achieving a significant reduction of poverty and income
concentration in the continent. Latin America became less poor in the second
half of the 20th century, and this is something to be praised, but
its indices of inequality, which were already comparatively high in 1950,
remained so throughout the 1950-1980 period. The costs of this process included high inflation levels –
a further object of concern of Prebisch and the cepalinos -, which
accelerated at an unprecedented rate near the end of the century. These costs also included a growing
foreign debt and a bloated, inefficient, and corrupt public sector. The integration of the continent
itself, a dream nurtured by ECLAC from its very beginnings, moved at the
speed of a turtle.
From the academic point of view, the
Latin American School of Economics did not acquire many followers
outside the continent. There are very few mentions of it in the international
literature of the history of economic thought, macroeconomics and growth
economics. One exception is found in Thirlwall and McCombie (1994, pp.256-7),
who refer to the importance of Prebisch in the construction of
center-periphery models of growth and development. (The authors build an
equation which would be later adopted in post-Keynesian growth models.)
Be that as it may, the most
important feature of the Latin American School is the fact that its authors
were thoroughly concerned with the practical relevance of their writings.
This is not a prerogative of this school, as we learn from Milberg (1996),
who claims that in the field of international economics researchers have been
persistently concerned about policy-relevance. Nevertheless, this is
something to be praised, in times when ultra-formalism tends to dominate a
significant part of the academic scene. Influenced as they were by the German
Historical School, the cepalinos fully recognized the prescriptive
nature of economics. Their writings show an explicit commitment to values
such as economic development, social welfare and equity. The cepalinos
wanted to learn the relevant theory and to assemble the relevant statistics,
but they also wanted to tell something important and true about their Latin
American world. In this sense, they mobilized some broad-based economic
expertise in order to propose economic and social changes, thus bridging the
gap between what they learned in the textbooks and the world out-there.
Notes
1. Among these writings two were specially path-breaking: the essay called
“The economic development of Latin America and its principal problems”,
presented for the first time in June 1949, during the ECLAC general assembly
held in Havana, Cuba; and the introductory part of the Economic Survey of Latin America 1949, presented during the ECLAC general assembly held in
Montevideo, Uruguay, in May 1950.
2. This is what Hodgson (2001) would call the neglected problem of historical
specificity, which he considers to be a problem of vital significance for the
social sciences, fully recognized by all the leading members of the German
Historical School. It addresses the limits of explanatory unification in the
social sciences, in the sense that they must build theories that are
sensitive to historical and geographical variations. In the author´s own
words:
“... differences between different
systems could be so important that the theories and concepts used to analyse
them must also be substantially different, even if they share some common
precepts. A fundamentally different reality may require a different theory.
This, in rough outline, is the problem of historical specificity.” (Hodgson
2001, p. xiii)
References
Burger, Hillary. 1999. An Intellectual History of the ECLA
Culture, 1948 to 1964. Boston, MA: Harvard
University Press.
Hodgson, Geoffrey, 2001. How Economics Forgot History. London and New
York: Routledge.
Milberg, William, 1996. “The Rhetoric of Policy Relevance in International
Economics”, Journal of
Economic Methodology 4 (2): 199-200.
Prebisch, Raúl, 1971. Change and Development: Latin America´s Great Task.
New York: Praeger.
Prebisch, Raúl, 1987. “Cinco Etapas de mi Pensamiento sobre el
Desarrollo”. Comércio Exterior 37 (5).
Prebisch, Raúl. 1948. “Desarollo Económico de América Latina y sus
Principales Problemas”. Santiago:
CEPAL, E/CN.12/0089, 87 pp. (published
in English as “The Economic Development of Latin America
and its Principal Problems.” UN E CN. 12/89 Rev.1.
Thirlwall, A. P. and McCombie,
J.S.L., 1994. Economic Growth and the Balance of Payments Constraint.
St. Martin´s Press.
United Nations, Economic Commission for Latin America, 1951. Economic Survey of Latin America 1949.
Santiago: UN.
______________________________
SUGGESTED CITATION:
Ana Maria Bianchi, “Concern with Policy-Relevance in the Latin American
School of Economics”, post-autistic economics review, issue no.
18, February 4, 2003, article 2. http://www.btinternet.com/~pae_news/review/issue18.htm
Common Ground Critiques of Neoclassical Principle Texts
Steve Cohn (Knox College, USA)
Like many heterodox economists I am pleased and excited by the growth of the
PAE network. I'd like to share
some thoughts about a project I
have been working on that overlaps many initiatives and ideas that
have been discussed in the PAE Review.
The “critical commentary” project is
based on four major assumptions.
Assumption 1: Need for Critique
In the mid 1990s
about 1.4 million students took principles classes in the United States. All 20 best selling introductory
macroeconomics textbooks in the U.S. are basically neoclassical texts.1
It is unlikely that even 1% of the students use a non-neoclassical principles text.
To make matters worse, for several decades the neoclassicists have been increasing
their control over economic education at the pre-college level. There has been a major effort to
craft and then impose on high school (and even pre-high school) economics
courses "voluntary content standards" that reflect neoclassical
ideas. This has been accompanied
by the creation of review mechanisms, such as the Test of Economic Literacy
(TEL), that assess economic knowledge in terms of students' acceptance of
neoclassical theory.
When economists objected to the
narrowness of the "voluntary" content standards, two important
members of the drafting committee were quite explicit about their attempt to
censor other viewpoints. They
indicated,
"The final
standards reflect the view of a large majority of economists today in favor
of a 'neoclassical model' of economic behavior….The task was to produce a
single coherent set of standards to guide the teaching of economics in
America's schools. Including
strongly held minority views of economic processes risks undermining the
entire venture."2
Assumption 2: Generic Target
There is a template, a standard neoclassical treatment of most topics covered
in principles courses, which can serve as the target for a heterodox or
pluralist commentary. Space
limitations preclude defending this claim here, but it is hardly
controversial. Colander's
observation that principles texts can not diverge more than 15% from standard
fare characterizes the market's homogenization fairly well.
Assumption 3: Common Ground Critique
While the
neoclassicists have been very good at homogenizing instruction within their
ranks so as to speak with one voice when it counts, those of us with
non-neoclassical positions have been less inclined to follow this
strategy. And for good
reason. Part of our success is
based on the hard won development of specialized languages (such as Marxist
theory) that are able to resist being co-opted by neoclassical
discourse. I think many advances
for heterodox theory will come by preserving these separate languages and
integrating their insights.
Nevertheless, while I think it is important for the individual
paradigms to continue to flourish as separate schools of thought, I am
convinced it is possible to find broad common ground across a wide range of
critiques of neoclassical principles texts, including work by many Marxist,
radical, institutionalist, feminist, Post Keynesian, socio-economic,
humanistic, and ecological economists.
To use a biological metaphor, the issue is whether heterodox paradigms
can be thought of as members of one species or separate species. I believe there are enough shared
ideas among paradigms to inter-breed and support shared assaults on
neoclassical texts.
Assumption 4: Appropriate Pedagogy
An effective
critique of standard texts requires a sustained voice. One of the rhetorical
strengths of principles books is the repetition of the same kind of analysis
across many different topics.
Our critiques must offer a competing "habit of mind." Besides challenging the formal
arguments of neoclassical economics,
heterodox critiques must also challenge the "stories"
in neoclassical principles texts and offer alternative stories, metaphors,
and patterns of analogies to convey heterodox ideas.3
The Significance of Common Ground
Since establishing
our common ground may be key to expanding the influence of pluralist
economics, I will concentrate on elaborating Assumption 3 in this article. Besides offering opportunities
for intellectual cross pollination, securing common ground might increase the
clout of pluralism within the economics profession. Why not, for example,
band together to demand that the College Board's Advanced Placement exam
include at least one question that requires some knowledge of alternative
economic paradigms? The growth
of ICAPE4 and recent efforts to create umbrella projects, such as
the recent and/or upcoming conferences on the history and future of heterodox
economics in the U.S. are promising steps in this direction.
A key challenge for "heterodoxy" is to define itself in ways that
move beyond the rubric of "non-neoclassical" economics. In defining a common ground in the
"critical commentary" I have tried to do three things: (1) identify
shared ideas that generate a pattern of heterodox critique across
topics and chapters of introductory macro texts; (2) give special attention
to ideas that link methodological differences to policy differences; and (3)
characterize the common ground in ways that permit distinct paradigms to
develop common differences with textbook economics in different
ways.
Let me offer two examples of the latter point. I think holist alternatives to
methodological individualism are one of the most fundamental differences
between heterodox and neoclassical economics.5 Holist alternatives are expressed differently,
however, in different heterodox paradigms. For example, Marxist holism finds expression in
"dialectics;" institutionalist holism highlights patterns of
institutional reproduction; holism in radical economics often illuminates
social structures of accumulation;
feminist holism can involve systems of patriarchy; Post Keynesian
holism highlights socially constructed conventions for responding to
uncertainty; and so on. While
the approaches are very different they all assert that there is a "coherence"
to economic life that reproduces itself over time at a higher level of
integration than the individual.
A second example involves epistemological issues. In contrast to neoclassical theory's assertion of a
positivist-modernist epistemology, heterodoxy acknowledges the paradigmatic
and multi-dimensional nature of knowledge. While different economists have taken this challenge in
different directions (including the adoption of pluralist or Babylonian methodologies,
the rejection of micro foundation requirements, the acceptance of empathy and
aggregate analysis as viable research techniques, the adoption of critical
realism, etc.), there is a common ground that expands economics
discourse from the narrow terrain of textbook methodology.
Any attempt to create a common ground is inevitably going to exclude some
"terra firma" for many perspectives. The commonalities and rubrics I have chosen work well
along many dimensions, but not so well along others. With these qualifiers in mind, I
offer the concepts below as a heuristic for promoting discussion of common
ground in heterodox critiques of textbook economics. Because of space
limitations I have simply listed and not discussed most of the
categories. I will offer a few
comments on the two asterisked categories whose
meaning may not be self-evident from their title.
Heterodox paradigms share a common rejection of the following aspects of
textbook economics:
- its positivist-modernist epistemology
*- its subtexts
*- its treatment of issues of
well-being
- its inappropriate use of abstraction
- its universalization of homo economicus
-its allegiance to methodological individualism
In areas of particular relevance to macro theory, heterodoxy also
rejects:
- its assumption of perfect
information
- its assumption of perfect
competition
- its use of comparative static
rather than dynamic models
-
its appeal to partial equilibrium intuitions to explore system-wide issues
of macro coordination
- its abstraction from the monetary
character of the economy
- its abstraction from the labor
market's "subjective" dimension and the
institutionally
contingent determination of wage/profit shares
Heterodox critiques of neoclassical economics (at least the way I am using
the term heterodox) involve two different kinds of inter-connected
objections. Within neoclassical
economics, the first might be seen as "normative" and the second as
"positive" objections.
One of the claims of heterodoxy, however, is that the sharp
distinction between positive and normative statements claimed by neoclassical
economics oversimplifies the complex relationship between the two. Thus I will call the two objections
textual and subtextual. To some
extent, the first deals with the techniques of analysis and the second with
the goals of analysis (although the goals obviously influence and infuse the
choice of techniques).
Many heterodox economists feel that neoclassical economics often acts as an
apology for capitalism and laissez-faire oriented policy regimes. The
neoclassicists ridicule the claim, analogizing it to finding ideology in
geometry. I have found the
concept of subtexts very helpful in explaining heterodox thinking.
By subtexts, I mean (1) the tacit and unprovable assumptions about the nature of society and
the (2) normative ideas about the goals of economic knowledge that underlie
all economic paradigms.
Most intellectual work is motivated by a belief that the ideas pursued
are worth knowing. Subtexts
provide the context for knowing, i.e., they provide a backdrop that situates
the knowledge in relationship to the projects it is intended to facilitate
(i.e., it shows how the knowledge might be used).
Neoclassical and heterodox economics
tend to have very different subtexts and, partially as a result of this, tend
to offer radically different contexts for thinking about economics and public
policy.
Illustrative of a larger list of textbook subtexts are the implicit
assertions that:
1.
Neoclassical economics is a scientific theory and as such
demands belief in ways similar to modern physics.
2.
Market outcomes reflect free choice.
3.
People are naturally greedy, with insatiable consumer
appetites. Capitalism is
successful, in part, because it offers an incentive system that builds on
this “human nature.”
4. The
major purpose of economic theory is to promote economic efficiency and
economic growth, as both provide a basis for human happiness.
5. There
is no alternative to capitalism.
The failure of the former Soviet Union proves that socialism can’t
work. The message of the 20th
century is "let (capitalist) markets work." The onus is on the government to
justify "intervention" in the market.
In
contrast, among the key subtexts in heterodox economic writings are claims
that:
I think that issues of
well-being, implicit in many heterodox paradigms, like Marxist and Post
Keynesian economics, need to be made more explicit, as in socio-economics, ecological
economics, and feminist economics. Most neoclassical textbooks devote little
attention to analyzing the nature and causes of human well-being. They strongly imply, however, that
there is a close positive correlation between national output and national
well-being. While most
texts briefly acknowledge that several factors might complicate the link
between output and well-being, they generally ignore these complexities and
imply that this is quite appropriate.
Heterodox economics (implicitly or explicitly) challenges the relatively
mindless correlation between economic growth and human well-being animating
neoclassical textbooks.
Heterodox economists tend to give greater attention to empirical findings
about well-being (like those of Richard Easterlin) and theoretical concepts
that explore well-being, such as ideas about positional competition and
"meta-externalities" (the effect of economic outcomes on
non-economic societal variables like the viability of democracy). As a result heterodox analyses
challenge the mantra of "let the market work" that echoes in
principles texts
Contrasting Metaphors
I'd like to conclude with an abbreviated list of contrasting images that
respond to Assumption 4's recommendation that heterodox critiques challenge
the metaphors as well as the formal analytics of textbook economics.
Neoclassical Texts Heterodox
Alternatives
Economist as Scientist/engineer Economist
as Social Theorist
Key complementary disciplines: Key
complementary disciplines:
mathematics & computer science anthropology
and sociology
Homo Economicus Homo-Sociales
(Rational Isolated Economic Man) (Human
Beings in Social Contexts)
the Invisible Hand the
Prisoner's Dilemma
the Auctioneer the
Casino
Perfect competition Strategic
Competition
and Passive Firms and
Active Firms
Crafting a common ground for heterodox critiques of textbook economics is
inherently a collective project.
I have had enormous help from many people who cannot be acknowledged
here. I would welcome more
feedback, as so too would the editor of this journal.
Notes
1. One can debate the status of Colander's thoughtful, but by his own
admission, compromised text and hope that future editions of Stiglitz's book
will move further in a heterodox direction. Despite their contributions to a more thoughtful
economics, I find both books clearly on the neoclassical side of the ledger.
2. John J. Siegfried, (Secretary-Treasurer of the American Economics
Association) and Bonnie T. Meszaros of the Center for Economics Education and
Entrepreneurship: "What
Should High-School Graduates Know in Economics? National Voluntary Content Standards for Pre-College Economics
Education." American Economic Review 87(2) May 1997, p. 249.
3. While I am not sure that deployment of active learning teaching techniques
inherently favors heterodox economics, many feminist economists and PAE
contributors, such as Peter Dorman and Susan Feiner, have made interesting
arguments that they do.
4. ICAPE = The International Confederation of Associations for Pluralism in
Economics
5. Admittedly there are well known methodologically individualistic Marxists,
though the concept seems an oxymoron to me. Nevertheless I think this perspective should be included
in heterodox economics because of the broad overlap with heterodoxy in other
areas.
______________________________
Please e-mail (scohn@knox.edu) if you have any suggestions
for the commentary or wish to see sample chapters.
______________________________
SUGGESTED CITATION:
Steve Cohn, “Common Ground Critiques of Neoclassical Principles Texts”, post-autistic
economics review, issue no. 18, February 4, 2003, article 3. http://www.btinternet.com/~pae_news/review/issue18.htm
How Reality Ate Itself: Orthodoxy, Economy
& Trust
Jamie Morgan (The Open University, UK)
Quis custodiet ipsos custodies?
Who guards the
guards?
An economic theory that cannot sustain its own possibility is a poor
one but can also be a powerful one. A market economy may valorise the
symbolism of the invisible hand but it is as equally beholden to the
symbolism of the tacit handshake. The handshake is a metonym for a relation
and a market economy is a set of relations inscribed in rules, tacit or
otherwise. First amongst equals are trust and the means by which trust is
enacted and maintained. Without trust nothing else functions and social
reality would be impossible. The philosopher J. L. Austin was one of the
first to recognise the importance of this.1 There are at least two
dynamics to talking about social reality. First, description where we
designate things true or false by reference to them as objects or past events
- the hat is black, yesterday was Wednesday and we had lunch. Second,
performance, where current conduct and dialogue constitute a new conceptual
element to social reality with material repercussions for future relations –
the meeting of hands and it’s a deal, or the negotiation and witnessed
signing of a contract. In the immediate sense, performance is neither
strictly true nor false since it is not initially a description, but a doing
or making. The doing is in this first instance appropriate or inappropriate,
sincere or insincere, successful or a failure. That it is done is in the
second instance true or false – the contract as negotiated by two parties
with the legal authority to engage in those negotiations was signed by each
and entered into in good faith. The glue in this transition is the trust that
binds the particular rules of appropriate interaction. The interaction may
fail for a variety of reasons that cause immediate problems – an earthquake
may prevent the delivery of a consignment required for a just in time
production process. But these reasons are not devastating to the social
institution in which they occur – the sustainability of business agreements
perpetuating economic activity. However, when practices are designed to
confound basic principles of transparent dealing, when rules are insincerely
held, when a promise ceases to be something you intend to keep, trust
dissolves and markets cease to look quite so ‘spontaneously’ vibrant.
The orthodox Cheshire cat
As has often been argued, the timeless, ahistorical, institution-free
fundamentals of orthodox method cannot be easily reconciled to problems of
markets as rule systems.
But what does it mean that trust and the rules that constitute market
systems are not a central problem for orthodox economics? Orthodoxy is about
the spontaneous optimality that emerges from the removal of impediments.
Since the very idea of rules tends to be conflated with regulation there’s
nowhere left to hang the structuring of markets. This of course forgets that
deregulation is itself a (demonstrably inefficient) form of regulating rule.
Its inefficiency and its contradiction is that this form of regulation tends
to create the conditions for abuse that undermine the trust on which the free
economic activity of markets is based. The radical individualism inscribed in
it provides for the belief that freedom to massively predominates over
freedom from. Freedom from, our collective protection from the
abuses that undermine the very possibility of individual action, is pushed
aside. This deep ideological commitment can be heard in the words of Milton
Friedman:
What’s
interfering with the recovery is all this fuss about corporate governance,
which, in my opinion, is being carried too far. In all these cases – Enron.
Global Crossing, WorldCom – it was the collapse in the market that brought
attention to them. What’s happening now is that the hullabaloo, which in
effect is saying that to be a CEO is to be a member of a criminal class, is
very adverse for enterprise and risk.2
But the collapse of the market is not some natural event, it is the
dynamic consequence of complex interactions, many of them unanticipated or
unintended. One aspect of that is how the practices that constitute markets
can undermine the trust that markets require to function. Criminalizing CEOs is
adverse for enterprise and risk but would not be occurring if their practices
did not contribute to crises where they can no longer be disguised or
ignored. Economists tend to forget about power, but all human systems have
power asymmetries. For the powerful to be held to account indicates deep
concerns. That orthodoxy cannot recognise this, still less contribute to its
analysis in terms of its own theoretical tenets, indicates that it has little
that is constructive to say concerning the analysis of an important cause of
economic crisis.
In any case, one rarely sees
far when the view is from the top, however clear the view may potentially be.
In a recent speech Federal Reserve Chairman Alan Greenspan argued that both
the $8 trillion dollar loss of share vale on the DOW at the start of the new
century and the problems incurred as a result of Enron etc. indicated the
general health of the financial system.3 The basis of his
argument was that technology had produced new opportunities for financial
‘risk dispersion’ and that ‘a more flexible world economy’ was spreading
costs and absorbing shocks more readily. The proof? ‘No major US financial
institution was driven to default.’ In adopting this position, Greenspan
reveals himself as something of a stoic - whatever doesn’t kill us makes
us stronger. Still, the US financial institutions are scarcely the whole
body of economy. Default has quite a different meaning for those impoverished
by collapsing share values and ‘financial irregularities’. Risk dispersion is
a rather hollow term for those unable to pay their mortgages or with no jobs
to go to (US unemployment is 6% and rising). If we call the financial head
healthy we must still ask ourselves how it is treating its economic body – as
a temple or a trashcan? And need we call it healthy? 2001 was a record
breaking year for fraud class actions (488) in the US against firms.4
The majority by state pension funds and union pension schemes. Around 8 to
10,000 individual cases are being filed a year at the National Association of
Securities Dealers (NASD). And all of this despite a change in the law to
make it more difficult to sue firms for compensation for irregularity
- the 1995 Private Securities Litigation Act means that ‘aiders and abetters’
of wrongdoing in a fraud case cannot be held liable.
Practices that undermine trust
The context of the problem of trust is a finance system keyed to the
unrelenting pursuit of the next profitable firm and the next growth sector.
Consistent growth provides the basis of a profitable firm and a profitable
bull market for the financial industry.
When a firm meets its revenue forecasts it can mean a large increase
in its share valuation. Analysts categorise firms as ‘Market Out-performers’
(MOs), ‘Market Performers’ (MPs) and ‘Market Under-performers’ (MUs). Whether
a stock is rated as a ‘buy’ a ‘neutral’ or a ‘sell’ is, in principle, related
to which direction it is tending to in terms of these categories. Conventionally, our perception of
shares is based on their price-earnings ratio or P/E.5 The lower
the ratio the greater the earnings of the stock as a proportion of its price
and thus the faster one recoups the initial investment. P/E therefore provides
a measure of the attractiveness of stock as equity. But how reliable are the
price of the share and the earnings of the firms as indicators of the
decision to invest? What lurks beneath the numbers? Here, knowledge is
power:
·
The power to construct the firm’s reported revenue stream occurs
within strong pressures to place it in its best possible light. In terms of
trust, one confronts the question of how far the relationship between the
accountants and the firm can stretch. When does creative accounting become
aggressive accounting that in turn becomes collusion in fraud?
·
The power to manipulate stock prices through complex financial
arrangements on the basis of information that others do not have. Here, the
problem of trust comes up against the question of at what point expertise
becomes self-interest to the detriment of the system from which it feeds?
This is not just an issue of legality since trust is more than a
question of ‘were any laws broken?’ Part of the constitution of trust are the
ethics that inform how law is made and how it is adhered to – in its spirit
or in its letter? The grounds of trust are extremely difficult to define, but
easily lost. Losing sight of the importance of trust is the downfall of the
system. Its dysfunction becomes ravenous and reality begins to eats itself.
Its clearest expression is a debilitating scepticism. Its immediate, though
by no means final, consequence is a downward spiral of corporate
valuation.
Cannibalising reality?
The past five or six years have seen
numerous financial scandals. Since economy is an open system one tends to
find a complex interaction of some or all of the above practices within those
scandals. The dot.com bubble provided a great deal of scope for spinning (the
preferential allocation of stock to favoured clients) and laddering (having
investors promise to buy more stock at progressively higher prices once
trading begins). Though cases of spinning are alleged on the London markets,
New York has been the focus of investigation.6 New York
Attorney-general Eliot Spitzer has been engaged in protracted investigation
of 12 of the major financial institutions for forms of spinning. Most of the
evidence is based on private e-mails and documents that contradict the public
statements of investment analysts. Henry Blodget, a Merrill Lynch analyst,
for example, publicly rated Infospace stock as a buy whilst privately noting,
‘This stock is a powder keg… given the bad smell comments that so many
institutions are bringing up.’7 Breach of Chinese walls is also
alleged against Citigroup’s investment banking arm Salomon Smith Barney,
which consistently rated Qwest Communications as a ‘buy’ up to the point of
its price collapse. At the same time, Philip Anschutz, Qwest’s founder, was
selling Qwest shares amassing a $1.45 billion profit. Anschutz also received
57 allocations for various share issues at a personal profit of around $5
million from Salomon whilst Qwest had generated $37 million in revenue for
Salomon from its transactions.8 Fines imposed by the Securities
and Exchange Commission (SEC) on the banks currently stands at $1.4 billion.
$900 million of which constitutes compensation for investors, $450 million to
fund independent research (to maintain Chinese walls) and $85 million for
‘investor education’.9 $400 million of the total will come from
Citigroup (who have also set aside $1.5 billion to meet the costs of
compensation for further investor litigation).10
The dot.com firms themselves and also the new telecoms were highly
prone to creative accounting based on capacity swaps and barter in order to
massage their revenue figures during the early phase of set-up. This and talk
of new business models making money in completely new ways with extremely low
long-run fixed costs sucked in masses of venture capital (over $40 billion of
which is now lost).11 At the same time, as a high growth sector,
dot.coms provided (along with various high growth sectors of overseas
markets) one of the initial areas of high-risk that proved extremely
attractive to split capital trust (SCT) managers. The fact that some of these
issues were spun, of course, meant that the estimation of risk by those
managers was baseless and their vulnerability far greater than even they
could imagine. Any other shock to the system, such as 9/11, could only
exacerbate their vulnerability. The collapse of Aberdeen Asset Management’s
SCTs, contributed to the £10 billion lost by more than 50,000 private
investors in this sector.12
The possibility that even apparently low risk
investments are not what they seem also emerged. The misuse of “special
purpose vehicles” and “off-balance sheet obligations” (OSOs) prevents
investors relying on firm’s accounts with any degree of confidence. WorldCom
used OSO’s to keep $4 billion off balance. In 2000 Enron was 7th
in the Fortune top 500 with reported revenue in excess of $100 billion
(a 150% increase on the previous year).13 Its shares traded at
over $60. Its chief financial officer, Andrew Fastow orchestrated several SPVs
set up in the name of his children and his wife, from which he allegedly
earned $30 million in fees and siphoned assets. The decline of the DOW over
the turn of the millennium made the use of Enron stock to finance continued
debt restructuring more difficult and on October 16th 2001 Enron
posted a bombshell $1.01 billion loss. The vulnerability inherent in its
revenue enhancements then kicked in in earnest. On the 17th the Wall
Street Journal publicised Fastow’s SPV connections. On the 29th
Moody’s Investor Service, down-rated Enron’s credit rating increasing the
servicing costs of its newly revealed debt. By December 2001 the firm had
filed for bankruptcy and it was all over. Its share price had collapsed to
less than a cent. Numerous small investors who had relied on its stock for
their pensions and large pension funds themselves were hit hard. State
pension funds in New York, Georgia and Ohio lost over $350 million. By
February 2002 the Bank of America had $231m in Enron related losses. One
hundred Merrill Lynch executives lost $16 million of their own money invested
in an Enron partnership.14 Ordinary Enron employees received no
severance pay. In November, however, senior staff had awarded themselves $55
million in ‘retention bonuses’ from the dregs of its coffers. Just prior to
the October 16th loss statement 29 senior executives sold stock,
over a dozen reaping in excess of $10 million. A class action suit has now
been brought against them for insider trading whilst Fastow, and a number of
collaborating London bankers, have been indicted for fraud.15
Meanwhile, Enron’s accountant, Arthur Andersen was indicted for obstruction
of justice. Its other clients bailed out to the remaining Big Four
accountancy firms and Arthur Andersen, previously the fifth largest
professional services firm in the world was liquidated. The nature of
Andersen’s relation to Enron is suggested by the following statement from an
anonymous former executive of the firm:
Everyone makes the
mistake of thinking Andersen and Enron are separate companies. There are
hundreds of ex-Andersen people inside Enron, a bunch of young kids just out
of college. Give those new Andersen kids a downtown loft, a new Lexus and
show each one the golden path to becoming a partner. Hey learn to do things
the Enron way.16
The initial fallout from Enron was the re-auditing
of accounts previously held by Andersen. Deloitte & Touche, for example,
took over the audit of MyTravel from Arthur Andersen, its re-audit took £15m
off the profitability of the firm. Share prices subsequently fell by 36%.17
With revelations concerning SPVs major news, corporations moved quickly to
distance themselves from any hint of scandal. Blue-chip firms, such as Xerox,
have been publicly realigning their former accounts and future forecasts. But
according to the IMF, ‘questions regarding the quality of reported corporate
profits in the aftermath of Enron’s failure continue to have an adverse
impact on international and corporate bond markets.’ As Mathew Wickens of ABN
Amro says, part of the problem are the figures firms are posting because ‘we
don’t really know what they mean.’18 Presswatch ranks accountancy
as the top service sector for column inches of negative publicity. People are
sceptical about stock markets. In a survey by the investor group Pro-Share
more than half the 450 investors questioned felt less confident in the
accuracy of company accounts. ‘One in three believes auditors are not
independent of the companies they audit.’19 The collapse of trust,
therefore, places Friedman and Greenspan’s rather blithe accounts of the $8
trillion fall in the DOW in a rather different light.
The effects of the collapse have been widespread.
California, the richest state in the union with an economy of $1.3 trillion
faces a $21 billion budget shortfall in 2002.20 Some of this is
due to general recession to which the collapse of the stock market has
contributed. Some if it is directly attributable to that collapse. In 2000,
California received $17 billion in taxes on stock market profits, mainly from
dot.coms, in 2002 that fell to $5 billion. Cuts in state spending of $10
billion have subsequently been announced including state worker redundancies,
pay freezes and also reduced healthcare expenditure for the poorest in
society. Californians were also direct victims of Enron. It has been alleged
that Enron traders triggered widespread blackouts by buying huge blocks of
power capacity in the state’s electricity market to artificially increase the
price of their own supply.21
What secrecy reveals
Sophisticated capitalism allows for a variety of primitive abuses.
This is not simply an issue of lies and deceit. To argue this way is to
reduce the problem to the agent, to the bad apple, rather than the conditions
of enablement within the orchard. Analytically, this does not move one far
enough away from orthodoxy and radical individualism. Deceit is the tip of
the structural iceberg. The full nature of the rules of the structure and the
way in which they are held needs to be considered. The US Sarbanes-Oxley Act,
which now requires finance directors and CEOs of listed companies to attest
to the accuracy of their accounts or risk jail, is a step forward in giving
teeth to corporate governance, but it is not in itself corporate governance.
Nor does it restore trust, since once rules are codified firms will seek to
exploit them. What is also needed are ethics of appropriate action that
mitigate the desire for such exploitation. How one might maintain them under
the pressures of competitive capitalism is an open question, but it is not
one that should be conflated with lying per se. There can be an
ethical good in being economical with the truth. In macro policy it makes no
sense to confirm a run on a currency or confirm some policy that relies on
surprise for its effectiveness but has been leaked (such as currency
devaluation). Equally, rules cannot be overly general across economy – there
are good reasons why the police don’t work on commission. What is certain is
that orthodoxy adds nothing constructive to the debate on markets as rule
systems. It does not lie, but it is false. A lie in social science, like
honesty in politics, is usually found out and punished. But false knowledge
has a life of its own. Ironically, one wonders, therefore, if Keynes is entirely
correct in his sentiment when he argues, ‘you can’t convict your opponent,
you can only convince him.’
Notes
· Thanks to Vicky Chick for reminding
me of the quote from Keynes used in the conclusion.
1. pp. 45-52, J. L. Austin, How
To Do Things With Words (Oxford: Oxford University Press, 1962)
2. D. Smith, ‘Feisty at 90 – Friedman Speaks Out,’ The Times Business
September 8th 2002.
3. Text reproduced in full The Times Business, September 27th
2002.
4. J. Doran, ‘After the bust, a boom in fraud suits for Wall Street’s
lawyers,’ The Times Business, November 30th 2002.
5. PE = p-g/ (I+ e-g)
p
R. Marris, ‘Have the markets reached bottom?’ The Times Business
November 7th 2002. R. Cole, ‘P/e ratios indicate good value,’ The Times Business
July 20th 2002.
6. In the UK see, Insight team, ‘Revealed: the cosy deals that taint Goldman
Sachs,’ The Sunday Times Business November 24th 2002.
7. See A. Rayner, ‘Spitzer poised to reveal fresh evidence against 12 banks,’
The Times Business November 2nd 2002.
8. R. Lambert, ‘Are Wall Street’s Ethics Dead?’ The Times October 8th
2002.
9. D. Rushe, ‘War is over (on Wall Street at least),’ The Sunday Times
Business December 22nd 2002.
10. J. Doran, ‘Citigroup plans $1.5bn fund for compensation,’ The Times
Business December 24th 2002. A. Rayner, ‘US banks to settle
with regulators,’ The Times December 9th 2002.
11. N. Hopkins & T. Bawden, ‘Spectre of high-tech bubblelingers on,’ The
Times Business November 8th 2002.
12. P. Durman & L. Armistead, ‘Dotty, the champion of split caps,’ The
Sunday Times Business October 27th 2002.
13. See B. Cruver, Anatomy of Greed (London: Hutchinson, 2002).
14. D. Rushe, ‘Enron Watch,’ The Sunday Times February 3rd
2002.
15. 78 charges have been filed so far. ‘Former Enron chief to face more
charges,’ The Times Business December 27th 2002.
16. B. Cruver, ‘I had a lucrative career… but it cost me my soul,’ The
Times Business October 2nd 2002.
17. J. Ashworth, ‘Unearthing the Arthur Andersen time bombs,’ The Times Business
Thursday October 10th 2002.
18. L. Paterson & G Duncan, ‘IMF fears more shares misery,’ The Times
Business June 13th 2002.
19. D. Wild, ‘A horrible year, but at least now accountancy is sexy,’ The
Times Business December 19th 2002.
20. C. Ayres, ‘Economic woes take lustre off Golden State,’ The Times
December 11th 2002.
21. J. O’Donnell, ‘Enron’s ‘tricks plunged California into darkness’’, The
Sunday Times Business October 6th 2002.
______________________________
SUGGESTED CITATION:
Jamie Morgan, “How Reality Ate Itself: Orthodoxy, Economy & Trust”, post-autistic
economics review, issue no. 18, February 4, 2003, article 4. http://www.btinternet.com/~pae_news/review/issue18.htm
Austrian Economics and
the Post-Autistic Economics Challenge
Peter Wynarczyk (Northumbria
University, UK)
1 Introduction
The
post-autistic challenge to orthodox economics echoes criticisms that have
been made by non-mainstream economists ever since entrenched conventional
wisdoms were established within the discipline. They represent variations on standard heterodox themes,
albeit largely originating from refreshingly grass-root student sources. The following short article is
sympathetic towards a large part of the post-autistic agenda but remains wary
of several issues located at the core of that agenda. In addition, it suggests that the
Austrian research tradition has made a sustained and constructive case (over
a prolonged period of time) against
the prevailing mainstream orthodoxies, increased and widened knowledge of
which would serve to enhance and enrich the post-autistic challenge
itself. Increased dialogue
between these two parties, as well as with all other heterodox elements along
with orthodoxy, can only serve to improve matters and actualise the
promise of the intellectual gains from trading ideas embedded within the
commitment to pluralism within the discipline as a whole.
2 The Post-Autistic Agenda
The
post-autistic challenge has crystallised around several key problematic elements
associated with economics as a discipline, the hegemony of neoclassical
ideas, and the teaching content and delivery of the subject within university
academic circles. Taking my cue
from the grass-root concerns of students (and some of their teachers) in
France, Cambridge UK, and Kansas City, and relayed by this review and its
earlier incarnation, it can be argued that the post-autistic agenda
highlights contra orthodoxy:
1 the
need for the recognised inclusion of a plurality of approaches and methods
within economics, respecting the history of ideas, fostering debate and
critical thinking, alongside inter and intra disciplinary dialogue, diversity
and openness;
2 the
need for the triumph of real over imaginary constructs;
3 the
removal of formalism for formalism’s sake, especially with regard to the
preoccupation and over-application of mathematics (usually as an end in
itself) and the heavy dosage of theory largely unattached to any empirical
base;
4 the
adoption of richer models of human agency and institutional change which
seriously consider such factors as culture and history as significant active
ingredients in any explanatory framework;
I view
these four points as the core of the post-autistic agenda and the basis of
its critique of a detached, monopolistic and hegemonic neoclassical
orthodoxy. Indeed,
dissatisfaction is largely captured by points 1 and 2; with points 3 and 4 as
a further teasing out of the consequences of point 2 and the application of
point 1. In what briefly follows
I will suggest that Austrian economics anticipates
and already addresses most of these
concerns. Over its not
inconsiderable life cycle it has persistently challenged the restrictive and
overly limited ‘what is’ approach of mainstream thinking and offered a
constructive glimpse of the possible, of ‘what can be’. To its credit, and unlike a number of
its heterodox rivals, it has been more focused on highlighting and demonstrating
the inadequacies and shortcomings in neoclassicalism and endeavouring to overcome them than in dwelling on the alleged
irrelevancies without attempting to sufficiently advance beyond them.
3 Austrian Anticipations of the Challenge and Their
Answers
Almost
all of the post-autistic critique of orthodoxy outlined above was raised and is largely being answered by
the Austrian research tradition.
This may be surprising to those who have tried to reduce Austrian
economics to a subset of neoclassicalism. I am not suggesting that Austrian economics was alone in
anticipating the post-autistic critique, a pitch can, and has, already been
made by others for institutionalism, but rather that it would be a mistake to
believe that the target of orthodoxy includes
Austrian economics itself – it cannot.
Modern
Austrian economics increasingly presents itself much more as an alternative to orthodoxy rather than a
supplement. Given Austrian arguments against
simplistic aggregation it should come as no surprise to find that the
research tradition has always contained (and been willing to sustain) a
diversity of views. Currently
there are two opposing but dominant wings within Austrianism represented by
Lachmann and Kirzner; with the former advancing a more radical form of
dynamic subjectivism to replace mainstream
‘equilibrium always’ theorising, and the latter an entrepreneurial and
process orientated but ‘equilibrium tending’ approach as a bolt-on to orthodoxy. In recent years there has been
noticeable increased intellectual convergence and reconciliation between
these two positions, entertaining the possibility of both dis-equilibrating
and equilibrating activity allowing for both change and order. Since the 1970s the Austrians
have been largely engaged in rediscovering their Mengerian insights which, when
allied to distinctive Misesian and Hayekian contributions, raises serious
questions, at the ontological and conceptual level, against standard
economics. It also suggests that
the Austrian research tradition today, taken as a whole, is as far removed from
mainstream economics as it has ever been in its history. Its commitment to the construction of
‘better theory’ addressing issues largely neglected but epistemically
threatening to orthodoxy means that incorporation into the modern
neoclassical fold is neither wanted nor warranted.
Given
this background, it is now time to consider how Austrian economics
anticipated, largely answered, and remains less vulnerable to attack from the
core points of the post-autistic agenda outlined above. Each point will be examined in turn
in order to explore the merits, similarities and possible differences between
Austrian economics and the post-autistic challenge.
3.1
Pluralism and Dialogue
The
Austrian research tradition has demonstrated throughout its history a willingness
to entertain diversity and embrace debate. It has engaged with the mainstream and the heterodox in
equal measure and on an equal footing.
Austrianism has
challenged neo-Walrasian economics (captured in the planning debate concerned
with the possibility of economic calculation under socialism) and Marshallian
economics (most notably the debate over the nature of economic crisis). In addition, it had an infamous
‘methodenstreit’ with German historicism, made repeated attempts to ‘close’
Marxism, and endeavoured to undermine Keynesianism. It continues to engage with the largely Chicago-based
mainstream and with the heterodox elements of Post-Keynesian and
Institutional economics. I
believe that this is all to Austrian economics credit and reflects its
commitment to pluralism and its belief in the competition of ideas.
Austrians
appear to have taken John Stuart Mill’s strictures On Liberty seriously.
His text advances the pluralist case by advocating the maintenance of
rivalry between different perspectives on the grounds that this leads to
pronounced benefits. Mill
believed that dialogue between alternative frameworks was both a defence
against stifling dogma and a positive sum gain to all parties concerned. He argued that the existence of rival
traditions provided a necessary safeguard against intellectual slavery and
complacency by keeping us on our toes and alert to improvement. This would be
further enhanced if we welcomed criticism from without and endeavoured to
understand our opponents from within. This potent argument for pluralism is
further buttressed by Austrian insights on the dangers of monopoly provision
and state socialism where the absence of genuine rivalrous competition will
prevent innovation of products and ideas that may prove to be of far greater
benefit than those currently employed (hence preventing the market to act as
a discovery procedure). Deeply
entrenched vested interests will endeavour to stifle any enterprise and developments,
no matter how meritorious, which threaten and undermine its own. It is useful to remain mindful here
of Schumpeter’s insight on ‘creative destruction’ and the need for the new to
promote progress.
Another
notable feature of Austrian economics has been its continued interest in the
history of the discipline in general and its own history in particular. Hayek, Robbins, and Schumpeter
especially stand out here with regard to their seminal contributions to
economic historiography. Given
orthodoxy’s increasing neglect of the past (since anything of value is
assumed to be adequately contained in the present stock of neoclassical
knowledge) these and other accounts of pioneering efforts go largely
unread. Mainstream texts are now
usually presented as sterile, complete, polished, and fully-formed accounts
of orthodox thinking at its current destination without adequate discussion
of the interesting way it got there.
In contrast, Austrian economics continues to have a fascination and
respect for its own history (and that of the wider discipline). Austrian economists remain firmly
wedded to the central texts which have driven their research tradition from
Menger onwards as sources of inspiration and direction. By accepting the need to ‘rediscover’
Menger or ‘reinterpret’ the economic calculation debate, they are rejecting
the orthodox stance already alluded to that the present by necessity contains all of the useful past. A key exponent of the Austrian
treatment of historiography who epitomises this position most forcibly is
Lachmann. He adopts a critical
but humane stance in his treatment of intellectual forebears by accepting
that the ideas they advanced were neither the final word on the matter
(without limitations or open to challenge from alternative explanations) nor
inherently exhaustive or fully-developed (in the sense of being articulated
to complete closure). Lachmann
is asking us to be alert to the possibilities of re-examining the ideas of
the past in the hope that they might further illuminate the present or a
problem of which their originator may have been unaware. He has drawn attention to the problem
of the ‘storage of ideas’ – the carrying over of intellectual capital that has not been fully utilised from one
generation to the next - and the need to ‘salvage’ such ideas when lost. In his own work he has endeavoured to
re-examine the legacy of Max Weber, to reconcile aspects of Keynes and the
Austrians, and to explore the striking similarities between the outlooks of
Mises and Shackle.
3.2
Real Over Imaginary Constructs
Orthodox
economics continues to allocate too many intellectual resources to fictions
and imaginary constructs detached from reality. Its comparative success within the limited and restrictive domain it has set itself cannot be denied but it has been slow to
move persuasively beyond this insulated fabled terrain and engage
meaningfully with real world matters.
Whilst some underlying assumptions may be relaxed and more realistic
applications pursued, especially at the margins, its core remains largely
immunised from any degree of external epistemic threat.
The
Austrian research tradition has been engaged in a persistent and sustained
assault on the methodological, ontological, conceptual, and theoretical
limitations and shortcomings of mainstream economics ever since its
inception. Much of their
critique has been directed at the lack of realistic assumptions,
over-simplistic argument, and models that continue to capture at best surface phenomena rather than
essential characteristics.
Several examples drawn from the Austrian research tradition serve to
attest to these claims:Menger’s rich presentation of inherently flawed human
agency remains at odds with the clinical rational choice maximisation model;
Mises’ recognition that orthodoxy dwells
on fictions such as the imaginary constructions of equilibrium and neutral
money rather than market process and money having real effects; Hayek’s
demonstration of mainstream economics concentration on the static ‘pure logic
of choice’ framework and its fatal neglect of knowledge and informational
deficiencies; and finally, Lachmann’s vibrant and intricate picture of
capital and its structure illuminates an area of economics that continues to
be largely shrouded in darkness.
Perhaps the best example of the Austrian case against orthodoxy is
captured in their ‘fundamentalist revolution’ – the so-called economic
calculation debate. As modern
Austrians have shown in their reappraisal of the significance of that debate,
economic calculation demonstrated more than the impossibility of socialism,
it showed the wide gulf between the rediscovery of the Mengerian vision by
Mises and Hayek and the neoclassical Walrasian vision employed by the
competitive socialists. It
helped to pronounce the huge and increasingly unbridgeable distance separating
Austrian and mainstream economics to this day. It also demonstrated the importance of the need to
re-examine and salvage ideas insufficiently regarded in the past.
3.3
Substance Over Form
Mark
Blaug, one of a growing band of economists who has drawn attention to the
widespread misuse of formalism in modern economics, sees it as ‘an ugly
current’, ‘a disease’ and a ‘bad game’ that economists increasingly
play. Given what was said in the
previous sub section it should come as no surprise to find that Austrians too
deplore orthodoxy’s predilection for form over substance and the use of
formalism for formalism’s sake.
They, unlike much of the mainstream, have always been willing to trade
form for substance and this has been a major driver of their research
tradition. Attention has already
been drawn to the Austrian rejection of micro-formalism, and the same is true
of their rejection of macro-formalism with its heady mix of aggregation and
prediction. They have a record
of rejecting both the over-application of mathematics (usually as an end in
itself) and the use of pseudo-scientific econometric methods lacking adequate
correspondence with the social realm.
Austrians largely eschew mathematics because it lends itself to the
neglect of qualitative change and genuine novelty whilst econometric
techniques endeavour to reduce the social world to the physical. It has to be conceded here that
whilst the Austrians do want their theory to be grounded in reality they
have, to date, set less store in identifying the appropriate empirical base
for their analysis. They
will certainly need to explore such matters, especially with regard to their
identification of the relative strength of the forces of equilibrium and
disequibrium appertaining in the economy at any particular time.
3.4
Human Agency and Institutional Change
Orthodox
economics is beset with behavioural and institutional deficiencies largely
caused by its failure to embrace the temporal and non-price dimensions of
human activity. Culture and history
tend to be underscored because economic action (often generalised into
capturing all action) usually takes place outside of interpersonal space or
historical time. Individuals
tend to come fully-formed and sufficiently informed to ply their maximisation
techniques, removed from any societal or historical context. This picture of human agency has long
been a target of attack and ridicule from heterodox economics including Austrian economics. Indeed I would suggest that the
Austrian alternative remains far
richer and more developed than any so far advanced outside of the mainstream.
Austrian
economics advances a middle-ground position with regard to human agency:
rejecting both the idea of the
individual as a completely independent entity or as an agent who has no meaningful or purposeful choices to
make. This is all captured in
Mises’ notion of human action; with
the human emphasising the social element and the action emphasising that such
activity can make a difference. Austrians, following Mises, recognise that
agents are social beings, the products of given situational contexts, and
prime movers of change. They
also acknowledge that preferences are neither fully-formed nor stable but
have to be discovered and are largely endogenously determined. In addition, Austrians accept that
human agency takes place within historical time and an institutional
setting. Human decisions are
fallible, based upon inherent and irremovable ignorance, borne out of the existence
of pervasive and genuine uncertainty and concomitant computational
problems. Within such a
framework, institutions serve both to constrain and enable purposeful
behaviour by providing a set of rules, conventions, or inertias. The Austrians, ever since Menger,
have been interested in the role of firstly, spontaneous, then secondly,
designed institutions or orders.
They have displayed a preference for the former (especially the
market) over the latter (especially the state) in the non-ergodic transmutable
reality which we live, serving as uncertainty-reducing (but not eliminating)
‘points of orientation’. Of
course, more work needs to be done by the Austrians with regard to
institutions but efforts by the likes of Hayek, Lachmann, and more recently O’Driscoll
and Rizzo, suggest possibilities for further progress, especially embedded
within an evolutionary, path-dependent, framework buttressed by human action
under uncertainty.
4 Final Thoughts
It has
been argued above that Austrian economics offers an interesting window from
which to view the post-autistic challenge to orthodoxy. The Austrian research tradition
offers both a robust critique of
mainstream economics and an alternative borne out of pluralism and dialogue
with all its rivals and a
commitment to real rather than imaginary constructs. It rejects formalism and advocates a
richer model of human agency than any of its competitors.
______________________________
SUGGESTED CITATION:
Peter Wynarczyk, “Austrian Economics and the Post-Autistic Economics
Challenge”, post-autistic economics review, issue no. 18,
February 4, 2003, article 5. http://www.btinternet.com/~pae_news/review/issue18.htm
A Reply to Perino on the Absurdity of
“Efficiency”
Richard Wolff (University
of Massachusetts, Amherst, USA)
I am pleased that Grischa Perino found so much that was agreeable in my
critique of efficiency.1 On the other hand, I believe Perino
missed one of its central points. Just as beauty lies in the eyes of the
beholder, so efficiency lies in the minds of economists and others who use
that concept. Proponents of different economic decisions, policies, and class
structures typically deploy their different efficiency calculations in
theoretical and practical battles. Moreover, they do so on an absolutist
terrain. That is, each contesting efficiency calculus promotes itself as the
efficiency calculus whose results must trump all others. The form of this
debating ploy is often to denounce the opposing position and its efficiency
calculus as based on “arbitrariness” while one’s own rests on the
foundational certainty of rigorously measured costs and benefits. Perino is
concerned about this charge of arbitrariness, yet it is subject to a critique
identical to the one he found persuasive regarding efficiency. Arbitrariness,
like beauty and efficiency, lies in the eye of the beholder.
Every efficiency concept depends, my article argued, on a very particular
presumption about causes and effects (that one can reduce a list of costs and
benefits to a singular causative economic act, policy, or conditions whose
efficiency is to be measured). Likewise, each efficiency concept can only
select and measure a small subset of the infinite present and future costs
and benefits ramifying from any economic act, policy, or condition.
Efficiency measures are thus inescapably as variable, idiosyncratic, and
incommensurable as the different presumptions and selections underlying them
(to which they are relative). Yet they persist as ideological bludgeons
used by adversaries attempting to suppress their opponents by claims that one
economic process is more or most efficient absolutely. Thus, to
mention a few examples, socialist economies are less efficient than
capitalist economies, deregulated markets are more efficient than regulated
ones, minimum wage laws diminish efficiency, and so on.
Across the ages, individuals and groups made economic decisions and evaluated
economic policies and systems by considering – in particular ways - some
selected aspects of them. These considerations differed across groups, time,
and place. Nothing was “arbitrary” in the decisions and evaluations nor in
the considerations leading to them. Their social contexts overdetermined
which issues arose for decisions and how different social groups responded
(i.e., which particular aspects they selected to consider and in which
particular ways).
Economists debating the great issues of our time often use absolutist
efficiency arguments against one another, charging each other with the
“arbitrariness” that concerns Perino. My critique of efficiency attacks the
terrain of such debates. It also advocates an alternative terrain where the
debate would center on the specific values that contest to shape history. On
that terrain, efficiency claims, like arbitrariness claims, would be
recognized for what they are: very questionable derivatives of contesting
values. Rather than being
disguised and manipulated as issues of efficiency and arbitrariness, the
struggles among alternative values (political, economic, and cultural) would
emerge as such. Behind the mask of “experts” who do “efficiency measurements”
to “reach optimum decisions,” both democratic participation in decision
making and critical alternatives to the status quo are usually repressed. The
critique of efficiency (like that of the accusation of arbitrariness) is
aimed at undoing such repressions in the service of basic social change.
Note
1 See Grischa Perino, “Need Efficiency
- and Much More! A Response to Richard Wolff”, post-autistic economics
review, issue no. 17, December 4, 2002, article 7. http://www.btinternet.com/~pae
news/review/issue17.htm and Richard Wolff, “Efficiency: Whose
Efficiency,” post-autistic economics review, issue no. 16, September
16, 2002, article 3. http://btinternet.com/~pae
news/review/issue16htm.
______________________________
SUGGESTED CITATION:
Richard Wolff, “A Reply to Perino on the Absurdity of ‘Efficiency’”, post-autistic
economics review, issue no. 18, February 4, 2003, article 6. http://www.btinternet.com/~pae_news/review/issue18.htm
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