Tuesday, August 25, 2015

Why Am I Defending Economists -- Especially THESE Economists?

by Neil H. Buchanan

Frequent readers of Dorf on Law have seen ample evidence that I am hostile to the economics profession as it is currently constituted.  Although I often find myself in agreement with those on the left side of the current divide among economists, I have made clear my discomfort with the norms (both intellectual and professional) of the field as practiced in almost all economics departments -- in the U.S. and around the world.  I am certainly a "dissenting economist."

On the policy front, I have critiqued economists who advise both Republicans and Democrats, though not in equal measure.  Moreover, I spent quite a bit of time two years ago describing how "orthodox left" economists such as Paul Krugman end up (perhaps inadvertently, but still quite consistently) maintaining the professional status quo by siding with conservative economists against "heterodox left" economists.  (My final post on that subject can be found here, with a link in the first paragraph that leads to previous posts in that series.)

There is no doubt, therefore, that I find much to criticize in the world of credentialed economists.  Even so, just because they are guilty of so much does not mean that they are guilty of everything.  I thus found myself quite annoyed a few weeks ago, when a guest columnist in The Washington Post blithely offered some of the most baseless attacks on economists that I have seen in some time.  The column, "This is what economists don’t understand about the euro crisis – or the U.S. dollar," was written by a prominent political scientist whose record certainly suggests that she possesses an impressive knowledge of European politics.  Even so, the author's argument ultimately boils down to something like this: "There are economists with whom I disagree, and they are wrong because they only think about economists and not politics, which is what I know."

In the opening sentence of the piece, prominent U.S. economists are accused of almost enjoying the Euro/Greek crisis.  They are, rather amazingly, said to be offering critiques with "more than a hint of schadenfreude."  In an attempt to be bipartisan, the author then slams Greg Mankiw (conservative), Paul Krugman (liberal), and Martin Feldstein (conservative) for being variously "smarmy," "relentlessly excoriating," and "condescending."  What is notable, however, is that the author never actually argues that these economists are wrong that the crisis is (in Feldstein's words) "the inevitable consequence of imposing a single currency on a very heterogeneous group of countries."  Instead, "[w]hat this commentary gets wrong, however, is that single currencies are never the product of debates about optimal economic solutions."

This does not even rise to the level of a cheap shot.  If ever there were three economists who cannot be accused of political naivete or ignorance, it is those three.  Yes, Mankiw likes to write dumbed-down pieces for The New York Times in which he acts as if (an extreme conservative version of) Econ 101 is really all one needs to know to run the world.  In fact, I have a folder on my hard drive called "Mankiw Follies," in which I keep a running list of such nonsense.  My dearest hope is that I will never have enough time in my schedule to go back and read all of them, much less to write the article forming in my mind that would explain their aggregated madness.

But the arguments to which Mankiw, Krugman, and Feldstein refer are not international monetary versions of "assume a can opener."  The argument was never about "optimal economic conditions" but about the very predictable results of adopting a currency union when both economic and political conditions were far from optimal.  After a long -- Dare I say smarmy and condescending? -- summary of how the U.S. achieved a common currency, the columnist finally asserts that economists do not understand "a broader reality": "[M]oney has always and everywhere been part of broader projects of political consolidation. This means that it has always been highly contentious."  The hell you say!

Finally, we get to the real argument, such as it is: "European leaders weren’t stupid or self indulgent when they decided to move ahead with the euro, without fiscal union or strong Europe-level democracy. They just cared more about politics and international security than economics."  What the columnist should have understood is that Krugman et al. are saying something like this (with which I obviously agree): "European leaders were stupid and self indulgent when they decided to move ahead with the euro, without fiscal union or strong Europe-level democracy, because they just cared more about politics and international security than economics and because they thought that they could wish the economic realities away."

As an analogy, there really are true-believer economists who insist that any attempt to mess with "the invisible hand" will lead to ruin.  Minimum wages?  Horrors!  These economists are wrong, of course, but that does not mean that there are no economic constraints on what one can achieve via increases in the minimum wage.  And tarring every criticism of the minimum wage by saying that "it's not stupid and self-indulgent to think that there are more important things than economic efficiency" is simply incoherent.  I want to increase the minimum wage, but I know that it would be insane to try to set it at, say, $1000 per hour.

Finally, consider this admission of the level of wishful thinking: "When [European leaders] did think about economics, they hoped that a strong euro, anchored in an independent European Central Bank located in Frankfurt and built on a commitment to protecting the stability of the currency, would help resolve the problems of currency depreciation, spiraling inflation and economic instability that came with the weak currencies of the 'Club Med' countries to the south of Europe."  I have no doubt that they did so hope.  And other people at the time said that those hopes were not based in reality, that the result of moving too fast would be to increase instability and risk undoing all of the many important accomplishments of the project to integrate Europe.

"History does not unfold as a series of neat and sterile decisions made by people rationally trying to create economically optimal policies."  I am not saying that there are no economists who would disagree with this statement.  I am saying, however, that even the prominent economists whom I have harshly criticized over the years for being far too insular in their thinking are not that insular.  Many economists really are politically ignorant (and arrogantly so).  In this case, however, being truly politically savvy should have suggested that it was the European leaders who had "neat and sterile" little stories about how the Eurozone would work.

The Eurozone might stay together, or it might not.  The history of U.S. fiscal integration is interesting in its own right, and it suggests that monetary history is not a smooth series of events.  But so what?  No serious analysis claims otherwise.  People often overuse the claim that their opponents have merely built a straw-man argument.  In this case, that claim is true.  Mankiw surely is smarmy, but the economists who doubted that Europe was ready for the euro were not political naifs.  Apparently, European leaders were so convinced of their own political brilliance that they thought that they could make things happen simply because it would be nice if those things could happen.  That is "leadership" of the worst kind, and Europeans have paid a steep price for such arrogance.  It might get worse.


David Schwartz said...

I am not sure whether it is a reflection on the profession or the prize itself, but any profession in which two "masters" - Schiller and Fama - can get the Nobel Prize for holding directly opposing views on market efficiency seems unscientific, to say the least.

Paul Scott said...

Ha. I hit reply to ask something of Neil, but I think I'll start with David.

1. Two "masters" of a field in an actual science could certainly hold opposing views and still both be worth of the same prize celebrating excellence in the field. In fact I would say that is entirely consistent, supportive even, of what science is about. A scientist can be simultaneously a. wrong and b. the single most important contributor to scientific advancement in their field.

2. Yes, economics is not a science. That does not make it worthless or uninteresting. That does not even mean they cannot correctly model and predict events. There are many useful, practical even, things that are not a science.

Paul Scott said...

It was just a trow-away line in your piece, but one I have seen many times when it is not a trow-away line, that I don't accept (though it may well be right).

When discussing the minimum wage, people (most often supporters) will often use the line " I know that it would be insane to try to set it at, say, $X per hour." Where X is a really high number (though I will admit your X is higher than anyone's I have seen!). I think this form of statement is often thrown out as being self-evident, but I think it very much is not so. Even at your very high X, I think all we might have is a way of approximating a socialist form of government through pseudo-market mechanisms (analogous to the ACA approximating single payer).

Now, this might cause significant global economic fall out in line with the US government nationalizing all industry, but I do not think it is "insane" nor that the work has been done that would establish that it would be a long-term disaster.

Now normally the X I see is something like $25. Which does not even remove us from our standard market framework. I just thought I would toss out for your comment that the idea that there is some self-evident massively destructive minimum wage is something that has not been proven.

David Schwartz said...

Paul - Would you say they could both be right? Or put another way, there is a more subtle position which suggests that they could both be right under different circumstances? That said, this is generally not how the arguments are presented. One is either an efficient market economist, or an inefficient market economist, or perhaps now a third type - a behavioral economist. I must confess that I tend toward the inefficient or behavioral hypotheses. The problem with economics generally - and the reason why it is not a science - is that there is rarely if ever a way of conclusively demonstrating that an hypothesis is wrong. That is surely where it differs from science. To paraphrase Enrico Fermi, when an experiment is successful, you've made a measurement; when it fails you've made a discovery. Anyway, I would certainly not label economics as useless - certain areas of microeconomics are extremely useful, and whether we like it or not, we generally are forced to follow some sort of economic theory when we try to formulate macro policy. But many economists do think of their subject as scientific, and state hypotheses backed up with data, reliable or not, as revealed truths. That is where I think they go wrong.....

Neil H. Buchanan said...

I very much appreciate the comments from both David Schwartz and Paul Scott. On the exchange between those two commenters re whether economics is a science, I'll have a few things to say in my upcoming post on DoL this Thursday.

I really like Paul Scott's comment re what he correctly describes as my throwaway line about the $1000 minimum wage. He is right that there has been very little serious effort put into "proving" (even in the weak sense that economics requires) that a $25 or $50 minimum would be a disaster. I was surprised recently, for example, when I saw an economist with genuine lefty credentials worrying that $15 was "out of sample," meaning that he worried that we were in uncharted waters with the push to $15. To me, it seems a non-stretch from the in-sample evidence to say that we can safely shoot for $15. So, I agree that it is not self-evident that some supposedly too-high numbers are in fact too high.

I used the $1000 number in large part to avoid getting into that debate. But Paul Scott makes an interesting SAT-style analogy -- the ACA is to single-payer as a $1000 minimum wage is to socialism. I hadn't thought of it that way, but continuing with that analogy, I guess I'd say that the $1000 minimum would qualify as "insane" in the sense that the disruptions from it would be much more costly (in the broadest sense of that term) than simply admitting that one is converting to socialism and then doing so. It would be like taking the ACA and making it even more bureaucratic, opaque, and so on, with even bigger giveaways to Big Pharma and the health insurers. I guess there is a reasonable debate about where to draw the line, but once we've reached the point where the indirect approach is that disruptive, then it seems much better to take the direct approach.

Michael C. Dorf said...

I would foresee two problems with a $1000/hour minimum wage: 1) Businesses that provide goods or services that can be outsourced to places with MUCH lower wages would fold; and 2) if the wage were enforced in the remaining economy for local labor, the wage pressure would be very inflationary, potentially so much so that the inflation would eventually erode the minimum wage.

Paul Scott said...

The inflation is what makes it work. $1000/hour brings the lowest paid worker up to a neurosurgeon or a top 0.1% lawyer, but it doe snot touch the billionaire class. Massive inflation is needed to devalue the currently held assets.

Also, out-sourcing can be completely eliminated by a combination of 1. requiring US businesses to pay $1000/hour without regard to the location of the employee and 2. tariffs on imported goods and services for foreign businesses importing goods or services to the US. That will (excepting crime, of course) make the $1000/hour a global requirement for those wishing to operate or sell in the US.