On media misrepresenting the case for reform in economics

by Severin Reissl

I’m staying in Germany at the moment, and today I came across an article in the paper Süddeutsche Zeitung that I thought would be worth commenting on. The Süddeutsche is generally a good quality newspaper with some interesting articles but their “Economy” section is really going downhill, becoming more ridiculous by the day. Just last week, in an exceptionally silly and incoherent article that warned simultaneously about continuing deflation and a likely period of high inflation, a commentator declared Japan – a country with its own sovereign currency – “insolvent”.

Today, the paper is reporting on the meeting of “Nobel Prize” winning economists taking place in Lindau as part of the Lindau Nobel Laureate Meetings (As an aside, the conference was opened by Angela Merkel, who called for more pluralism and honesty in economics. Oh, the irony). As reported by the paper, a major part of the conference consisted in discussing the state of economics after the financial crisis. Reasonable people like Stiglitz attended, but of course, given the prize`s history, the lineup chiefly consisted of fundamentalists like Edmund Phelps, who promoted the inevitable line that the crisis was really all the governments’ fault for not letting markets be free enough. The only thing new about this is that now governments are apparently also to blame for inequality.

There are a number of problems I have with the article itself. One is common and central to almost all reporting on reform of economics in Germany, although I have never seen it stressed thusly in media from other countries. Articles invariably state that a major criticism of mainstream economics is that it relies on “homo economicus who is only interested in personal gain”. This argument, of course, entirely misses the point in that it promotes the false view that `mainstream’ economic agents are rational and self-interested whilst `non-mainstream’ economic agents are always irrational and altruistic.

We all know that utility theory is extremely flexible, so flexible in fact as to make it devoid of any content that is not tautological, and that it is therefore perfectly possible to construct an altruistic economic agent, even one who is not fully informed, who will still be perfectly rational in the strict sense. The problem, rather, is the difference between rationality as understood by economists (including the implicit assumption of known probability distributions etc.) and what any reasonable person would describe as rational – a mode of behaviour conforming more closely to what has been termed procedural rationality which, given the context of genuine uncertainty, should in fact be regarded as the more rational approach out of the two (for a good introduction to these concepts see the first chapter of Marc Lavoie’s new textbook which is freely available from the publisher here). As such, the paper celebrates game theoretic approaches that supposedly show how people “actually behave” and “go beyond homo economicus” – something which, I would argue, most of them really do not do and are not capable of doing.

The paper also praises as “innovative” a model which “shows” why globalisation has increased inequality and that we need to invest in education to combat this. My, my, what in the world would we do if we didn’t have our economics laureates? Incidentally, Hyman Minsky convincingly argued as early as the 1960s that (better) education, quite independently of its inherent desirability, will likely not be sufficient to eliminate poverty and unemployment.
In general, I’m afraid that I do not share the article’s confidence that change in economics is already happening and especially that it is coming from the discipline’s innermost circle, that of its “Nobel” laureates. Rather, much of what is happening can aptly be described as what Tom Palley has termed “Gattopardo Economics“.

The silliest comment in the article, which has in some form or another been repeated over and over since the crisis, comes in the form of a quote from Alvin Roth talking about the state of mainstream economics in general and its failure to predict the crisis:

“But take medicine for example: The fact that doctors cannot predict epidemics does not mean that people will not go to the doctor any longer when they break their leg.”

That this analogy is limping (no pun intended) in several respects should be obvious. But it appears particularly dishonest when considering that, as Professor Roth should know very well, virtually all work done in economics at least since the 1970s has been explicitly or implicitly informed by Milton Friedman`s methodological instrumentalism which makes predictive success the only possible measure of a model’s usefulness. This methodological approach was of course incredibly convenient particularly if one constructed theories so divorced from reality that they could not practically be falsified. But if this is your methodological stance, you must at some point accept being measured by its standards. It would be great to see some more critical journalism on such issues but probably that’s too much to ask.

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