Monday, April 28, 2014

Post-Crash economics clashes with 'econ tribe'

Manchester University’s Post-Crash Economics Society (PCES) released a report recently into the way economics is currently taught at Manchester, which is relevant to economics teaching at universities worldwide.

Their well articulated advocacy for pluralism in economics teaching, where neoclassical approaches are just one of many analytic techniques in the curriculum, has tapped into the current media disquiet with economics.

The involvement of the Bank of England’s new Chief Economist, Andrew Haldane, certainly helped, and the report has now found media coverage at the Financial Times, the Wall Street Journal blog, The Independent, and Paul Krugman’s New York Times blog.

In this article I first provide an overview of the PCES report in the context of the modern history of economics and the dissenting voices that came before them. Then I examine the tribal defences raised by the mainstream in response to it, which only serve to reinforce the urgency of the task of transforming economics into a socially valuable endeavour.

What is it all about?
The PCES report provides a concise overview of the systematically narrow and outdated teaching approach in economics, which unfortunately simply reflects the mainstream practice of economics. It highlights how the economics profession, and economic teaching, has seen a ‘great narrowing’ over the past two decades, all but redefining the discipline away from the study of economic phenomena, to the study of a particular family of equilibrium marginal models.

At a practical level the report offers guidance for improving teaching, and a wholeheartedly agree with the points made, which I summarise as follows (emphasis is quoted text)
  1. Economics education should begin with the study of economic problems, where economic phenomena are outlined and the student is given a toolkit and must evaluate the strengths and weaknesses of how different theories explain different phenomena.
  2. Introduce pluralism so that students understand that different models and theories can be applied or are most useful in different situations. Students should be able to consider a variety of theories before forming judgements. This is important because economic theory is not universally applicable and much depends much on institutional, historical and social contexts.
  3. Include the study of institutional power structures and politics. In doing so, students should be aware of the ethics of being an economist and a consideration of the ethical consequences of economic theory.
  4. Ensure that the philosophy of economics, or the more generally the philosophy of science, forms a core part of the curriculum. Student should be able to understand which assumptions are justified in a scientific theory and how rigorous must the ability to falsify a theory must be.
  5. Finally, provide students an understanding of the historical development of a particular model or economic paradigm in order to contextualise the approach and provide insight into the problems it was designed to solve and how context influenced its formation
The PCES report, and its proposed reforms, is itself part of a recurring theme in the history of economics. In 1973 Joan Robinson tried to revolutionise economics teaching, writing a textbook reflecting most of the reforms advocated by the PCES. Unfortunately that book is all but forgotten in economics. I certainly wish Robinson had been successful, as it would have deterred the next generation of top economists from merely repeating the nonsense that went before them.

In a strange historical coincidence, William Baumol complained of poor teaching of economics as far back as the late 1930s. At the time he found the teaching ignored what was then the cutting edge work of Keynes and Joan Robinson herself.

In 1968 it was the Union for Radical Political Economists that set about disrupting the discipline. By 1972 this movement had agitated so successfully that the then President of the American Economics Association John K Galbraith, a supporter of the movement, noted in his 1972 Presidential address to the Association that "For a new and notably articulate generation of economists a reference to neoclassical economics has become markedly pejorative". He went on to say
Neoclassical and neo-Keynesian economics, though providing unlimited opportunity for the demanding niceties of refinement, has a decisive flaw. It offers no useful handle for grasping the economic problems that now beset the modern society.
But nothing changed.

In 1992 the Foundation for European Economic Development (FEED) funded work that produced a Plea for a Pluralistic and Rigorous Economics, which was published in the American Economic Review.  Again, nothing.

More recently the Post-Austistic Economics movement emerged in Paris in 2000 with a similar mission to reform economics, followed closely by a proposal to open up economics by a group of PhDs at Cambridge in 2001.

In 2003 Harvard economics students organised a group called Students for Humane and Responsible Economics (SHARE), which launched a petition calling for a new approach to economic teaching and offered an alternative introductory course that was ultimately rejected by the university. At Manchester, the PCES has had their proposed course on Alternative Theories of the Crisis rejected by the university just a month ago.

In 2011 we also saw the EC10 class walk out on N. Gregory Mankiw’s lecture at Harvard in support of the Occupy protests, which in retrospect seems completely appropriate given Mankiw’s prostitution of economic ideas to defend the wealthiest 1%. Published at one of the leading economics journals, Mankiw’s ‘Defending the 1%’ article provides a classic example of the unscientific nature of the discipline’s ‘respectable’ journals, and the perverse anti-scientific but ideological incentive system embedded in the culture of economics.

The PCES is now one of many student societies, including for example, the German Pluralist Economics Network, justifiably calling for change in economics. Again the time appears ripe for disruption of economics, and the PCES offers useful guidance for how to achieve that.

The tribe responds
First, let me say that ‘econ tribe’, the core of the economics profession, is truly a tribe - a clique, a social construct - rather than a scientific community. As senior econ tribe member once gave me the following advice.
...the group ‘elders’ have implicit theories in their heads as to how the world works, what forms of behaviour are appropriate, what beliefs are reasonable, what questions are truly yet unanswered, what articles of faith should not be doubted, and where they and their group ultimately make their money
Oh, and that’s just the start (added emphasis).
…many economists like to pretend that even if they give practical policy advice, they as economists make no value judgment on what people want, i.e. ‘preferences are taken to be stable and can differ over all individuals’.

Such statements are then implicitly ‘backed up’ by theoretical models of decision making arising from underlying preference maps (i.e. a ‘deeper layer’).

Now, as a statement of reality this is a completely absurd and purely religious position since no-one even comes close to having ever measured a preference map despite the feeble protestations of the revealed-preference crowd, but as a defensive shield against the criticisms of psychologists and mathematically-challenged economists it is very effective. It drags criticisers into a morass few will escape from and that no outsider would be able to follow anyway, making it sound like a good riposte.

Nearly all sub-fields of economics have similar defensive religious beliefs used to deter entry by unwanted outsiders
A give-away signal of a tribe member is that they will deny the religious nature of their tribe, and pledge loyalty wherever possible by defending the tribe against all challenges. This is the sell-out that most successful economists make at some point in their career, something Yanis Varoufakis has written extensively about.

We see evidence of overt religious zeal and loyalty pledges in the mainstream responses to the PCES report. Here are the links so you can read them for yourselves - Wren-Lewis, Yates, Farmer, Krugman. Expect more in the coming weeks.

The blueprint response was that economics teaching could be better, but economics is fine. I couldn’t disagree more. This is a mere loyalty pledge.

Poor teaching reflects the poor scholarship of the discipline more broadly. This is most clearly seen in Ferrero and Taylor’s survey of economists, where 78% of professional economists (including professors) incorrectly answered a multiple-choice question about the definition of opportunity cost. The profession subsequently kicked into gear to defend itself from embarrassment, with one article in a ‘respectable’ journal making the Alice in Wonderland response that any Humpty can use opportunity cost to mean just what they choose it to mean - “neither more nor less!”

But the big defensive play to combat the PCES threat was to assert that the ‘sciency-ness’ of the mainstream is the reason for its dominance, and the reason we should respect it. Again, deny the religious aspects of economics, be loyal to the tribe.

From Wren-Lewis.
…economics is a science. Its response to data and events may be slow compared to the normal sciences, for obvious reasons, but it is progressive
From Farmer
Economics is a science…the core approach to modern economics, both macro and micro, is the culmination of a process of intellectual argument in which ideas have been sifted, debated and compared with facts. Some have survived; others have not.
Farmer’s claim is not at all true. Most of the modern macro debates were already happening in the 1800s.

It is scary to think that these economists believe what they doing is science. There are parts of economists that do take those crucial scientific steps of prediction and experimentation, and the results usually contradict mainstream theory - conflict is real, costly punishment is real, social norms can evolve and change, preferences are not well behaved, markets boom and bust, and more. Yet for some reason the preacher’s models seem immune to evidence.

A comment from Yates’ post points to the non-scientific approach deemed acceptable in economics.
If economists wished to study the horse, they wouldn’t go and look at the horses. They’d sit in their studies and say to themselves, “What would I do if I were a horse?
Physicist-turned-sociologist Duncan Watts has warned about this approach
…social scientists, like everyone else, participate in social life and so feel as if they can understand why people do what they do simply by thinking about it. It is not surprising, therefore, that many social scientific explanations suffer from the same weaknesses—ex post facto assertions of rationality, representative individuals, special people, and correlation substituting for causation—that pervade our commonsense explanations as well. 
Krugman and Yates take the whole ‘sciency-ness’ one step further, pretending that economists do in fact know what’s going on in the economy, in banking, in financial crises, and in recessions. Or something.

Steve Keen fired off a response to Krugman, arguing that he contorted the failure of economics to foresee even the remote possibility of a debt-fuelled crisis, into a mere failure to keep an eye on shadow banking - as if better data on shadow banking would have somehow led to the whole econ tribe dropping their core money-less models of the economy in equilibrium to embrace theoretical approaches of outsiders.

A second defensive play, seen in Yates and Farmer’s responses, is that within the mainstream there is a model for everything, so no need to look outside. Again, no reference to the success of any of the models in predicting economic phenomena. It is as if the high priests response to evidence is to merely create a new god - “Ah yes, haven’t you seen, we have a Tornado God now. Solved that didn’t we” - and ignore reality.

In the past Krugman has actually made similar points. Mainstream economics ignored increasing returns to scale as a reason for trade, even though it had long been understood by ‘outsiders’. To address this he created the Increasing Returns God for the tribe.
I was, of course, only saying something that critics of conventional theory had been saying for decades. Yet my point was not part of the mainstream of international economics. Why? Because it had never been expressed in nice models. 
Which only serves to highlight the invalid non-scientific approach - ideas are not judged on the merit as predictive tools, but on whether they can be expressed in the pre-determined modelling methods of the tribe as nice totems of the modelling gods.

As I have said, the value of a scientific model is its ability to predict outcomes in new situations. In economics, the reverse is true. Most economists believe that models provide insights simply by their construction, whereas in reality we can never know if the model is useful unless it offers useful predictions.

It is telling that we see no arguments based on scientific principles in these responses. Nothing on the practical usefulness of mainstream approaches above others. No long lists of scientific battles won by the mainstream because of the useful predictive power of their approach, and plenty of silence on the battles they lost (eg. the capital debates).

That is to be expected from the tribe’s high priests. But it also shows a distinct ignorance of alternative approaches. If there was a wide understanding of alternatives a response comparing the merit of different approaches could be made. The reason it isn’t made is because once economists learn of heterodox approaches the usually leave the tribe. For example, I can’t imagine that any macroeconomist with a decent understanding of Godley and Lavoie’s integrated monetary models would really continue to believe that the mainstream ‘label the residual’ approach to a money-less equilibrium is more valid.

The future
I wish the PCES the best of luck. It is possible for economics to be a useful science, but that requires a much more humble discipline that is able to judge theoretical and methodological approaches based on proper evidence. It starts by acknowledging that in a scientific sense, the body of knowledge in economics is extremely limited, and much of what passes for economics is a collection of mere credible stories about certain phenomena, which are yet to be tested.

I hope indeed that the observation that Pilkington makes is the correct one, and that the time is ripe for transformation in economics.
…silently, behind the scenes, the heterodox have been winning the debate. Krugman would never admit this, of course — indeed, he seems to live in a bit of an echo chamber over at the NYT with all his fanboys and fangirls and he may not even be fully cognizant of it — but if you move in economics circles you’ll know this to be generally recognised.
But let me finish with more sober words from James K Galbraith, because I believe transforming economics is going to be one hell of a battle of tribal politics.
Leading active members of today’s economics profession... have formed themselves into a kind of Politburo for correct economic thinking.  
As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades.

They predict disaster where none occurs. They deny the possibility of events that then happen. ... They oppose the most basic, decent and sensible reforms, while offering placebos instead.

They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject.

No one loses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.

Tuesday, April 22, 2014

Corrupting Piketty in the 21st century

The media attention surrounding French economist Thomas Piketty’s new book Capital in the 21st Century is growing ever more fervent. Here are my two cents.

To me three things are clear to be about this book. First, it is a timely reminder that distribution of resources within society matters. This is especially important for an economics profession who has often ignored the issue and whose core analytical framework is a completely inappropriate tool for its analysis.

Second, and this is quite a surprise, the mainstream economics profession seems to be rather accepting of the book, which, when I read it, seemed to make the claim that most of their scholarly methods are flawed and that the economics profession knows very little about the more important elements of social organisation. While on the surface this appears to be a mature response by the profession to valid criticisms, I fear that the profession will corrupt the message of the book and will unfortunately not have the impact on improving economic scholarship that it seems intended to have.

Third, and this is my one personal gripe, the book fails to acknowledge the many social processes studied by sociologists and even ecologists that have been used to explain unequal outcomes in a wide variety of settings. For example, the process of preferential attachment is fundamental to producing the unequal distribution of the success of artists, musicians and even, ironically, authors. Such a process can not only explain the broader inequalities in terms of access to resources (income and wealth), but also the inequality of book success, where Piketty finds himself in the top 1% of economics authors (and there really is no shortage of books covering similar topics recently, for example here, here, here and here).

I want to now explore these latter two point in more detail.

The surprise hero
The mainstream acceptance of the book in economic circles is, in my view, due to the simplicity of the r > g story Piketty weaves into the long run inequality trends he has meticulously pieced together. This story is compatible with many of ridiculously simplistic explanations economists love, such as technology change, education, regulatory intervention in labour markets, and just about anything else. Yes, the mainstream is stuck on these same metaphysical explanations that Henry George made fun of back in the 1870s.

What this means then is that r > g heuristic Piketty uses is not a precise model applicable to a wide variety of circumstance, but a general framework in which a variety of political, social and institutional models will sit. This heuristic basically says that the rate of return to capital owners tends to exceed the rate rate of growth of the economy, and hence increases inequality over time. It is a similar idea to the model from Chapter 4 of Joseph Stiglitz’s PhD thesis from 1966. Piketty summarises the process as follows:
When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.
This explanation is general enough not to exclude many popular but flawed neoclassical stories about inequality. Indeed Piketty peppers his explanations of potential forces leading to a divergence of wealth with hints of neoclassical theories, which definitely help him appeal to his intended audience. But ultimately he paints a political, social and institutional story of wealth distribution, one which the economic reviews seem to miss.
the inequality r > g is a contingent historical proposition, which is true in some periods and political contexts and not in others. 
It is unfortunate that the definition of capital that Piketty uses does not distinguish between scarce factors of production, like land, patents and other State-granted monopoly rights, and produced factors of production, like buildings and so forth. This matters in theoretical discussions because produced factors of production don’t necessarily produce any return unless coupled with a scarce factor of production. James Galbraith noted this in his review, along with other important measurement issues such as implicitly using value as a measure of quantity (which has been criticised elsewhere). These are certainly correct, but one can’t expect appropriate data to emerge from the history books that can be easily segregated into modern definitions. Indeed, others have argued that Piketty uses capital in the more general and appropriate way as the monetary value of assets able to be used as collateral. Which is a fine debate to have, but not much help when the body of existing economic theory uses the term to mean something else. In all, this confusion is likely to be exploited by those wishing to leverage Piketty’s new-found popularity to their advantage.

One thing we miss in this process is that if ownership of wealth was equally distributed, it wouldn’t matter whether r > g in terms of its impact in inequality. Or more precisely, institutional settings can be designed to combat any social force that concentrates wealth if we so desire, and if it is politically palatable.

Corrupting the message
The Slack Wire's Suresh Naidu has already noted these obscure interpretations of the book within economics, calling the corrupting process ‘bastard-Pikettyism’. Like me he fears the valid methodological critiques will be ignored, and the main message will be propagandised into one that is supportive of the current mainstream approach.

Let’s not pretend this isn’t the way new ideas are dealt with by the power structures within the economics tribe. Thomas Palley has extensively discussed how this same process happened following the financial crisis. He calls it ‘Gattopardo economics’, and his subtitle sums up the process: The crisis and the mainstream response of change that keeps things the same.

We can see this starting in quite a few of the now hundred of reviews and comments emerging online. For example, Tyler Cowen seems to want to corrupt the idea of capital back into a physical thing and essentially say that the past is not a good guide to the future. Of course Piketty is no fool and completely acknowledges the uncertainty, simply noting that we should learn lessons from history that reverting toward equality is no automatic outcome. In my mind the vagueness of the use of the term capital is allowing the profession to read it as they see fit, ignoring the political and institutional environment.

Robert Solow seems to like the book (32min mark of linked video), and particularly idea of an r > g mechanism. We see Solow at pains to fit Piketty’s commentary on the long-run picture of inequality within his ‘model thinking’. When he discusses what he thinks is going on with the gap between r and g he says:
On the pure theory side, the sorts of influences that appear in the book suggest that there will be an increase in the capital output ratio - this is likely if the law of diminishing returns is still operating at all - is likely to push the realised rate of return on capital down a little bit. You can ask how much down if you make the technical calculations that one would normally make, and that rest on assumptions that are already in Thomas’s book, you would expect the rate of return on capital to fall when the permanent growth rate falls, and fall somewhat better than one to one, so that the gap between r and g is likely to remains positive to be somewhat narrower. So there is no reason to suggest that this process of accumulation of wealth and income at the top of the distribution to top increasing. 
Oh no, please, not those technical calculations.

The great fear I have is that the economic profession will use the book to argue that inequality is a complex issue and that changing the distribution of wealth is technically difficult. It is not. There are endless policy options for reducing inequality which are simple to implement, and often are implemented (or have been) in some part of the world. It’s not rocket science. Sure, politically redistribution is difficult. But it is not the job of the economics profession to pander to current political sensitivities - we should be offering solutions.

Here are just a few; mortgage (and other) lending constraints, limits to rent increases and more secure housing tenure for renters, limits on executive pay, higher welfare support to the most needy, shifting the tax base away from wages towards land and land-like resources, stop privatising public utilities, greater public investment in network infrastructure, and more.

Was it r > g that got Piketty’s book into the 1%?
The inequality of media attention lavished on this book [1], in preference over the many other equally worthy new economic books, is part of the some social mystery that the book itself attempts to resolve.

In my view it is clear that owning wealth is an advantage to acquiring more wealth. In sociology, and on the fringes of economics, the process of preferential attachment is being regularly identified in social systems. This review is helpful in getting acquainted with the idea.

While the idea that r > g suggests a process of cumulative advantage, the mechanisms at play in such a processes are unable to be modelled in a world of perfect markets. The fundamental feature of capitalism, it seems, is not the perfection it is made out to be in economic theory. This will be hard to deal with for the true believers in the profession.

Preferential attachment processes at the individual level can, and have been, identified empirically.

We know that already large firms are more likely to win government contracts, thus reinforcing their dominant position. We observe that corporate directors with more cross-directorships are more likely to get new directorship positions. We know that current level of popularity of books, music and films is a good predictor of their future popularity and that ‘superstars’ are the product of a cascading process of gaining advantage.

And more relevant to this discussion, am I likely to buy, read and review a book that already has gained significant media attention than one that hasn’t? Yep.

To maintain a degree of fairness and equality when there is widespread preferential attachment processes occurring society there must either be either a) institutional limits on these processes, or b) active redistribution to counteract the undesired results. In sports we see example of a), where team salary caps are common. Piketty notes the historical role of taxes on capital as an example of b) and promotes such solutions later in the book.

To be clear, Piketty makes a great contribution to economics, especially in his call to tightly link economic analysis to historical political and social conditions, rather than pretend to solve problems of the world from detached abstract reasoning. However like all reformation efforts in the discipline, his (and fellow students of inequality) will be met by fierce internal opposition, the ultimate outcome of which is to twist his work into something it is not in order to pretend that it supports the status quo. This happened to Keynes, Coase, it happened following the Cambridge controversy, it happened in macro after the financial crisis, and it will happen again now. There are simply too many vested interests who want the profession to continue to come to the same conclusions.

fn[1]. Here’s just some of the attention the book has received: Bloomberg, Real World Economics Review, Dissent Magazine, Monthly Review, Quartz,New Yorker, Business Insider, Harvard University. Marginal Revolution, Foreign Affairs, Huffington Post, The Nation, Taleb, The Economist, New Yorker Magazine, BHL, The Conversation, Tyler Cowen again, Squarely Rooted, Joshua R. Hendrickson, RWER again

Tuesday, April 15, 2014

Robinson: An introduction to economic doctrine

Imagine a modern economics textbook comprising of three parts, with the last two being Analysis and Modern Problems. What do you think would the first part would be called?

I doubt your answer was Economic Doctrines. But that’s exactly how Joan Robinson began her textbook An Introduction to Modern Economics back in 1973.

For Robinson, rebuilding modern economics teaching meant starting with an understanding of evolving economic doctrines. As such, she begins her revolutionary textbook with a summary of the defining battles within economic philosophy, tracing the key players and their moral and logical arguments since the writings of Fan├žois Quesnay in the 18th century.

Robinson’s book, written with John Eatwell, was supposed to offer a fresh new way to teach economics that would replace the ‘Samuelson’ approach to economic teaching. It failed to do so. In fact it failed so catastrophically that it never gained one tenth the circulation of Samuelson’s principles text in its short publishing history, and has been all but forgotten in modern discussions about rewriting the economics curriculum. So unpopular is this book that it is deemed unworthy of shelf space at my university library, and instead resides in an off-site library storage facility.

But its popularity should definitely not be a guide to its quality.

For those who may never read the book I want to highlight some of the more interesting content that you won’t easily find elsewhere, and that is perhaps even more important and relevant today than forty years ago when the book was first published.

As a recently trained economist one of the more shocking things about Robinson’s textbook is the way many core features of neoclassical economics are brushed away in a sentence or paragraph as mere metaphysical reasoning. She defines such reasoning as being “applied to a use of language that conveys no factual information, describes no logical relations nor gives precise instructions and yet is calculated to affect conduct.” One such concept is utility, which is described as follows when it is first introduced
Utility is the characteristic of commodities which makes individuals want to buy them, and individuals buy commodities to enjoy utility consuming them.
Another metaphysical concept is that of profit maximisation; which is purely defined in terms of itself. While it may seem a little smug of Robinson to dismiss these ideas, the unscientific nature of metaphysical concepts renders much of the economic approach to generating knowledge utterly useless. Not a week passes when I don’t see a new economics paper or seminar that makes appeals to unmeasurable and unknowable concepts, defined purely in terms of themselves, that exist only as story-telling devices. Just a few days ago I sat in a seminar where labour markets where being ‘modelled’ in terms of an unquantifiable concept of search efficiency, which could not be defined without circular reasoning, and offered no testable predictions.

Another feature of Robinson’s book is that unlike our new Australian learning standards in economics, her text includes the following index items
Moral considerations, 2-3, 42, 313; see also Metaphysics, Politics and Social Justice.

Slogans, 1, 3, 9-10, 59
For anyone with a mainstream economics education these terms would seem wildly out of place. Even the mere suggestion of morality in economics these days will cast you as an outsider and ruin your career prospects. Economists love to see themselves as value free, and collectively ignore the reality that any welfare analysis is inherently a moral analysis.

When discussing the rise of the neoclassicists, Robinson writes critically of their core construct of the Walrasian equilibrium.
Walras himself realised that it is not practicable to reach the equilibrium position by trail and error, but he imagined that buyers and sellers could proceed by shouting out demands and offers, finding the equilibrium set of outputs and prices before production and trade took place.

His modern followers seem to have given up pretending that this is possible, and content themselves with finding conditions necessary to ensure that at least one position of equilibrium exists.
Oh my. She really did just say that a great bulk of academic economists have simply given up on reality to content themselves with mathematical game-playing. Which implies that much of neoclassical theory itself is unable to be reconciled with real processes in the economy.

Finally, we get a taste of the controversy that surrounds the definition of capital which is generally omitted from introductory texts. Robinson includes Thorstein Veblen’s view on the orthodoxy from his review of John Bates Clarks’s The Distribution of Wealth to make the point.
Here, as elsewhere in Mr Clark’s writings, much is made of the doctrine that the two facts of ‘capital’ and ‘capital goods’ are conceptually distinct, though substantially identical. The two terms cover virtually the same facts as would be covered by the terms ‘pecuniary capital’ and ‘industrial equipment’… 
This conception of capital, as a physically ‘abiding entity’ constituted by the succession of productive goods that make up the industrial equipment, breaks downs in Mr Clark’s own use of it when he comes to speak of the mobility of capital; that is to say, so soon as he makes use of it… 
The continuum in which the ‘abiding entity’ of capital resides is a continuity of ownership, not a physical fact. The continuity, in fact, is of an immaterial nature, a matter of legal rights, of contract, of purchase and sale.  
Just why this patent state of the case is overlooked, as it somewhat elaborately is, is not easily seen. But it is plain that, if the concept of capital were elaborated from observation of current business practice, it would be found that ‘capital’ is a pecuniary fact, not a mechanical one; that it is an outcome of a valuation, depending immediately on the state of mind of the valuers; and that the specific marks of capital, by which it is distinguishable from other facts, are of an immaterial character. 
What we see in this book is what I believe is an honest appraisal of economics. The myths and legends that are passed down as fact in most textbooks are shown to be anything but. Even Adam Smith’s pin factory and the lessons of division of labour are challenged.

The book does leave the reader wondering exactly how economic research should proceed. I think Robinson would be impressed by the gains made by experimental economics researchers, particularly because their findings more often than not challenge some element of neoclassical doctrine.

If you want an introduction to economics that acknowledges the rather limited knowledge generated by the field, and starts from fundamental moral foundations, then you could do worse than tracking down a copy of Robinson and Eatwell’s textbook from your local library's storage shed.

Thursday, April 3, 2014

Australian journalists wage war on cycling

Two recent traffic accidents involving cyclists and cars - one a ‘dooring’ and one a that can only be described as a driver flat-out running over a man on a bike with their car - provide a rather sobering backdrop to the introduction of Queensland’s new 1m law next week.

The law is described on the Queensland government website as follows [1]: 
From 7 April by law motorists must give:
- a minimum of 1 metre when passing cyclists in a 60km/h or less speed zone
- at least 1.5 metres where the speed limit is over 60km/h.
Motorists will be allowed to cross centre lines, including double unbroken centre lines, straddle lane-lines or drive on painted islands to pass cyclists provided the driver has a clear view of any approaching traffic and it is safe to do so.
There has been extensive media coverage of both the traffic accidents mentioned, and the implementation of this new law. As there should be.

But I simply cannot believe that the media coverage has been either honest or ethical. In fact, I would describe the media coverage as journalists promoting legal falsehoods and legitimising road-rage against cyclists.

In light of the media's abysmal efforts to cover these stories I have been pondering the following questions: Is it ethical to misrepresent the new law, or even current laws related to cycling? Is it ethical to promote a war between motorists and cyclists on the road?

Let me show you why ask such questions.

A recent editorial in The Australian following the 'oozing' incident seemed to serve the sole purpose of misleading and deceiving the public. It needs to be quoted here in full to be believed - I don’t want to be accused of a lack of context
THE arrogant sense of entitlement in our inner cities is also evident in the ever-growing number of cyclists snaking their way through pedestrians on overcrowded pathways, darting between cars and clogging-up lanes on our congested roadways.
The problem of city cyclists reached their apogee in Melbourne this week when a cyclist was “doored” on busy Collins Street, after a passenger opened a taxi door and a rider crashed into it. Neither the taxi nor its passenger could be deemed at fault because a narrow “bike lane” inhibited the taxi from stopping next to the kerb. The passenger was lucky to avoid serious injury.
What makes this incident even more absurd is that, although the lane was marked by a bicycle symbol, it was not actually a dedicated bicycle lane. Melbourne bike lanes must have signage, fixed to a pole, that shows the start and finish of a lane, as well as clear markings on the road itself. The state’s bicycle operations officer — yes, there is such a position — admits there is confusion for cyclists, pedestrians and motorists. Cyclists, including the one “doored” this week, are using cameras to film such incidents so they can make insurance claims. The Victorian government imposed even tougher on-the-spot fines in 2012 for people who opened car doors in the direct path of cyclists.
For too long, authorities have bowed to the demands of selfish cyclists and their lobby groups. Truth is, our cities are dominated by cars because they are sprawling. We have no equivalent of Amsterdam and should stop pretending we do.
In this article the law, in my view, is clearly misrepresented. The lane used by the cyclist in this incident was marked in a particular way with bike stencils (what are typically known as Bicycle Awareness Zones) indicating that drivers should be alert for cyclists and normal road rules apply. These normal road rules allow bicycles to pass vehicles on the left side.

The Australian’s editorial implies that a) it was inappropriate, if not illegal, to cycle in that road space because it was not a bike lane, and b) the taxi driver and passenger could not be at fault. Both these claims are false.

Such poor journalism probably goes some way to explaining why in a later article at The Age, their readers blamed the cyclist for the collision. 

Yesterday in Brisbane we had some coverage of the new 1m passing law. Madonna King calls it “a hostile and unworkable law”
That’s why there are so many spats even before the laws commence; sharing the road already requires motorists to cross the middle lane, to safely pass a cyclist. 
But despite the law being introduced to try and diffuse arguments, it’s only going to escalate tensions.
In this article it is implied that it is difficult to drive with cyclists on the road and that the rights of motorists are superior. Similarly, The Australian’s Michael Saunders and Robyn Wuth covered the law with an article about how the new 1m law will be unworkable, with a helpful link embedded to a Courier Mail article by Chris Bartlett entitled 14 reasons we hate cyclists, which is so bad I just can't tell whether it is satire (though the reader comments suggest not).

Returning to the question of ethics in journalism. How would these journalists feel if a driver who had killed a cyclist came forward and said

“It’s been in the newspapers everywhere. Cyclists bring it on themselves. The new law is unworkable. It wasn’t a real bike lane so I didn’t give them any room. Maddona King told me it is a war out there!”

I hope they would think twice about publishing fact-free misleading articles primarily aimed at provoking outrage and conflict. It is simply not that difficult to drive with other vehicles on the road - trucks, cars, buses AND bicycles - if we all just have a little courtesy.

fn.[1] For future reference, here are the links to summaries of relevant traffic laws in relation to cycling on public roads- Queensland,New South Wales,Victoria,South Australia,Western Australia,ACT, NT.

Wednesday, April 2, 2014

Four Corners: No logic on China

On Monday night Four Corners aired a segment about the post-GFC Chinese stimulus and its massive impact on levels of investment and debt. It was entitled How China Fooled the World, which is somewhat baffling, because there is no tricky involved in their very real investment binge. As you can tell, I have my reservations about the show’s analysis. 

While I appreciate the effort to highlight just how dependent the world has become on Chinese investment, and indirectly on the policies of the Communist Party of China, the segment never made the point that the west has CHOSEN this path by refusing to independently support their local economies and employment by making tough political choices that involve reallocation of wealth and public investment. 

A far greater irony is that many in the west who fear a Chinese economic collapse usually end up pointing the finger at China’s political system and the lack of private enterprise or competition as the fundamental cause. Yet private enterprise and competition are fundamental features of the system that collapsed in the west during the financial crisis, and China’s non-competitive state-owned industry was apparently the only thing that saved the world from further destabilising impacts of capitalism!

By their very nature, complex systems, such as the socio-economic system, are prone to sudden collapse in activity following a period of extremely high activity. This applies in China just as it did in the west, although the system in China is characteristic more centralised choices and less emergence. It is highly unlikely that China will have investment at over 50% of GDP for decades to come in a perfectly smooth growing economy. 

But that doesn’t mean a collapse needs to be catastrophic or even costly in terms of the things that matter to those people within the system. For example, if the collapse in activity results in more years of schooling and education, fewer work hours per worker and more holidays, greater investment in environmental protection and restoration, and so on, this could just as equally be seen a beneficial period of transition; a collapse that forced radically beneficial social change. We shouldn’t underestimate the power of central control and need for the Communist Party to maintain improving living standards to support their legitimacy. 

That is of course, the optimistic view. There will certainly be many losers from a major economic contraction in China, and Australian consumers are part of that group. 

But back to the Four Corners story. I had a few other problems with the coverage, which like most economic reporting was quite superficial and lacked a rigorous foundation of analysis. Here are just a few.
1. Most funds for the Chinese stimulus came from borrowing. This is bad. 
Of course funds came from borrowing. This is neither good nor bad. The detrimental effects of debt that we now acknowledge are usually related to debt used for speculation rather than real investment, yet the whole segment was devoted to identifying just how much real investment there is in China
2. This rate of investment is unsustainable
Chinese investment share of GDP is around 50%, potentially 54%, up from around 43% of GDP in the period prior to the financial crisis. Many commentators saw the pre-crisis levels as unsustainable as well. Certainly this level is high, but remember that the longer this lasts, the wealthier China will be and the more easily it will be able to handle a large-scale economic transition. There was no consideration of what sort of transition the Communist Party might have in mind to edge down from these levels, just as there was no consideration of how the Party created such high levels of investment.
3. The rest of the world was unable to conduct stimulus on a similar scale 
This is another contradictory claim. For some reason, China, still a poor country in per capita terms and one with apparently gross political disfunction from the entrenched rent-seeking Communist party, was the only one who could save the world from the financial crisis. Similar levels of public investment could be made in Europe or the United States if the political will was there.
4. Shadow banking is a problem because debts are hidden 
What we didn’t really see is a view on what would be different if debts were not hidden? There seems to be no consensus on what it means in any case, and very little understanding of the political willingness of the Chinese Communist party to use their monetary system for their social, economic and political goals. The substance of this and other criticisms of China boiled down to ‘debt is bad’. Ignoring of course the international imbalances and the massive debts much of the west have with China.
5. Housing oversupply is 15%
This was strange. Surely more housing per person is a good thing. Some may be empty at the moment, but at some point there will be incentives for these home owners to occupy or rent these homes. And if you are thinking that they need lots of maintenance and might fall down before they are occupied, then you’ve identified another activity that can help in the transition to lower investment - maintaining current investments. 
Certainly China’s growth won’t be smooth sailing at these unprecedented investment shares of GDP for decades to come. There will be a transition, and it will be a bumpy ride.

But from my view most of the opinions in this documentary were blind repetition of contradictory views - that China was the only one who could save the west from the crisis, but now they will be unable to save themselves; that the Chinese political system was able to radically control production to maintain growth and employment, but now won’t be able to; that the answer to the problem that China does not yet have is to make the choices that the west has made, which didn’t stop them from having severe financial crises with lingering social impacts.

It is all so confusing.