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March 2, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Four Fiscal Phonies

Posted: 02 Mar 2012 12:33 AM PST

Republicans use concern over the deficit as a cover for their true agenda:

Four Fiscal Phonies, by Paul Krugman, Commentary, NY Times: Mitt Romney is very concerned about budget deficits. Or at least that's what he says; he likes to warn that President Obama's deficits are leading us toward a "Greece-style collapse."
So why is Mr. Romney offering a budget proposal that would lead to much larger debt and deficits than the corresponding proposal from the Obama administration?
Of course, Mr. Romney isn't alone in his hypocrisy. In fact, all four significant Republican presidential candidates still standing are fiscal phonies. They issue apocalyptic warnings about the dangers of government debt and, in the name of deficit reduction, demand savage cuts in programs that protect the middle class and the poor. But then they propose squandering all the money thereby saved — and much, much more — on tax cuts for the rich.
And nobody should be surprised. It has been obvious all along ... that the politicians shouting loudest about deficits are actually using deficit hysteria as a cover story for their real agenda, which is top-down class warfare. To put it in Romneyesque terms, it's all about finding an excuse to slash programs that help people who like to watch Nascar events, even while lavishing tax cuts on people who like to own Nascar teams. ...
Is there any way to make the G.O.P. proposals seem fiscally responsible? Well, no — not unless you believe in magic. Sure enough, voodoo economics is making a big comeback, with Mr. Romney, in particular, asserting that his tax cuts wouldn't actually explode the deficit because they would promote faster economic growth and this would raise revenue. And you might find this plausible if you spent the past two decades sleeping in a cave somewhere. ...
What, then, would their policies accomplish? The answer is that they would achieve a major redistribution of income away from working-class Americans toward the very, very rich. ...
There's one more thing you should know about the Republican proposals: Not only are they fiscally irresponsible and tilted heavily against working Americans, they're also terrible policy for a nation suffering from a depressed economy in the short run even as it faces long-run budget problems.
Put it this way: Are you worried about a "Greek-style collapse"? Well, these plans would slash spending in the near term, emulating Europe's catastrophic austerity, even while locking in budget-busting tax cuts for the future.
The question now is whether someone offering this toxic combination of irresponsibility, class warfare, and hypocrisy can actually be elected president.

Links for 2012-03-02

Posted: 02 Mar 2012 12:06 AM PST

"Microfounded and other Useful Models"

Posted: 01 Mar 2012 09:56 AM PST

More on today's apparent theme, at least for the moment, economic methodology. This is from Simon Wren-Lewis:

Microfounded and other Useful Models, mainly macro: This title harks back to one of the books that have influenced me most: Blanchard and Fischer's Lectures on Macroeconomics. That textbook was largely in the mould of modern microfounded macroeconomics, but chapter 10 was not, and it was entitled 'Some Useful Models'. One of their useful models is IS-LM.
The role of such models in an age where journal papers in macro theory are nearly always microfounded DSGE models is problematic. Paul Krugman has brought this issue to the forefront of debate, starting with his 'How Did Economists Get It So Wrong?' piece in 2009. His view has been recently stated as follows: "That doesn't mean that you have to use Mike's [Woodford] model or something like it every time you think about policy; by and large, ad hoc models like IS-LM are actually more useful, in my judgment. But you probably do want to double-check your logic using fancier optimization models."
This view appears controversial. If the accepted way of doing macroeconomics in academic journals is to almost always use a 'fancier optimisation' model, how can something more ad hoc be more useful? Coupled with remarks like 'the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth' (from the 2009 piece) this has got a lot of others, like Stephen Williamson, upset. I think there are a lot of strands here, many of which are interesting.
The issue I want to discuss now is very specific. What is the role of the 'useful models' that Blanchard and Fischer discuss in chapter 10? Can Krugman's claim that they can be more useful than microfounded models ever be true? I will try to suggest that it could be, even if we accept the proposition (which I would not) that the microfoundations approach is the only valid way of doing macroeconomics. If you think this sounds like a contradiction in terms, read on. ...[continue reading]...

I don't disagree, but my view on this is a bit different, e.g. see the post New Old Keynesians? (though the claim that the newer models weren't built to answer the important questions we needed to confront when the crisis hit is not as valid today -- much of the current work in macro is intended to fix this problem).

"Value-free economics?"

Posted: 01 Mar 2012 08:38 AM PST

Dan Little on the positive and normative distinction within economics:

Value-free economics?, by Dan Little : A recent volume by Vivian Walsh and Hilary Putnam,  The End of Value-Free Economics, brings to a fine point a line of argument that has been brewing for fifteen years: is the logical positivist insistence on separating "fact-based" science from "value-based" ethics any longer a tenable one? Most particularly, are there now compelling reasons for declaring that mainstream economics needs to recognize that the distinction is wholly untenable? Is the zeal for insisting on "positive" economics now unsupportable? Should economists at last recognize that Lionel Robbins' strong exclusion of normative language from the science of economics both unjustified and unwise?  Walsh and Putnam argue that the answers to each of these questions is definitive: the strict dichotomy between fact and value in economics can no longer be supported.

The issue of facts and values has a number of sources within the empiricist tradition.  There is Hume's view that we can't derive "ought" from "is"; or in other words, that moral judgments are logically independent from empirical beliefs.  There is the positivists' criterion of significance, according to which the meaning of an utterance reduces to the empirical experiences that would demonstrate its truth or falsity.  (The two propositions together imply that moral sentences are meaningless or "non-cognitive", since the first proposition concedes that no empirical experience can demonstrate the truth or falsity of a normative statement.) And there is the positivists' idea that science is exclusively concerned with "facts"; but the first two propositions consign moral statements to the category of "value" rather than "fact", so science cannot contain normative vocabulary.  Another source was internal to debates within neoclassical economics itself: Lionel Robbins's arguments against interpersonal comparisons of utilities, based on the idea that making such comparisons unavoidably involves taking an evaluative stance towards the individuals in question.

The key idea advanced in The End of Value-Free Economics is that none of these philosophical ideas have survived the critique of positivism that was offered within philosophy of science and philosophy of language over the past fifty years.  The attempt to draw a sharp line between "fact" and "value" turns out to be impossible.  And this is equally so in economics.

Consider an example.  The concept of Pareto efficiency is defined in value-neutral terms: a distribution is Pareto-efficient if there is no other distribution that improves some individuals without harming at least one individual.  The concept of distributive justice is not value-neutral; it invokes the idea that some distributions are better because they are more fair or more just than others.  The positive economist holds that the latter set of distinctions are legitimate to make -- in some other arena.  But within economics, the language of justice and equity has no place.  The economist, according to this view, can work out the technical characteristics of various economic arrangements; but it is up to the political process or the policy decision-maker to arrive at a governing set of normative standards.  Walsh and Putnam (as well as Amartya Sen) dispute this view on logical grounds; and this leaves the discipline free to have a rational and reasoned discussion of the pros and cons of various principles of distributive justice.

Raising the issue of value-neutrality for economics is a frontal assault on the uncritical positivism that neoclassical economics incorporated from the 1930s and forward. But it is also an attack on something else--the no-longer acceptable idea that economists can only tell us how things are, not how they should be. Is famine worse than food sufficiency? Is literacy better than illiteracy? Is good health an improvement in wellbeing? If we take the view that "positive economics" cannot contain normative judgments, then none of these questions could be answered by an economist. "It depends on what you value." What Walsh, Putnam, Sen, and other contributors to this volume want to say is that this response is idiotic, and there is no basis in logic, science, or methodology that would support it. Of course economics, and economists, can find that starvation is a bad thing. Instead, they maintain that the best philosophy of language and philosophy of science supports the idea that value concepts and descriptive concepts are intermingled or "entangled", and that we can offer good reasons and evidence for evaluating claims involving both.

Why, some readers will ask, has Hilary Putnam become a central figure in this emerging debate? Putnam is known as a technically astute philosopher of mathematics, logic, and physics, and a philosopher of language; he is known for a sometimes wavering adherence to several versions of scientific realism; and he has made contributions of the greatest importance to each of these fields. But how did he come to get deeply immersed in the issue of the role of values in economics?

Vivian Walsh is one important part of the answer. Walsh undertook a series of articles in the 1980s and 1990s that were critical of the logical positivist assumptions that have lingered within the methodology of neoclassical economics. He took encouragement from the writings of Amartya Sen on welfare economics that confidently dismissed these positivist assumptions -- for example, the idea that science could not incorporate values or that statements about values were meaningless. (Lionel Robbins is offered as a particularly clear advocate of these views.) And Putnam worked up his reactions to these ideas into a novel book in 2002, The Collapse of the Fact/Value Dichotomy and Other Essays.

A key construct in the collaborative thinking that Putnam and Walsh have done together is the idea of the "second phase of classical theory." (Harvey Gram discusses this construction in detail in his contribution.) Walsh introduces the idea and Putnam follows up in his essay. What this refers to is the fact that classical political economy, as expressed by Smith and Ricardo, underwent a major intellectual revival in the 1960s when thinkers like Pierro Sraffa proposed reappropriating some of their key analytical ideas. Sraffa's Production of Commodities by Means of Commodities : Prelude to a Critique of Economic Theory was a key product of this rethinking. The rethinking itself came about because of an uneasiness about the premises of neoclassical economics, and it stayed close to the core logical ideas. The first revival focused on Ricardo, but the second phase, Walsh argues, has given a much more nuanced interpretation of Smith himself.  Walsh finds that this reconsideration has been led by Amartya Sen and is more wide-ranging. Here is why Walsh thinks this reconsideration of Smith is important:

This is because Smith embedded a remarkable understanding of the core concepts of a political economy whose implications for moral philosophy he understood and explored.  The Smith texts as a whole offer a rich tapestry, interweaving threads of classical analysis, moral philosophy, jurisprudence, and history. (7)

And here is how Putnam summarizes Sen's contribution to this reconsideration of classical political economy:

If we are to understand Sen's place in history, the reintroduction of ethical concerns and concepts into economic discourse must not be thought of as an abandonment of "classical economics"; rather it is a reintroduction of something that was everywhere present in the writings of Adam Smith, and that went hand-inhand with Smith's technical analyses. This is something that Sen himself stresses. (quoted by Walsh, 29)

Amartya Sen has argued throughout his career for the robust possibility of reasoning about value issues -- in economics and elsewhere. (A very early place where Sen takes up this topic is in "The Nature and Classes of Prescriptive Judgements"; link.) Much of what Sen brings to this debate within economics, according to Walsh and Putnam, is found in his capabilities theory as a foundation for a theory of welfare or wellbeing. This theory is based on the idea of human functionings; and there is a plain intermingling of factual and evaluative ideas associated with this notion.  We need to know what human beings can and want to do, before we can say how well off they are. And this means bringing in orienting human values at the foundations. Putnam draws attention to Martha Nussbaum's list of core human capabilities. Anyone reading these descriptions would agree that they presuppose human values. And Nussbaum (as well as Sen and Putnam) believes that we can rationally discuss and evaluate these. But if welfare economics is to incorporate a substantive notion of human wellbeing, then it plainly cannot be maintained that it is "value-free".

Another important locus for Sen's reintroduction of ethical concepts into economics is his critique of the narrow conception of individual economic rationality.  As Sen puts the point in "Rational Fools" (link),

A person thus described may be "rational"in the limited sense of revealing no inconsistencies in his choice behavior, but if he has no use for these distinctions between quite different concepts, he must be a bit of a fool. The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool decked in the glory of his one all-purpose preference ordering. To make room for the different concepts related to his behavior we need a more elaborate structure. (336)

Sen introduces the idea of "commitments" directly into the concept of economic rationality.  Individuals choose among preference rankings based on their commitments -- to each other, to political ideas, to groups with whom they have decided to affiliate.  And this brings normative ideas directly into economic decision-making -- and therefore into the domain of economics.

Walsh and Putnam insist on a point that seems very important to me as well: it is the dichotomy between facts and values, or between positive and normative analysis, that they reject. They do not reject the idea that there are facts and there are values. But they believe in important respects these categories are intertwined and inseparable. They argue for "entanglement" and "rich description." They believe that it is fully possible and acceptable to engage in rational debates over the best theory of justice, or human nature, or human freedom; and to do so within economics as well as outside of economics.  And they believe that science can handle its goals without this sharp dichotomy.

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