Friday, August 13, 2010

Clawbacks from economists?

This review is not particularly in itself. It is worth skimming to get the flavor. Once you feel comfortable with what you have read, search for the word "ugly." The idea is that these mostly neoliberal economists claim to have created enormous value for the economy. I assume that the essays were composed before the crash, but the editor claims that our profession deserves extra funding for all the value it created. Could the public demand a clawback to penalize these economists for the harm they have done?

Better Living through Economics
Siegfried, John J.
Vedder, Richard

Published by EH.NET (August 2010)

John J. Siegfried, editor, Better Living through Economics. Cambridge, MA: Harvard University Press, 2010. viii + 315 pp. $45 (hardcover), ISBN: 978-0-674-03618-5.

Reviewed for EH.Net by Richard Vedder, Department of Economics, Ohio University.

This volume of essays advances the proposition that economic theory and economic research can and has been harnessed to promote human welfare in many different ways, materially improving the quality of our lives and arguably our incomes. Not unusual for compilations of essays, this book contains the good, the bad, and, unfortunately, the ugly. Fortunately, “the good” dominates, and I would say two-thirds of the volume successfully achieves its mission.

John Siegfried, Vanderbilt professor and Secretary-Treasurer of the American Economic Association, seems to be the prime mover on getting this volume published. As Richard Caves states in a cover blurb, many of the “essays are concise, clear and consistently written at a level within the reach of undergraduate economics students.” Good examples include Thomas Tietenberg’s excellent treatment of the evolution of emissions trading to more efficiently deal with restricting environmentally undesirable practices, Elizabeth Bailey’s nice narrative about the benefits of transportation deregulation beginning in the late 1970s, Robert Moffitt’s clear and well balanced discussion of the evolution of the Earned Income Tax Credit, Michael Boskin’s discussion of improvements in measuring inflation, Lawrence White’s analysis of changing views on anti-trust regulation over time, and the Asch, Miller and Warner’s discussion of how the military draft was ended and subsequent issues arising from that. Each of these authors shows that basic propositions taught in any good principles of economics course can be harnessed to make the world work better and more efficiently. Generally speaking, the discipline and self-correcting properties of markets are stronger and more effective in allocating resources than rules-based command decisions made through the political process. Also, aligning incentives with socially desirable objectives pays.

Anne Krueger’s essay stands out in several respects. First, she very convincingly demonstrates that the move away from protectionist/import substitution policies in the 1950s and 1960s harnessed the spirit of enterprise and brought about enormous improvements in the standard of living for literally billions of people. And she appropriately notes that the underlying theory was not discovered by an National Science Foundation grant revealing huge insights, but essentially by the work of Adam Smith and David Ricardo a couple of centuries ago.

This gets to a problem. Economists sometimes get overwhelmed with their own self importance and claim more than they should. John Taylor writes a generally solid essay arguing that reductions in macroeconomic stability in modern times reflects in large part a move to a more intelligent understanding on the role of monetary variables in the economy. Taylor believes the evolution of new economic modeling in recent decades that combine rational expectations with some allowance for price stickiness has brought about enormous policy improvements. Maybe, but I side with commenter Laurence H. Meyer (himself a former Federal Reserve Governor) whose views are “the shifts in monetary policy ... are due more to the rediscovery of classical monetary theory than to advances of modern macroeconomic theory. ... classical monetary theorists had the story basically right” (p. 165). The work of Milton Friedman outlined a half century ago -- itself informed by still earlier work of quantity theorists and neglected practitioners like Clark Warburton -- was far more important than modern-day theoretical refinements.

The less good essays stray a good deal from the stated mission of offering clear, concise explanations of using economics to deal with problems in a language an undergraduate student can understand. Alvin Roth’s paper on deferred-acceptance algorithms is filled with jargon, is exceedingly hard to follow, and deals, frankly, with a far less dramatic advancement in modern economics than improving price indices, promoting the power of comparative advantage, or the gains from transport deregulation. Modest Roth is not -- he cites nearly thirty papers he authored or coauthored in the bibliography. The McAfee, McMillan and Wilkie piece on auctioning spectrum licenses deals with a moderately more important topic, but again gets into too many details of alternative bidding possibilities to be of interest to all but the most gung ho specialists.

Alas, I must come to the “ugly” part of this book. This appears to be not simply a volume of essays to promote the practical dimensions of modern advances in economics, but more an effort to increase the income and prestige of economists relative to other scholars. On page one John Siegfried assets, without a scintilla of supporting evidence, that “the value of the improved policies documented in this volume is likely hundreds of billions of dollars.” His agenda becomes clearer very shortly: “Interestingly ... only a few of the contributions outlined here have been financed or promoted through the private sector” (p. 3). In other words, NSF economics grants have a huge payoff. Charles Plott even goes further: “the social value of the contributions of economics compares well with the contributions of basic research in any field of science.” (p. 6). This, of course, is a normative judgment without a scintilla of rigorous proof, measuring, for example, the rate of return on research in physics or biological sciences with that in economics or psychology (a point that even the NSF’s Daniel Newlon gently takes him to task on).

All and all, this reinforces my own feelings about our profession. For many, Physics Envy is a big cross to bear -- the unwillingness to accept that economics is not considered as respectable as many of the so-called hard sciences. This volume promotes the good economists have done, ignoring the policy disasters that economists have contributed to, for example, the stagflation of the 1970s, or, arguably, even the financial crisis of 2008 -- where were economists in warning about subprime lending, excessive use of untried to financial instruments, etc? Where are we today in opposing stimulus packages that historical experience and economic theory alike say do not work?

But above all, the volume is all about rent-seeking -- a plea to get more economics funding for the NSF and related agencies. It is amazing how much Adam Smith, David Ricardo, A.C. Pigou, Irving Fisher and Milton Friedman contributed to the advancement of human welfare without NSF funds. As Austen Goolsbee notes in a recent NBER working paper, more government grant funding inevitably increases economic rents because of the inherent short-term limits on the supply of good talent. If the authors had stuck to presenting the evidence without its obvious and overplayed commercial message, this would have been a far better volume.


Shag from Brookline said...

Which discipline has the skills to provide a meaningful and objective cost/benefit analysis of this volume?

michael perelman said...

If by volume, you mean the book, the answer is obvious.
If by volume, you mean the immensity of the problem, one should put little faith in cost/benefit analysis.

Debra said...

Ah... the ugly.
I am currently reading Jacques Barzun's "encyclopedic" (yes, well, not like Wiki, like Diderot..) attempt to trace the ideas that are beacons for our current society.
This summer, in Glasgow, I stood in front of a life size statue of Adam Smith who, I think was rector of Glasgow's prestigious university while doing research on WHAT WOULD BE EVENTUALLY NAMED economics.
(For Adam Smith, it was still philosophy...)
In the Royal Gallery of art, there are one or two paintings by Monet, all excited about that newfangled locomotive arriving in a Paris train station, for example.
What could Monet think NOW if he took a bus trip from New York to Washington and saw the incredible UGLINESS that the locomotive paradigm has brought to us, courtesy of... the scientific method essentially ??
No wonder SOME of our Romantic forefathers were very UPSET, even allergic to the idea of the supreme good being "a better and more efficient world".
NOBODY SAID that to get the "better and more efficient world" we would have to put up with so much ugliness.
Disqualifying economics as hard science STILL permits us to cling desperately to our belief in the IDOL "science" as we have come to define it.

Debra said...

Oops, Freudian slip. Correct the "Royal" gallery above to read "The National Gallery" in London.

Sandwichman said...

Clawbacks? No. Gallows? Si!