Wednesday, January 11, 2012

Economics and Fracture

On the plane back from Chicago I started reading Age of Fracture, the new book by Dan Rodgers on US intellectual history since the 1960s.  I had high hopes, since Atlantic Crossings, his earlier work on the origins of Progressive-era American policy activism in European (mostly German) reform, was a fantastic read.  And, to be honest, Rodgers kept me engaged on a redeye to Copenhagen, a layover, and a second leg to Amsterdam.  You can measure a book’s readability that way.

All the same, I felt misgivings on several fronts:

First, his writing doesn’t sparkle this time out.  Crossings was largely fashioned around short biographies, and Rodgers has a remarkable ability to capture what is interesting and meaningful about someone’s life from just a few well-chosen details.  It takes a very different sort of writer to make intellectual history come alive, and Rodgers ain’t it.  Most of the book is excessively abstract and lacks the telling examples—compelling connections to lived experience---that bring theoretical disputes to life.

Second, as many critics have already pointed out, there is too much description and not enough investigation in this book.  We want to know why some ideas triumphed and others slunk away in defeat.  Perhaps it is too soon to speculate intelligently about such things, but simply heaping one author’s argument on top of another’s is unsatisfying.

Third, I could not find any basis for Rodger’s selection of which authors or media to include.  The upsurge of evolutionary thinking is barely mentioned, for instance (a passing reference to E. O. Wilson notwithstanding), nor do film or music get their due.  In the end, Rodgers’ case rests on his gut sense that the patterns he sees were the ones that mattered most, and either you share this sense or you don’t.

Above all, and the reason I am posting my reactions on this blog, Rodgers largely misses the boat on economics.  That’s important not just because it’s my bailiwick, but because he argues that changes in economics and economic thinking were central to the process he describes.  I’ll give three examples.

(1) The so-called Coase Theorem.  (It is so-called because Coase himself thought its main function was to explain why most of the thorny externality problems that end up in the courtroom are too burdened with transaction costs to permit a negotiated solution.)  It is true that the textbook version of the theorem puts utilitarian considerations—aggregate wealth maximization—above matters of distribution and social justice, as Rodgers claims, but he misses the important point that distribution returns through the back door in more complete expositions of the model.  This is due to incentive effects (whether instigators or targets of externalities will moderate or intensify their behaviors in repeated game contexts) and behavioral factors like status quo bias (willingness to pay versus willingness to accept).  The crude, distribution-blind version of the theorem owes more to ideology than economic reasoning, and this matters since Rodgers wants to hold up Coase as a key example of the shift to asocial intellectual trends.

(2) Rational expectations.  Rodgers’ take on RE is a muddle.  He wants to say that RE annihilates the role of time, and this fits into a larger denigration of history, but his argument rests on a misunderstanding.  Indeed, you could say that purely adaptive expectations are time-denying as well, since they do not allow agents to reason from more than a trivial slice of historical evidence.  The real problem with RE is that it rests on a mathematic convenience that cannot be defended on substantive grounds: the assumption that a “rational” expectation is one that generates unbiased predictions of the outcomes that actually occur.  That is an error of teleology, but not of the other sins Rodgers ascribes to it.

(3) Game theory.  It is absolutely true, as Rodgers claims, that game-theoretic reasoning washed over economics and other social sciences during the period under consideration.  Did this constitute society-denying fragmentation?  It really depends on which games you look at and how you analyze them.  You could certainly argue that the movement from anonymous, one-shot, underspecified market behavior—the staple of pre-1980 or so supply and demand analysis—to repeated games with rules and reputation effects made economics at least potentially more socially aware.  My take on the period Rodgers discusses is that (some) economists made a heroic effort to ground complex social dynamics that have the look and feel of real life in choice-theoretic models.  We don’t see this as clearly as we should because, outside this specialist literature, economists doing other things continued to make the old assumptions of anonymity, one shot interaction, etc.  That gets casual observers off the hook, but intellectual historians have to meet higher standards.  (And how did his late-century canon exclude The Evolution of Cooperation?)

Overall, I suspect Rodgers is handicapped by not bringing a quantitative background to his subject.  Formal modeling and statistical reasoning have played an ever-expanding role in intellectual life.  The notion that systems that take a physical form, like economies, ecological networks and technological apparatuses, can be modeled and controlled entirely as bundles of information has revolutionized our world (not always for the better).  Our ability to measure and represent symbolically collective phenomena (like markets) at the level of their individual elements has exploded, and it is inevitable that we will demand intellectual frameworks that rest on more detailed units of observation.  Whether these increasingly disaggregated modes of understanding also lead to conceptions of timeless, asocial human atoms is a product of ideology, not disaggregation as such.


Barkley Rosser said...

The problem with ratex is not that it is just mathematically convenient. It is that it is empirically false. Lab experiments and many other pieces of evidence make it clear that people do not have rational expectations. Even one of its godfathers, recent Nobelist Tom Sargent recognizes this and says real people use adaptive expectations, even if he thinks that with learning there may be some convergence to ratex.

I would say that also the acceptance or ratex had a strong ideological component as well. After all, in its initial incarnation due to Lucas on the monetary policy side and Barro on the fiscal policy side, it supposedly showed that discretionary macro policy was impossible. So, laissez-faire all the way, baby!

Peter Dorman said...

Barkley, I agree entirely, but my objective was to question Rodgers' argument that ratex could be viewed as a dismissal of the role of history. What I should have said, to be clearer, is that ratex doesn't eliminate the past; it's an attempt to eliminate the future (fold it stochastically into the present). Rodgers doesn't take a position on whether ratex is right or wrong, and in criticizing him neither do I -- but the disconfirmation of the theory is in fact a matter of record.