The Moral of the Story

Man is a story-telling animal, and what matters most to humans, is the meaning of the story.

If you wonder why someone tells a particular story, it will generally be because that person is invested in the particular meaning that the story conveys. "The dog ate my homework," is valuable to the teller, for casting the teller of the tale, as blameless victim.

Economists tell tales, and, sometimes, they tell us why their favorite story is their favorite story.

Marginal Tax Rates & Effort

Reducing the marginal rate of income tax from 70% to as low as 15% for capital gains was going to release creativity and effort.  Consider this quoted from Bloomberg News (no link available). 

Wall Street firms’ soaring pay pushed traders to disregard risk and limited regulators’ ability to lure top talent to police banks, according to a panel probing the origins of the financial crisis. . . .
Stock-option bonuses motivated financial firms to use leverage to boost returns, and traders were given “aggressive incentives” to dissuade them from defecting, the Financial Crisis Inquiry Commission wrote in a 545-page book outlining its findings. Regulators had difficulty recruiting financial professionals, who could earn more working in the private sector, said the panel . . .

Pay at financial firms started to outpace other industries in 1980, when investment banks began converting from partnerships into publicly owned companies “trading with shareholders’ money,” the FCIC said. Total compensation at U.S. banks and securities firms had climbed to $137 billion by 2007.

. . .
Stock options and other incentives tied to a company’s performance encouraged risk-taking because gains for the employees were much greater than the workers’ potential losses, the FCIC said.
“These pay structures had the unintended consequence of creating incentives to increase both risk and leverage, which could lead to larger jumps in a company’s stock price,” the FCIC said in its report.

Should economic analysis have suggested the possibility of such perverse results?

I think, yes. 

Narrative and Logic, Meaning and Function

People love stories, and always want to know "what it means" -- it is in human nature to organize our experience and understanding in stories  -- stories, which compound judgment, cause and effect, intent and effort, into meaningful, sequential drama, drama that satisfies our emotional needs.

Scientific analysis, on the other hand, of the functioning of a system?  Interesting in its way, but not compelling in the manner of a dramatic narrative, though analysis has enormous practical implications, in the relation of science to technology, for engineering the means to actually do things, to control the processes of production.

This poses a problem for Economics, and for politics and society, in general.  What is the relation of meaningful story to functional analysis?

The problem of meaning and function -- or meaning v. function -- is an intellectual one for the science of economics, and also, a problem of epistemology: how does one "know" something, or discover something, about the world, about social reality, about how the world functions?

The problem of meaning and function is also a practical problem, because stories are a means to organize and motivate people, drama is a functional part of the social systems of political economy.

One might naively imagine that the critical question is,  Is the Story True?

Economical Ethics

Some things are just too easy. 

News that the American Economics Association is going to take up the possibility of adopting an ethics code.

The impetus is a documentary film, in which embarrassing interviews are shown with Glenn Hubbard and Frederic Mishkin.

David Rucio, at Real Economics Review, notes that Economics, unlike other academic professions, has no ethics code.

Believing that Economics is a deeply corrupt enterprise, I'm not the pious sort, who think an ethics code is likely to do much good, by itself.  It is heartening that at least some professional economists were disturbed to see the whorishness of some of their most esteemed colleagues on the silver screen, but I think developing an ethics code is likely to be a kind of distraction, a way to re-channel substantive concern about the damage done to the economy into a pious and self-serving concern about the damage done to the Profession.

So, here's my take, my teeny-tiny effort to get folks not to look away.

The scandal is not that some economists get paid.
The scandal is not that some economists get paid quite a lot of money.
The scandal is not that economists who get paid a lot of money like to obscure their association with certain institutions that pay them.

The core of the scandal is that (many) economists know very little about the economy and get paid a lot of money to make unfounded claims about the economy, anyway, as a means of impeding public understanding and responsible state action.

A large part of the profession our society assigns the task of understanding political economy has evolved a "body of knowledge" that consists largely of null results and excuses for ignorance.

One can be absolutely certain that the American Economic Association will focus on the purely ceremonial aspects, like ritual disclosure, and ignore the purveying of ignorance, lies and poisonous ideas.

(h/t to the Sandwichman for being the tipping point that got me to feel I ought to create a post on this, as futile as feels.  Like all blogging isn't futile.)

Supply and Demand

The iconic analysis of the economic textbook since the 19th century has been Marshall's Cross: the sloping supply and demand curves, intersecting to determine price and quantity sold, in a (metaphoric) market.

A witty geometrician might observe that the Economist has overturned Euclid, in drawing this familiar graph: instead of two points determining a line, two lines determine a point.  The joke is actually profoundly important: this economic analysis is overdetermined.  Whatever price and quantity transacted, there are always two available explanations:  supply and demand.

What one can actually observe is the price and quantity transacted.  The rest of the supply or demand curve is a counterfactual supposition: an act of imagination tempered by subjective assessments of plausibility.

The result is arguments between economists, over whose counterfactual is better.

Steve Keen

I haven't read Steve Keen's Debunking Economics, but, maybe I will, now that I am writing this blog.

Steve Keen is an Economist, and writes as an iconoclast and heretic, as much as a critic.  He advocates for the out-party Heterodox against the in-group, Orthodox.  It's a dispute I don't care about, to be honest.

Professor Keen does take seriously the fundamentals of economics, and especially the fundamentals as represented in the textbooks, particular the introductory, "Econ 101" textbooks.  That's where my critique and his may intersect, since many economic arguments in the public political discourse derive their intuition and authority from Econ 101.  The extent to which Econ 101 theory is faulty, or commonly misunderstood and misconstrued, is a real problem for the quality of the public discourse, as well as for Economics as a programme of academic research and teaching.

The simple fact that Economics can have a division between the "Orthodox" and the "Heterodox" may indicate that something is seriously wrong in the Academy.  No academic discipline can usefully admit dogma to its doctrine.  It may be useful, later, to explore a bit the epistemology of religion and science.

First Post: Purposes and Themes

I am not an economist, and really have no business writing a blog, where I pontificate on what is wrong with economics, but . . . here I am and here I blog, nevertheless.

I have great respect for the importance of economics as a subject of study and a guide to politics and policy.  Of the academic profession, I have more doubts.  I decided to write this blog, because I keep having ideas for posts that might fit on such a blog.  Maybe, the ideas will run out on me, now that I have a place to put them. 

I am going to try to maintain some reasonable standard of respect for the business of seriously considered economic ideas, and not be a complete philistine.  I intend to be a Critic, not a Crank.  It has been said that those, who cannot do, teach; and those, who will not teach, criticize.  That may well be true of me.