Economics imperialism and its discontents

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Flyer for George Stigler’s 1984 lecture, ‘Economics – the Imperial Science’. Reproduced in: E. Nik-Khan and R. Van Horn (2012) ‘Inland empire: economics imperialism as an imperative of Chicago neoliberalism.’ Journal of Economic Methodology 19(3): 259-282.

In his widely-read blog, Noah Smith has a post today entitled, rather bluntly, “A new age of econ imperialism is coming.”

While not quite as triumphal as the title makes out, the thrust of his post is plain enough: economics will continue to try and invade and occupy the other social sciences.

Much of the discussion about econ methods these days revolves around the “credibility revolution”, and the broader rise of empirics in general. Despite scattered protests from various quarters of the discipline, there looks to be no stopping the transformation of econ into an empirical, evidence-based field.

But the shift isn’t just healthy – it’s also a golden opportunity for economists to do what social scientists love best, which is to go on a giant raid and conquer the other social sciences! The new empiricism is the amphibious assault ship that will carry hordes of Econquerors (heh) to the vulnerable shores of sociology.

 

Leaving aside Smith’s colourful and amusing language, there seems little doubt that he is expressing a pretty common trope in the attitudes of many economists towards the other social sciences. This is the view that economics, equipped with superior tools of mathematical and empirical analysis, is simply better than the social sciences it might supplant. Continue reading

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$7 billion of neoliberalism

The Stationers' Company mark

The Stationers’ Company: an early example of government cultural policy. Image: Wikipedia.

Australian economist Jason Potts has restarted an important debate about cultural policy in this country with an article entitled “You’ve got $7 billion – so how will you fund the arts?“. I just wish he hadn’t analysed Australian cultural policy from the sort of instrumentalist, neoliberal position we find so familiar in many other spheres of policy debate.

I’ll say right up the top that I’m a fan of Potts’ work, and think him a pretty clever fellow. His work on evolutionary economics is in its own way quite heterodox, and a far cry from the sort of automatic and reflexive market worship we often associate with both the RMIT Economics school, and the Institute for Public Affairs, which he is apparently doing some work with.

On the other hand, his op-ed in The Conversation on cultural policy  is not one of his more perspicacious efforts. Justin O’Connor has already written a useful response, but I thought I’d add a few points of my own, set forth below.

Let’s start by setting forward Potts’ argument. Then we’ll move on to a critique.

Last year the Australian Bureau of Statistics did the maths – government spends about A$7 billion annually in Australia on arts and culture. The exact dollar figure varies depending on what we count, but it includes heritage, broadcasting and botanical gardens, along with all the usual suspects: performing arts, literature, film, visual arts, and so on.

This is apples, oranges and all sorts of random fruit.  “Heritage” funding, for instance, includes such things as war memorials, botanical gardens, zoos and some national parks expenditure. That’s a pretty different sort of thing to grants to game design companies or tax incentives to Hollywood movie studios. Does it actually make sense to treat all of these things as the same sort of expenditure?

Anyway, moving on:

To make this exercise fun, let’s suppose that no political horse-trading was involved in reaching this figure. Let’s assume this figure is the result of disinterested economic calculation of the size of the positive externality in the production of a public good, all wrapped in willingness-to-pay studies, and tied with a big bright cost-benefit ribbon.

So what’s next?

Do we put away our box of shiny economic tools and turn to grubby political compromise to allocate the exact market-failure correcting amount of public funding?

In Australia, as in Europe, this is more or less what we do. Economics to justify an economically efficient level of spending – and politics to implement it.

Really? Last time I looked, in most nation-states, including most democracies, politics is almost always the over-riding factor in the way  budget priorities are set. Sure, politicians and lobbyists and ordinary citizens use economic arguments to make the case for this spending increase or that tax cut. But the process is always and by definition political. On the really big picture stuff, economics arguably can’t really help us. For instance, how much should Australia invest in national defence, or climate change mitigation? The answer depends on inherently political judgments, such as whether you think global warming is real, or the likelihood of a major war.

Indeed, ‘economic efficiency’ is itself an inherently political argument, because it applies a very particular set of assumptions to public policy — namely that Pareto efficiency can actually hold in the first place. In markets in which there is imperfect information — and cultural markets are amongst the most opaque of all — Pareto efficiency may well be impossible. Potts knows this, which is why his quip about the “exact market-failure correcting amount of public funding” strikes me as disingenuous.

So let’s get to the guts of Potts’ argument:

… modern economics suggests that it would be better if we turned the process upside down. Let politicians determine the level of funding in a given area – and let economists determine the allocation.

Why? The political model of funding allocation is very bad at creating – or even recognising – new knowledge. In fact, political allocation mechanisms cause incentives that reward lobbying and punish experimental or innovative thinking.

Only by weakening those incentives can arts and cultural funding seek to be more than a rearguard preservation exercise or sinecure for vested interests.

I suppose it’s something of ad hominem attack to point this out, but it’s just a tad ironic that the person making this argument is a Federation Fellow of a publicly funded Australian university. A person writing for a website, by the way, also funded by universities and the government, using a medium — the internet — that was created almost exclusively by public investment in research.

“Political allocation mechanisms”, by which I think Potts means governments making budget decisions, certainly create incentives that reward lobbying. Then again, so do market mechanisms. Markets require the state to provide a level playing field via such basic institutions as property rights, police forces and courts of law. All of these create incentives for vested interests to plead their cause.

This is no trivial point, by the way: the cultural industries are completely dependent on intellectual property rights such as copyright and patents. The very fact that many cultural goods are non-rivalrous and non-excludable creates huge incentives for content industries to lobby governments to create and strengthen IP regulations — as has been well documented by researchers such as Lessig. When property rights become unenforceable, digital goods become a whole lot less valuable. Anyway, Potts’ claim was that public spending creates lobbying, which is bad. On this analysis, many of the cherished market mechanisms of the cultural industries must also be bad, because they were created via lobbying.

This points to a further naievete: the implicit belief that cultural goods and services are just like any other industrial product.

Even a moment’s reflection shows us this isn’t true. The products of cultural industries are not like any old widget or commodity: they are not even really the same thing as an iPhone or an operating system. Cultural industries produce symbols, and symbols are powerful (or at least highly influential). An aluminium ingot or a wind turbine cannot affect the democratic judgment or voting intentions of millions of citizens. A newspaper empire or television network can.

It doesn’t really matter whether you think that the power of media companies to swing elections is illusory. The history of modern media policy tells us that governments certainly do think symbols are powerful. Media has generally often been heavily regulated, sometimes on the grounds of public interest, but more commonly for naked reasons of political expediency. Even in the US, with its famous First Amendment, successive Washington administrations have had no qualms about controlling spectrum, imposing stringent copyright regulations, and spying extensively on their citizens’ communications. Hosni Mubarak turned off the internet in Egypt for a reason. Whether it’s internet filters or the Stationers Company, the political nature of cultural industries means they can’t be divorced from questions of power.

This curious ignorance of the symbolic reality of culture is often found amongst unsophisticated approaches to cultural economics — much as economics as taught in the modern university tends to ignore key aspects of sociology. As a result, when economists issue prescriptions for cultural policy, they tend to propose cures that are far worse than the supposed disease.

Perhaps this is why Potts misconstrues key facts about real-life cultural policy. For instance, he seems to think arts funding is about “inputs, not outputs”, when in fact nearly all Australian government arts grants are legal contracts specifying outcomes, allowing the government to recoup the funding if not properly acquitted. He also equates prizes as some sort of gold standard of outcome, which is strange because prize committees show exactly the sort of “bullshit” he decries in grant panels.

Similarly, when he argues for “tax credits to anyone – private citizen, corporation, foundation or NGO alike – for spending on arts and culture”, he seems to imply these don’t currently exist. In fact, they do. An individual donating to a DGR-status cultural organisation already receives a tax credit, while a non-profit NGO or foundation already pays no tax beyond the GST.

Austerity and the social construction of economic knowledge

In a rich and wonderfully detailed 2011 article for the American Journal of Sociology, Donald Mackenzie lays out a case for “The Credit Crisis as a Problem in the Sociology of Knowledge.”

The global financial crisis, Mackenzie argues, was partly the result of particular and contingent “knowledge-generating arrangements”, which allowed the wildly mis-allocated risks of the US mortgage securities industry to accumulate and eventually implode. Research for the paper included detailed interviews with 87 financial market participants. Continue reading

Responding to Steve Kates: more zombie shuffles

RMIT economics lecturer and weird Australian defender of the Romney 47%-thesis Steve Kates has a new blog up called Law of Markets, which is unsurprisingly devoted to Kates’ laissez faire economics and far-right political opinions.

You might recall that I wrote a post a few years back entitled “Don’t study economics at RMIT”, a rather tongue-in-cheek critique of Kates’ baroque views about economics, and the apparent concentration of libertarian economists at that institution.

The original post was in reaction to an op-ed by Kates in the Australian Financial Review, in which he argued that Labor government’s 2009 stimulus package was crowding out private business activity, and therefore causing inflation:

The RBA is continuing to raise rates because the government is taking up domestic savings more rapidly than we are able to generate those savings through productive activity.

In this economy at this time it is the government that is the single most important cause of rising rates. The RBA is only doing what it can to ensure the resources available for investment are properly priced.

As I argued in my original post, Kates’ ideas are highly neoclassical. Dr Kates is a well-known proponent arguing for the resurrection of Say’s Law, a largely discredited economic theory that suggests that demand and supply, by definition, are essentially always in equilibrium.

I criticised it at the time by pointing out that:

One of the implications of Say’s Law is the crowding-out theory of investment, namely, that government investment necessarily diverts the investment in productive capacity of an economy away from private firms. This is why Kates argues that “it is the government that is absorbing our national savings and raising the cost of capital.”

I further argued that there didn’t seem to be much evidence that the government was raising the cost of capital. I pointed out that the government was largely borrowing foreign money through sovereign bond issues, and that Australian firms were having no problems getting access to foreign capital via their own bond issues. So we should expect inflation and therefore interest rates to stay low.

So let’s just fast-forward and ask ourselves: has government stimulus in Australia crowded out private savings and raised the cost of capital?

No. Since Kates’ article, and since my response, Australian inflation has stayed remarkably contained, and interest rates have been lowered, not raised.

But how does Kates react to this reality? By denying it.

Here is his argument:

For me, schooled in the classics as I am, it was as obvious as a cloudless day that the stimulus could never achieve its ends. For virtually the rest of the profession it was not. Why the difference? I base my understanding on the classical theory of the cycle; they base their understanding on Keynes. That’s it. Nothing else.

Kates is so reflexively anti-Keynes that he simply can’t admit that a) stimulus can stimulate, and b) austerity can contract. This means he keeps getting things wrong. In 2010, for instance, he thought stimulus must lead to higher inflation and interest rates. Of course, it didn’t. Now, he believes that austerity is not really contractionary. Of course, it is.

It would be pretty funny, really, if it wasn’t so serious. Basic textbook IS-LM has been remarkably predictive in the current crisis. Pre-Keynesian neoclassical theory has been remarkably useless.

I tried to respond to Kates’ blog post, by the way. He binned my comment in moderation. Classy.