jamesz

Is economic theory inherently pro-market?

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I often get told that I must be a crazy free-marketeer because I’m an economist, as if there is something inherently pro-market about economic theory. So when I was reading an article in the JPE today it was refreshing to come across this:

The question whether – and why – markets may perform better than governments has fascinated economists for a long time, at least since the work of Hayek (1945). However, despite the importance of this question for economics and beyond, it is still hard to find formal arguments for why markets may be able to outperform a benevolent government. Instead, the benchmark result is still provided by standard welfare theorems according to which a benevolent government can always replicate the market outcome, or even improve upon it if the market is affected by failures such as adverse selection or externalities.

Now, it’s true that the article itself is about a set of circumstances in which markets always outperform the best governments — and the real world doesn’t always have the best — but it’s worth remembering that the core of economic theory is not at all the same thing as the political views of some of its practitioners.

Will Taylor

Quote of the Day: Nordhaus and Samuelson

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Regular readers of the blog will understand why I instantly thought of Matt Nolan when I read this quote:)

Economics cannot answer questions of how much poverty is acceptable and fair, but it can help design more effective programs to increase the incomes of the poor

Matt Nolan

Quote: From Keynes to Key

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A famous quote from Keynes:

When the facts change, I change my mind. What do you do, sir?

This is what John Key really needs to say about the “revelation” that he wouldn’t increase GST in 2008.

John Key now knows that increasing GST and reducing income tax is seen as a way to improve economic efficiency – so he is willing to do it.  When he said they wouldn’t do it, it was because the facts he was labouring under were different.

Criticising him on the basis of a speech in 2008, before the impact of the great financial crisis was clear, is petty – shame on the politicians, and other members of society, indulging themselves in this.

Matt Nolan

Quote 23: Daniel Little on Popper and meta-social theories

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Excellent quote (ht Economist’s View):

Popper’s critique of historicism, then, can be rephrased as a compelling critique of the model of the natural sciences as a meta-theory for the social and historical sciences. History and society are not law-governed systems for which we might eventually hope to find exact and comprehensive theories. Instead, they are the heterogeneous, plastic, and contingent compound of actions, structures, causal mechanisms, and conjunctures that elude systematization and prediction. And this conclusion brings us back to the centrality of agent-centered explanations of historical outcomes.

Agreed with this 100%.  Fundamentally, the usefulness associated with the study of economics comes from its framing and discussion of tendencies – not from the precise value of its predictions.

An understanding of individual actions and incentives allows us to describe what has happen and inform policy – but it does not give us a crystal ball with which to see the future, or figure out exactly what will maximise social happiness.

That is why we economists never seem to agree with each other.  But when we do agree, it is probably a good idea to listen, as there must be a rare combination of compelling factors driving such an unlikely event 😀

Note:  To clarify what I think the quote says that I’m agreeing with.  I believe it says that we can’t come up with some holistic model of society that will spit out nice predictions – we can only try to understand society through the behaviour of individuals given observed actions.  This sounds like methodological individualism to me …

Matt Nolan

Quote of the day: On subjective experience

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As we’ve said before, the first port of call for economists is trying to frame an issue as objectively as possible.  However, in a practical sense many economists can’t help jumping in and adding some conclusions along the way.

Now, I’m no philosopher so I find it handy to keep some rules of thumb in mind when trying to figure out what value judgments seem “reasonable” to me.

the frailty of life matters more when you are on the wrong side of it

(Unattributed as I can’t remember)

This quote makes me think of two important issues when I use value judgments to reach a conclusion:

  1. Value is subjective and built on experience, so how something makes a person feel and how it came to make feel that way does matter.
  2. My own values are subjective and built on experience, so I need to correct for my personal bias when I initially look at an issue.

This is something that some other analysts need to think about, especially when they make comments like:

Being drunk in a public place should be made illegal and fines should be given to those caught

Matt Nolan

Quote of the day: On NZ property investment

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From David Chaplin’s blog on the Herald site:

If New Zealanders have a love affair with property investments, it’s one where government and regulators have acted as pimp.

That is awesome – and very true.