Savitri Era of those who adore, Om Sri Aurobindo and The Mother.

Thursday, October 14, 2010

Boulding wondered if the flawless precision of mathematical economics would prove impotent

Free market economists work in the world of cleanonomics --- a frictionless world where the decentralized decisions of agents are coordinated seemlessly through the price mechanism.  The interventionist economists, and more realistic economists, on the other hand, deals with the messiness of the real world, the frictions in the world, which demonstrate how the price system cannot do its magic perfectly.  Thus, government can in fact improve upon the failures in the market.
The Diamond model on labor search and the matching problem in markets of course fits neatly into this caricature of economic thinking.  But where would Klein place Alchian's work prior to Diamond's on labor search?  Alchian's work fully embraces the frictions that exist in the real world, and attempts to show how market forces work to adjust behavior and evolve practices which ameliorate the messiness and lead to the coordination of plans.  The price system is important precisely because we are not perfect actors, and the world we live in is not perfect either.  Hayek, Buchanan, Coase, North, V. Smith, and L. Ostrom all practice their economics in the messy world of frictions and imperfections.  Yet they all demonstrated how behavior guided by property, prices and profit/loss would adjust and cope with our imperfections.
I often use a 2 x 2 matrix to communicate to students the different schools of thought in economics.  The rows reflect the problem situation we are find ourselves in (simple or complex), the columns reflect the outcome of our interactions (order or disorder).  
  • Neoclassical economics is found in the simple/order cell;
  • Keynesian and market failure theory is found in the complex/disorder cell;
  • Marxism and critics of economics are found in the simple/disorder cell.
  • What does that leave?  The complex/order cell and that is the intellectual home of the Classical economists such as Smith-Say, the Austrian school from Menger to Mises to Kirzner, and the New Institutional school of Alchian, Buchanan, Coase, Demsetz, North, Olson, Ostrom, Smith, Tullock and Williamson, etc.
The Austrians occupy a central place in this cell because they emphasize not only the cognitive limitations of man, but also the complications of uncertainty, time, and I think importantly modifications to our core understanding of money and capital.  Money is non-neutral, and the capital structure in an economy consists of combination of heterogeneous capital goods that multiple-specific uses.  Once these propositions are included in the analysis, along with other messy aspects of the real world, our understanding of market theory and the price system shifts drastically.  Nothing can be treated as given.  Everything must fall out of the analysis of exchange and production.  Economic analysis is about economic forces at work, not the analysis of situations after those forces have done their job.
The traditional perfect market versus market failure debate is stale --- the perfect market folks don't tell us how the story of the market unfolds, and the imperfect market folks stop the story short right when it is getting interesting.  Journalist can understand this simple characterization of economic ideas, but economists should know better.  Back in the late 1940s, Kenneth Boulding (John Bates Clark Medal winner in 1949) actually raised this issue in his review of Samuelson's Foundations in the JPE.  Boulding wondered if the flawless precision of mathematical economics would prove impotent in terms of dealing with the real world in comparison with the literary vagueness of classical economics and economic sociology.  Not many listened to Boulding, and instead of doing messynomics in the sense of complex/order cell, we got a stale debate between simple/order and complex/disorder. And it still is going on today.
This is not just an esoteric debate in economic method and methodology, it is a widely practical debate about the way markets actually work and the institutional environment that is either conducive to economic progress or inhibits economics progress.  One of the key issues is in the analysis of the cost of inflation.  If money is neutral, then the cost of inflation on society are widely different than if we understand the non-neutral aspect of money.  There are reasons to be concerned with inflation if money is merely a veil, but not to be acutely concerned.  But if money is non-neutral, inflation is extremely damaging to the economy through the distortions in the pattern of resource use it engenders.  And if the structure of production in the economy consists of heterogenous capital goods, each of which have multiple-specific uses, then the distortions to the pattern of resource use result in errors that are very costly to the economic system.  See Steve Horwitz's new paper on "Why Inflation Matters."
You don't need to call this "Austrian" economics, though Mises and Hayek did more than any other economists to get us to think about the messy implications of the world and how the market system and relative price adjustments guides us in copying with the imperfections of man and the world.  But I do think you have to say that "good economics" deals with the imperfections of man and the world in which men find themselves having to deal with one another.  It is the higgling and bargaining of the market as Smith said that is the stuff of our discipline.  Good economics occupies the complex/order cell, because good economics is about explicating the economic forces at work in society to match the most willing supplies and the most willing demanders so that they realize the gains from mutual exchange.  This matching is not simple even for the most basic of product --- you must always remember the I, Pencil story.  The matching within the market coordinates the diverse and often divergent plans of a multitude of individuals, the vast majority of whom are strangers to one another and never will be more than strangers, and who live and work in distant lands, speak different languages, worship differently, and yet somehow through the incentives of property, the information of prices, and the feedback of profit/loss accounting adjust their behavior to coordinate their activities with others through time so that goods and services consumers want are produced at the most cost effective way and delivered to the market.  Good economics should not just tell the final chapter of the story of economic life, and it should never cut the story short before it has had the chance to develop.  No, good economics is to be found in the unfolding story of economic life --- in those economic forces at work, in a world full of imperfections, in how the dynamic adjustments made by men result in a variety of coping mechanism for our ignorance and for the complexity of the world within which we find ourselves interacting with one another.  It is the messynomics of real world that is best explained by those occupying the intellectual space of complex/order.  Time we focused more on that, then the simplistic dichotomization between perfect markets and market failure.

Lori Z has left a new comment on your post "Neat People vs. Sloppy People": 
We need sloppy people in this world to make it a better place. It’s not so bad to be a sloppy person after all. Posted by Lori Z to Evergreen Essays at 7:44 AM, October 14, 2010

Without a doubt one of the biggest moves in animal studies these days is to talk about intersectionality. There are basically two ways this gets talked about: One is a discussion of the fact that the vegan/animal rights movement tends to be predominately white (my brother pointed this usage out to me when I was talking about this with him earlier). But the other way is to discuss the methods by which speciesism intersects with other oppressions. The classical example (perhaps the first example) would be Carol Adams' The Sexual Politics of Meat, which deals with the intersection of sexism and speciesism. And while interlocking oppressions (or, oppressions that are enmeshed but still discrete and semi-autonomous) are certainly important, intersectionality has traditionally carried with it a level of subjectivity that seems to be missing in these discussions. To clarify, when Crenshaw first developed the term (and the way it has been updated by Collins), intersectionality referred to a way that interlocking oppressions produced/shaped a subjectivity that exceeded the sum of those oppressions. So, the experience of a black could not be reduced to either the experiences of a white woman or a black man, or even those experiences combined. And while the term has developed a level of plasticity in the last two decades of its existence, in all the work deploying the term I am aware of, intersectionality continues to have a level of subjectivity to it. However, when most animal scholars are using the term, they are not saying that, for example, female animals have a unique intersection of oppression that is different from male animals or female humans (though this might be an interesting topic). What animal scholars are usually saying is that racism, sexism, classism, etc are bound up with speciesism. Now, I think that intersectionality is perhaps a confusing term to be using in these contexts, maybe even a misleading term. Maybe we need a different term, or if animal scholars are going to insist on using the term, at least they need to address the changes the term is undergoing in their work.

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