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Human Nature and the Moral Economy

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Economics is inextricably tied to moral behavior, though few economists will say that. It’s time someone did.

"Giving" by Nathaniel Gold

"Giving" by Nathaniel Gold

In every financial transaction–whether you’re selling a car, paying employees, or repackaging commodity futures as financial derivatives–there are ethical calculations that influence economic activity beyond the price. Sure, you can cheat a potential buyer and not mention that your 1996 Ford Mustang GT has a cracked engine block, in the same way that your boss can stiff you on overtime. If you get away with it you will succeed in making a short-term gain or see a bump in the next quarterly earnings report. But, if you eventually develop the reputation as someone who consistently defrauds the people you do business with, there is a good chance that the value of your net worth will be as negative as the moral values you embraced.

But why is it that businesses that are “too big to fail” don’t seem bound by the same moral economy as the rest of us? It turns out that anthropologists may have some insight, not only on this question, but also how we might integrate our economic and moral values that so often appear at odds. Researchers have found that the interconnection between economics and morality is seen most clearly in small communities where everybody knows each other, everyone has a free choice in who they deal with, and gossip can make or break reputations. This is even the case for societies that look very different from our own.

For example, in 2006 the anthropologist Joseph Henrich and colleagues published a study in the journal Science (pdf here) based on their analysis of 15 different societies ranging from American college students to urban wage workers in Ghana to semi-nomadic foragers in the Bolivian rainforest. By having each group conduct a series of economic games, the researchers found that there was a positive correlation between how much people punished cheaters and the amount of altruistic behavior in the society as a whole. What’s more, every society engaged in some form of costly punishment even though there was a great deal of variability between societies.

The researchers’ conclusion was that altruistic punishment emerged in our species through a process of gene-culture coevolution. In other words, human psychology is biologically predisposed to enforce a system of fairness, but how much we do so depends on the culture we see reflected around us. This result was later supported by another study in 2010 that developed a model explaining how even “selfish genes” could promote altruistic traits.

Recently I published an article at Voices on Society, the public relations hub for McKinsey & Company: a management consulting firm whose clientele have included many of the top corporations in the Fortune 500. The question I was asked to address for a readership in the financial services industry was what can anthropology tell us about the nature of giving? The answer I offered was simple: quite a lot.

Rather than a simplified form of market economics, as Adam Smith assumed, hunter-gatherer economies are typically structured around giving practices that can best be described as a system of philanthropic debt obligations. A common feature in most of these communities—ranging from the !Kung Bushmen of the Kalahari desert to the Oroqen reindeer peoples of Inner Mongolia—is that both food and material possessions are freely given to those who need them based on an informal system of social responsibility. In many tribal societies, for example, praising another person’s necklace or pig creates a moral duty to present the item as a gift, according to the University of London anthropologist David Graeber, author of the 2011 book Debt: The First 5,000 Years.

What is crucial for these gift economies, however, is that there is no expectation of direct reciprocity, a finding that challenges the core assumptions of classical economics. “As with so many actual small communities,” Graeber writes, “everyone simply keeps track of who owes what to whom.” There is no marketplace, no precise accounting, and, except under rare circumstances, no tallying of the relative value of a given item, or what its fair recompense would be. All members of the society usually owe something to someone else, a social network of gratitude that fosters their overall spirit of altruism.

These gift economies are well known in the anthropological literature, with Polish-born British anthropologist Bronisław Malinowski’s Argonauts of the Western Pacific (1922) and French sociologist Marcel Mauss’ The Gift (1925) being two of the classics (also see Colin Turnbull’s The Forest People). However, in addition to small-scale foragers or horticultural societies and those living in large industrial economies, there is considerable evidence that an innate sense of fairness exists in our closest primate relatives as well. Given that nonhuman apes also have cultural traditions it would not be surprising if a similar gene-culture coevolution was in operation, as may have been observed by primatologist Robert Sapolsky (pdf here) among one colony of baboons.

However, if it is the case that fairness and cooperation are intrinsic features of the human species (at least within groups) how can this information be used to promote a moral economy? This was the question posed by Yes! magazine for an article I wrote in April, 2013 called “Survival of the … Nicest?” Building off of the latest research by Michael Tomasello, co-director of the Max Planck Institute for Evolutionary Anthropology in Leipzig, Germany, I suggested that if the human adaptation for complex cultural traditions has been integral to human evolution there may be the potential for a bottom-up reshaping of our economic culture:

Humans, more than any other primate, developed psychological adaptations that allowed them to quickly recognize members of their own group (through unique behaviors, traditions, or forms of language) and develop a shared cultural identity in the pursuit of a common goal.

“The result,” says Tomasello, “was a new kind of interdependence and group-mindedness that went well beyond the joint intentionality of small-scale cooperation to a kind of collective intentionality at the level of the entire society.”

What does this mean for the different forms of business today? Corporate workplaces probably aren’t in sync with our evolutionary roots and may not be good for our long-term success as humans. Corporate culture imposes uniformity, mandated from the top down, throughout the organization. But the cooperative—the financial model in which a group of members owns a business and makes the rules about how to run it—is a modern institution that has much in common with the collective tribal heritage of our species. Worker-owned cooperatives are regionally distinct and organized around their constituent members. As a result, worker co-ops develop unique cultures that, following Tomasello’s theory, would be expected to better promote a shared identity among all members of the group. This shared identity could give rise to greater trust and collaboration without the need for centralized control.

There is some support for this idea in the work of Elinor Ostrom, 2009 recipient of the Sveriges Riksbank Prize in Economic Sciences (the Nobel Prize of Economics). In a posthumous paper published in the Journal of Bioeconomics, Ostrom, who died in June, 2012, reviewed the results of her research on farmer-managed versus agency-managed irrigation systems in Nepal that included dams, tunnels, and water diversion structures of varying complexity. What she found was that twice as many of the farmer-managed systems had a rating of “Excellent” for physical conditions, technical efficiency, as well as economic efficiency. In contrast, the agency managers–the Asian Development Bank, the World Bank, CARE, and the International Labor Organization–received a rating of “Poor” three times more often for physical conditions, five times more for technical efficiency, and eleven times more for economic efficiency.

Because the local farmers developed the rules themselves and planned the irrigation structure based on their own needs, the end result was a more stable and sustainable system despite the great diversity of approaches that different farmers would take. Ostrom found the same results [pdf here] when local villagers managed their own forest conservation efforts rather than European or US-based NGOs. This suggests that cultural diversity is not merely something to value for its own sake, it could lead to greater economic value overall.

One thing that is clear is that if a path exists towards a moral economy we are not on it. Social scientists are increasingly reaching the conclusion that economics is a field in disarray. Not only is the economic outcome so often in conflict with our most celebrated moral principles, leading economists can’t even agree on the core assumptions in their field. Despite the millions of dollars that go into economic think tanks and the construction of complicated financial models we can’t even come to a consensus on whether government spending helps or hurts an economy in recession.

Anthropologists study how people behave in the real world and, I believe, have something of value to offer our more serious-minded colleagues. Furthermore, our current knowledge about how humans evolved offers us a perspective on the kind of small-scale population structure that our species thrived in for 99% of our existence on this planet. We obviously can’t go back (at least not intentionally) but perhaps we can find a way to integrate this knowledge in order to create a flexible economy that encompasses both our human diversity and our shared morality. Since we now know that many of the assumptions about human nature that classical economics was based upon were either wrong or woefully incomplete, it is high time that other ideas be accepted around the table. With an economic system teetering on the edge of unprecedented inequality it would be immoral not to consider other options.

________________________________________________________________________________________

Update: A few economists have objected in the comment section to my statement that economics is a field in disarray. In 2009 the journal Nature published an article by economists J. Doyne Farmer and Duncan Foley in which they state that:

[E]conomic policy-makers are basing their decisions on common sense, and on anecdotal analogies to previous crises such as Japan’s ‘lost decade’ or the Great Depression. The leaders of the world are flying the economy by the seat of their pants.

This is hard for most non-economists to believe. Aren’t people on Wall Street using fancy mathematical models? Yes, but for a completely different purpose: modelling the potential profit and risk of individual trades. There is no attempt to assemble the pieces and understand the behaviour of the whole economic system.

Furthermore, in 2010, IMF economists Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro published a paper in the Journal of Money, Credit and Banking entitled “Rethinking Macroeconomic Policy” [pdf here]. In the following quote they are referring to the diversity of strategies taken by different countries following the economic crisis of 2008:

[T]he wide variety of approaches in terms of the measures undertaken has made it clear that there is a lot we do not know about the effects of fiscal policy, about the optimal composition of fiscal packages, about the use of spending increases versus tax decreases, and about the factors that underlie the sustainability of public debts, topics that had been less active areas of research before the crisis.

Eric Michael Johnson About the Author: Eric Michael Johnson has a Master's degree in Evolutionary Anthropology focusing on great ape behavioral ecology. He is currently a doctoral student in the history of science at University of British Columbia looking at the interplay between evolutionary biology and politics.

Follow his work on Facebook and Google+. Follow on Twitter @primatediaries.

The views expressed are those of the author and are not necessarily those of Scientific American.





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  1. 1. M Tucker 6:01 pm 09/23/2013

    “But why is it that businesses that are “too big to fail” don’t seem bound by the same moral economy as the rest of us?”

    Well, not to say that your analysis is wrong but my short answer is:
    “…if you eventually develop the reputation as someone who consistently defrauds the people you do business with, there is a good chance that the value of your net worth will be as negative as the moral values you embraced.”
    That DOES NOT apply to those “too big to fail” institutions. We are stuck with them and their immoral behavior. They are powerful enough to buy political support and avoid all regulations and penalties that might change that behavior.

    Link to this
  2. 2. Archimedes 6:30 pm 09/23/2013

    Thank you for the interesting, informative, and timely original article.
    The ancient Greek philosopher, Aristotle, extensively discusses ethics and morals, inclusive of that with regard to politics and economics, in many of his works which are considered the historical foundation for Western ethical and moral behavior and thought.

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  3. 3. Ralph Haygood 8:21 pm 09/23/2013

    I strongly agree with the main points of this post. Graeber’s “Debt” was among the most interesting and important (albeit also frustrating and unsatisfying) books I read last year, and anthropologist Christopher Boehm’s “Moral origins” is among the most interesting and important books I’ve read this year. Graeber’s book is more explicitly economical than Boehm’s, but both present anthropological findings with powerful implications for economic arrangements.

    As the science-fiction writer Kim Stanley Robinson put it awhile back, “[E]conomics is many things, sometimes a social science, but often mostly a name for explication and analysis of a legal system…which never challenges our current system’s basic rules and assumptions. So ‘economics’ is…an explication of capitalism, and as such it can be clarifying or obfuscatory, but it is never speculative or projective, in that it does not often propose really new systems. There are almost no worked-out alternative economic systems…the best current critiques of economics are coming out of sociology or anthropology or political science or law, not out of the field of economics itself.” (http://www.sfsite.com/06a/ksr369.htm)

    “Despite the millions of dollars that go into economic think tanks…we can’t even come to a consensus on whether government spending helps or hurts an economy in recession.” It isn’t despite but to a large extent *because* millions of dollars go into economic think tanks and the like that “economics is a field in disarray.” The peculiar problem of economics is that many people would like “scientific” affirmation of their economic prejudices, to claim that economic arrangements benefiting them are matters of necessity or that any alternative would be disastrous. Some of these people bankroll think tanks and oversee media organizations staffed by hacks who say what their superiors want to hear, never mind that it’s false. Even major universities are presumably not oblivious to the economic preferences of their major donors. It would be difficult for any discipline to withstand such widespread, well funded subversion, which has naturally become increasingly prevalent as wealth has become increasingly concentrated in this country. Imagine what would happen to biology if instead of one Discovery Institute, there were dozens, and rather than a few million dollars, many tens of millions were spent every year to promote “intelligent design” and its ilk.

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  4. 4. Jerzy v. 3.0. 9:27 am 09/24/2013

    Big corporations also have informal circles of friends helping each other, much like hunter-gatherers. The difference is that corporate CEOs don’t feel obliged to help outside their immediate circle.

    The solution might be encouraging punishment of unjust companies. Internet has a big role here and led to some firms compensating individual customers or introducing whole new unjust policies.

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  5. 5. ChrisAuld 2:02 pm 09/24/2013

    The editors at SA really need to stop accepting screeds about what’s wrong with economics written by people who so obviously know little or nothing about economic research.

    The interested reader might note, for example, that two of the three authors on the Nature paper on altruism Mr. Johnson extols as overturning economic thought are… economists.

    We are well-aware, thank you, that the assumptions on behavior in canonical models are unrealistic in many ways. You can find similar abstractions in every discipline studying the interaction of intentional agents, including ecology and evolutionary biology.

    The literature on the evolution of altruism has substantially benefited from both the importation of game theoretic methods from economics and the direct contributions of economists. This literature, contrary to the beliefs of SA contributors, is part of mainstream economic discourse, not a competing body of thought.

    Generally, economists study “how people behave in the real world.” Most economics is empirical. If Mr. Johnson and SA would like report on economics, a good first step would be actually learning a little about economic research. These hatchet jobs railing at a strawman version of economics misrepresent an entire discipline.

    Chris Auld
    Department of Economics
    University of Victoria

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  6. 6. EricMJohnson 2:26 pm 09/24/2013

    Thanks for the comment Chris. This is my personal blog and Scientific American has no editorial oversight, so you can level your criticisms at me alone. I respect your position, but it doesn’t appear you read my post very carefully before weighing in. First, I never linked to a Nature paper so I’m not sure what you’re referring to. But if your point is that some economists appreciate the importance of anthropology, I agree. We need more of that. Second, I also discussed the work of Elinor Ostrom who won the Nobel Prize in economics (or the equivalent) so I don’t believe I was writing a screed against economics as a whole. But I agree with those critics who believe that economics is a field in disarray for the reasons given (and which I also linked to).

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  7. 7. ChrisAuld 3:20 pm 09/24/2013

    Eric:

    The Nature paper I referred to is the one discussed in your linked 08/16/12 piece. Herb Gintis and Sam Bowles are economists.

    My point was not that “some economists appreciate the importance of anthropology.” My point was rather that much of the literature you draw on in an attempt to discredit economists is actually economics. You are referring to a body of literature spanning multiple disciplines.

    How would you know whether “economics is in a state of disarray”? Is that your opinion based on years of hard work getting up to speed on contemporary economic research? Or perhaps you’re just echoing someone else’s opinions sampled from very non-randomly selected sources? What you’re doing is analogous to visiting the blogs of climate change deniers, then repeating the arguments against mainstream climatology you find there, offering that you “agree climatology is in a state of disarray.”

    The blog you link supporting that opinion presents a radical and silly picture of the literature: behavioral economics is part of mainstream economics, not a competing paradigm. The notion that “few economists” think that morality is important in explaining behavior is unfounded. You’re making stuff up. As an applied econometrician, I find your insinuation that economists don’t “study the real world” particularly irksome.

    Finally, try this: go to Google Scholar. Search for “economics labor managed firm.” I get 274,000 hits. You can flip through page after page after page of studies written by economists on the topic you apparently believe we’ve ignored altogether.

    CA.

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  8. 8. marclevesque 5:45 pm 09/24/2013

    This is not an attempt to discredit economists

    Link to this
  9. 9. EricMJohnson 11:44 pm 09/24/2013

    Thank you for the link Marclevesque. It was a good read.

    Chris, this view of economics as a field in disarray is something that I have encountered time and again both in articles and among my colleagues in the sciences and social sciences. I can appreciate that it is surprising to you if this is the first time you’ve heard someone say it. But consider what economist and Nobel laureate Ronald Coase wrote last year in the Harvard Business Review: “This separation of economics from the working economy has severely damaged both the business community and the academic discipline. . . Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task.”

    Furthermore, Paul Krugman (hardly a lightweight himself on economic matters) wrote a lengthy critique of the field back in 2009 where he said “Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system.” The Chronicle of Higher Education had an excellent article talking about the controversies within economics as a field back in 2011. There are many more I could link to, but I think I’ve made my case.

    As to your second point, economics used to be closely connected to moral philosophy. It’s no accident that Adam Smith’s first book was The Theory of Moral Sentiments. But beginning in the late nineteenth century there was the development of a concept called Homo economicus, or “the Economic Man,” that assumed human economic behavior was strictly rational and utilitarian. This was a false assumption. We now know, thanks to work in neuroscience by Antonio Damasio and others, that there is no rational thought untethered from emotion. We are only able to make rational choices because we have a stronger emotional response for some over others. There are some economists who take this reality seriously (and in the Chronicle article I linked to it quotes several economists who are working to change the field) but, on average, economists have not appreciated how erroneous their assumptions are. I’m certainly not making this up.

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  10. 10. Phaeton 12:07 am 09/25/2013

    I live in interior Alaska. Two years were spent in Fort Yukon, no roads, population 600. Another year was spent in Birch Creek Village, no roads, population 30.
    Currently I live within 10 miles of Fairbanks, semi off the grid living on barter similar to village life.
    Sometimes a difficulty with city folks is I do not keep score. I know where everyone stands have never harassed any person for time spent between gifts.
    A difficulty with me is my inability to attach proper importance to paying electricity bills on time. No car, no plumbing, but I have grown accustomed to electricity.
    The “no money” system in the villages was far superior in quality of life. “Love of money is the root of all evil”? Maybe yes, maybe no, but stress and friction definitely were less without money.
    I did like the comment on gossip and status, those two items replace money as a social measure.

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  11. 11. ChrisAuld 4:13 pm 09/25/2013

    Eric:

    I regularly encounter criticism of economics along the lines you offer—there’s no shortage of it on the internet, for example, as illustrated by your quotes.

    My point is in part that your claim that you agree with such criticism is vacuous: you have no basis to decide whether such criticism is well-founded, you are just cherry-picking critical quotes about a discipline which you have not seriously studied. The article in the Chronicle you praise, for example, is truly awful: the evidence shows that only a tiny fraction of economists are “free market fundamentalists” (http://chrisauld.com/2011/10/15/myths-about-the-political-beliefs-of-economists/), and the journalist fails to mention that the critics quoted all happen to be members of the extremely tiny fringe of Marxist economists, who as you might guess are not exactly ideologically-neutral and well-informed observers.

    Again, economists are well-aware that the canonical narrowly self-interested rational choice model is falsified in many ways. All models of human behavior, and indeed all models much more generally, are also wrong. Some, as the saying goes, are nonetheless useful. In many contexts modeling social structures using homo economicus remains a good strategy—which assumptions a model should include depends on the mechanism the scientist wishes to shed light on.

    Contrary to your claim, however, mainstream economics journals are full of papers which study models including agents who are not homo economicus. This work includes models incorporating psychological phenomena, such as hyperbolic discounting and endowment effects, and a wide variety of models capturing various other-regarding behaviors, such as broadly-defined altruism, social norms, and peer effects.

    In my own field, health economics, we almost never use models in which material gain is the only goal considered, instead we consider models in which, simplifying somewhat, people must make tradeoffs between health and other goals.

    All of this research, involving canonically self-interested agents or otherwise, is intended to help us understand “how people behave in the real world.” Most economists, in fact, spend their research days using reams of data in an attempt to understand how social systems work in that “real world” place, and most do it because we would like to improve the human condition in addition to adding to scientific knowledge.

    CA.

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  12. 12. ChrisAuld 4:43 pm 09/25/2013

    PS: The article by Jim Stanford is, first, absolutely an explicit attempt to discredit economics. Second, it is not “a good read,” it’s deeply offensive, stupid, anti-scientific crap. Compare, for example, the evidence in the link in my post above to the claims Jim Stanford makes about the political beliefs of economists. Note that Stanford is not actually an economist at all—he’s a paid shill for the Canadian Auto Workers union. You might as well quote a “climatologist” who works for Exxon on the failings of mainstream climatology.

    Eric, you appear to credulously accept any and all criticism of economics you encounter. Is it wonder you’ve managed to formed a highly critical assessment of economics?

    CA.

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  13. 13. sault 6:27 pm 09/25/2013

    Here’s the deal. A physicist can make all kinds of models that ignore friction, air resistance and all manners of “inconvenient” factors that make for complications. As long as these factors are accounted for, the ideal model can be useful for some purposes, more or less. But if these simplifying assumptions are incorrect or are inadequate, the ideal model will consistently blow up in the physicist’s face. Repeated failures are a sure sign of trouble with a model.

    This is not possible with economics. Models cannot be reset multiple times and variables cannot be tested independently. In this way, certain factors can be misconstrued to show correlation or even causation when in fact, they might not have played a role at all or even drove the system in the opposite direction.

    For example, many people credit the economic policies of President Reagan for the economic turnaround of the 1980′s, but a casual glance at oil prices and the Federal Funds Rate in the years leading up to and during his presidency can explain most of the economic gains over the period in question. The strong belief by many economists that low taxes and lax regulation are what turned the economy around contributed to the financial crash of 2008 taking most of them by surprise, including the hard-core Ayn Rand acolyte Alan Greenspan himself. They also forget the huge government spending binge in the 1980′s that pumped up the economy somewhat while calling for reduced government spending right now.

    Another assumption by this crowd that is patently false is the belief that market participants are perfect, rational actors that have all the information necessary to make the best decisions available in order to maximize the “value” they gain from each transaction. Just looking at how successful some banks were at predatory lending or the terms of a “Payday” / title loan will quickly prove otherwise. The belief that market actors would regulate themselves for the good of the overall economy also went down in flames along with the housing market and Wall St. back in 2008.

    Overall, CERTAIN flavors of economics, like the ones coming from Austria or the Chicago School, have been proved wrong time and time again. Why we continue to give its disciples any more consideration is beyond me.

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  14. 14. EricMJohnson 9:54 pm 09/25/2013

    Thank you for your further clarification Chris. However, I simply can’t agree that the only way someone can critique a field of research is to have worked exclusively in that field. One could equally argue that working within a specific field makes you too close to see it clearly or that you have professional reasons not to. I have researched and written about economic questions a great deal over the years, both in its current as well as in its historical contexts. The internal tensions I referenced have emerged through that work. But this is hardly a sweeping indictment of economics as a whole. From what you write, it sounds like you’re engaged in some fascinating research and I’d be quite interested in reading it.

    Following what the commenter Sault wrote above, the dominant approach in economics has been off the rails for decades and has little relationship any longer with the world we live in. Consider the following exchange between Alan Greenspan, the longest serving Chairman in the Federal Reserve’s history, and Congressman Henry Waxman in October, 2008 during the House Oversight and Government Reform Committee hearing investigating the economic collapse:

    REP. WAXMAN: You found a flaw in the reality —
    MR. GREENSPAN: Flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak.
    REP. WAXMAN: In other words, you found that your view of the world, your ideology was not right. It was not working.
    MR. GREENSPAN: Precisely.

    I’m certain you already know about this. However, if this admission doesn’t suggest that economics is a field in disarray than I’m not sure what does. After all, Greenspan represented the dominant perspective in economics for thirty years. But this is not to say that all economists are painted with the same brush. That’s not what I wrote and it’s not what I believe.

    Thanks for a lively discussion.

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  15. 15. dburress 10:10 am 09/26/2013

    I like most of Johnson’s article, except when gets on his anti-economics hobby horse.
    I am a left-wing economist who is quite critical of much that goes on in the field. I agree with most of Krugman’s criticisms of the field, but I would also criticize some of Krugman’s ideas from the left. Nevertheless I do not find much to agree with in Johnson’s cliche-ridden critique, which could have been written 30 years ago. Johnson simply knows nothing about the actual scientific literature.
    As just one example, Johnson claims there there is no scientific consensus that stimulus works. He is simply and factually wrong. His supporting link pointed to political discussion in the popular press, not scientific literature. In the technical literature of those who actually study the impact of stimulus, there is overwhelming agreement that it has positive impacts. Even a survey of business economists, a fairly conservative crowd, found majority agreement that the impacts of the Obama stimulus were positive. Johnson mistakes the ranting of a noisy rightwing minority for absence of a scientific consensus. That is like claiming that a thousand signatures of more-or-less credentialed scientists denying climate change indicated absence of a consensus on global warming. Consensus is a property of active researchers, not a property of the field as whole, and certainly not a property of discussion in the popular press.

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  16. 16. EricMJohnson 3:20 pm 09/26/2013

    I’m pleased to see you enjoyed the majority of my post, dburress. I read your paper on distributive justice and it seems pretty clear where you stand on the issue of stimulus and fiscal policy. However, I have to disagree with you about the economic literature on this question overall. There is no clear consensus.

    Let me provide a few recent examples from the academic and policy literature demonstrating this point. I’ll focus just on the largest economic institution in the world: the International Monetary Fund. In 2010 IMF economists Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro published a paper in the Journal of Money, Credit and Banking entitled “Rethinking Macroeconomic Policy” [pdf here] in which they discuss how the economic crisis of 2008 forced them to rethink their basic assumptions on the fiscal and monetary recommendations offered by the IMF. They first note that “The rejection of discretionary fiscal policy as a countercyclical tool was particularly strong in academia.” That alone contradicts your statement. However, they then go on to describe how, in the wake of the financial crisis, different countries adopted a diversity of strategies to try and stabilize their economies and conclude with the following assertion:

    “[T]he wide variety of approaches in terms of the measures undertaken has made it clear that there is a lot we do not know about the effects of fiscal policy, about the optimal composition of fiscal packages, about the use of spending increases versus tax decreases, and about the factors that underlie the sustainability of public debts, topics that had been less active areas of research before the crisis.”

    This is further supported by a 2009 report by economist Mark Weisbrot and colleagues at the Center for Economic Policy and Research, a progressive economic policy think-tank, entitled “IMF‐Supported Macroeconomic Policies and the World Recession” [pdf here]. In their report they analyzed 41 agreements that the IMF made with different countries in which they find that 31 of the 41 agreements “contain pro-cyclical macroeconomic policies. These are either pro-cyclical fiscal or monetary policies – or in 15 cases, both – that, in the face of a significant slowdown in growth or in a recession, would be expected to exacerbate the downturn.” They go on to state the following:

    “But there has long been a double standard for low-and-middle income countries, in that Fund policy does not allow or encourage the same types of expansionary macroeconomic policies as it recommends for the high income countries.”

    Unless you maintain that economists employed by the IMF are outside of the mainstream, this discrepancy does not support your claim that there is “overwhelming agreement” on fiscal policy and that any disagreement is the mere “ranting of a noisy rightwing minority.” I wish that were the case. It would be much more comforting if the leading economic institution in the world actually knew what it was doing.

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  17. 17. Heteromeles 8:50 pm 09/26/2013

    Fascinating comment in the update:
    “[T]he wide variety of approaches in terms of the measures undertaken has made it clear that there is a lot we do not know about the effects of fiscal policy, about the optimal composition of fiscal packages, about the use of spending increases versus tax decreases, and about the factors that underlie the sustainability of public debts, topics that had been less active areas of research before the crisis.”

    Optimality criteria? One thing traditional societies do rather often is to hedge bets, rather than seek optimal returns. While optimizing is mathematically seductive (after all, it’s a simple derivative of a curve), in an uncertain world, it can kill you. One example (from Diamond’s recent The World Until Yesterday) is of farmers who simultaneously cultivate many fields miles apart, so that they spend most of the day walking. Most economists would say they’re idiots: they should focus their efforts on one field, rather than commuting. The problem is, up to half (or more) of their fields fail to produce a crop each year, for a variety of unpredictable reasons ranging from the vagaries of the rain to pests or disease. If the farmers focused their effort on the best field, in good years, they would reap a great surplus, but in the bad years (half the time) they would starve to death.

    I’d suggest that macroeconomics would benefit greatly from a massive dose of bet hedging theory. We’ve got enough computers that the math of bet hedging shouldn’t scare economists away. After all, if hunger can teach an illiterate peasant to hedge his bets to survive, it shouldn’t be impossible for a PhD to figure out something useful.

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  18. 18. ChrisAuld 8:07 pm 09/28/2013

    Eric:

    I see you’ve now amended your post with more cherry-picked quotes denouncing economics. It is disappointing you have reacted to my comments by digging your heels in deeper.

    All of your examples, in the addendum and otherwise, concern one narrow issue: macroeconomic fiscal policy. Perhaps you are unaware that there is anything in economics other than macroeconomics. It’s actually just one one field among many. Yes, there is a lot we don’t know, in general and particularly about macro, since macro is by far the most challenging field of economics. But: show me an active scientific discipline and I’ll show you a discipline where there is lots we don’t know. The only difference is most discipline’s internal disputes are not echoed in the pages of the NYT.

    Suppose you were to walk across campus and visit UBC’s excellent economics department. You would discover that it is not what you imagine. There are no Austrian nor “Chicago school” economists at UBC, for example, nor are there any at any other university in Canada (and vanishingly few elsewhere). Alan Greenspan did not “represent the dominant perspective in economics for thirty years,” even on narrow macroeconomic issues. There is nothing in mainstream economics based on Ayn Rand, and Greenspan is not and never was a research economist. The “ideology” to which Greenspan refers in your quote is shared by perhaps 2% of economists, as we’ve seen, so it is not clear why you’re accusing the discipline as a whole of sharing Greenspan’s political philosophy.

    You would also discover that, in fact, economists do not believe that “market participants are perfect, rational actors that have all the information necessary to make the best decisions.” Sometimes, much like every other quantitative scientist, economists do make unrealistic technical assumptions in mathematical models. But there is a vast gulf between believing a false assumption is useful as part of a modeling strategy and believing that the assumption is literally true. No one believes that people are perfectly rational and fully-informed.

    You would further find that such assumptions are also routinely relaxed in mainstream economic research. Much of the last 40 years of theory has been spent investigating the effects of uncertainty and irrational behavior, for example.

    The economists you’re attacking are made of straw.

    CA.

    Link to this
  19. 19. marclevesque 6:11 pm 09/29/2013

    “Economics has a long history of engagement on important public policy issues, and its early history was driven in large part by the desire to answer important public policy questions. However, ties between academic economists and the public, the press, policymakers, and economists in business and government have declined in recent decades. This has reduced the quality of the public dialogue on important policy issues and this, in turn, has made it easier for groups with a political agenda to use false and misleading claims to influence policy in their favor. In addition, as the ties between academic economists and the practitioners who use the models and techniques they produce have diminished, the questions economists ask have drifted away from the questions of most interest to society. Fortunately, however, the “Great Disconnect” with the non-academic community is being reversed with the development of new information technology. Economics blogs in particular have played a key role in turning things around.[...]”

    http://publicsphere.ssrc.org/thoma-new-forms-of-communication-and-the-public-mission-of-economics/

    Link to this
  20. 20. nosneaky 11:17 am 11/4/2013

    See Knack and Keefer 1997 “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation” Quarterly Journal of Economics.

    Link to this

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