The Case for Meta-economics Pt. 3: Relationship between Popular Economics and Professional Economics

While there is a good deal of debate about whether economics or for that matter any of the social sciences, are truly sciences, professional economics both within the academy and outside the academy is different from what might be called “folk theories” of economics.  In philosophy of mind, “folk theories of mind” are how ordinary people experience their own minds and their theories about the minds of other people.  A “folk theory” is distinguished from a scientific theory of the brain or consciousness.  While the notion of a “folk theory” is slightly patronizing, the distinction between folk and scientific theories is critical for the study of the human mind/brain because the experience of having a mind or cultural or personal self-reflection on the experience of having a mind is different than studying the mind/brain as a scientist;  “folk theories” are just as important, if not more important than scientific theories when dealing with human experience.

What I am calling “popular economics” is the broad range of ideas about economics, “folk theories”, that are not part of the sanctioned core of professional economics, as diverse and conflictual as that body of knowledge might be.  As in “folk theories” of the mind, popular economics is for the most part the practical, “business end” of economics, as much as that may dismay professional and academic economists.

In practice, people in the economy are using what they believe to be their own or someone else’s economic wisdom to make decisions and act millions of times a day, around the world.  While the practical disciplines of accounting and the some of the basic tools of corporate and public finance are fairly well systematized/controlled and not necessarily professional economics, there exists a broad range of thinking and acting about the economy inside and outside of businesses and government that is informed by personal theories about how the economy works, without the legally binding controls associated with accountancy and the “boring” part of corporate and public finance.  These personal theories are sometimes in dialogue with but not identical with the body of work recognized as professional or academic economics but there are also some truly “folk” economic theories that arise from people’s experience and which bear only tangential relationship to the professional variety.  For instance, a businessman might act according to the principle “give people a good deal and great service, and they will come back for more”.  This might not accord with what his accountant is telling him or what a professional economist might tell him but this is one of millions of potential popular or folk economic theories.

As with popular vs. scientific theories of mind, popular economics can never be replaced by professional economics for a number of reasons:

  1. Much of what is produced in professional economics is hard to understand without at least an undergraduate if not a graduate education in economics; perhaps this is a sign of weakness in professional economics but it may also be that there are some concepts that require abstract reasoning and mathematical understanding which is not a strength for many people.
  2. People are always going to have slightly different perspectives on certain economic phenomena that are not easily reducible to the rules of, for instance, accounting, which has a system of controls in it to make sure that the rules are followed (when these controls do not fail).  The dynamism of society has a lot to do with the ability of the human mind to take different perspectives on physical and social reality, which itself is also dynamic and changing beyond our ability to completely grasp what is going on.  So popular economics has a dynamism that perhaps is not completely compatible with a rigidly organized body of knowledge.
  3. Thirdly, and this is more of a flaw than a feature of professional economics, economic theories have had both acknowledged and unacknowledged flaws that make them less useful than they might be otherwise.  So popular economics, in addition to accounting and uncontroversial parts of corporate and public finance, have had to step into the breach to make practical rules where the major economic frameworks have nothing to say.

Economists and social scientists have also been interested to understand how the formal study of economics effects both views of the economy and views of society and human nature, i.e. how popular economics and the study of professional economics interact.  There have been studies that correlate the undergraduate study of economics with more stereotypically self-interested behavior in the game called the prisoner’s dilemma.  A recent study by the New York Federal Reserve of graduate and undergraduate economics students, (referenced by James Kwak on Baseline Scenario also with interesting comments by readers there) shows that undergraduate study of economics in the US  correlates with subscribing to a schematic endorsement of stereotypically neoclassical economic views on economics that are now associated with the political Right.  The same study found that graduate study is correlated with more nuanced and less Right-leaning views of some but not all of these issues.     Formally, the views of the latter must be considered part of professional economics.

Politics, Policymakers, and Popular Economics

One massively important subsection of popular economics is the relationship of politics and economics.  Like it or not, how governments act effects the economy enormously but these actors are not transmitting and instituting the exact dictates of a scientific consensus in the admittedly fractious discipline of economics.  The original name for economics in the 18th and 19th Centuries was political economy and some professional economists and academic institutions continue to use this name as a reminder of the importance of the relationship between politics in governments and economics.  There are three main types of popular economics as it relates to politics:  the personal theories and preferences of political leaders as regards economics, the theory of the economy embedded in standing laws and in policy proposals, and voters’/citizens’ views of economics as it relates to politics.   Professional economists can be employed by governments, political pressure groups, and political parties but these will often be selected to mesh with the general concerns of that group.   In this way, the popular economic “tail” can wag the professional economic “dog”.

In the United States as well as a number of other developed nations, popular economics as it relates to politics can be divided into two basic tendencies:  those who believe that the government should intervene in the economy in favor of interests of the less powerful and the non-human environment and those who believe the government should not intervene much at all in a redistributive or protective way in the functioning of the domestic economy.  Generally the probability of one individual or another holding one or the other of these popular economic theories are based on that individuals’ perceptions of their life experiences and/or their perceptions of how they, their families and their friends might best gain from different economic policy regimes.

While these two main political tendencies are related to how policymakers might make actual policy, their views are still a more complex blend of professed loyalty and their own actual personal/popular economics in practice.  A policymaker can profess to subscribe to one or the other of general popular economic theories in order to win votes and get elected while, in office, proposing and voting on legislation that in some ways contradicts those professed views.  For instance a policymaker can claim to believe that government is for protecting the less fortunate and the environment but in actual fact tend to support bills and executive orders that for the most part serve the interests of the already rich and powerful.  Currently disappointed left of center critics of the Obama Administration believe that this last characterizes many of his initiatives to date.   Or another policymaker can profess to believe that government should not intervene in the private sector and should become smaller as an institution but end up in practice intervening in the private economy (perhaps in favor of established business interests) and expand government in other ways.  Professed libertarians and those on the conservative Right who would like to disown the policies and politics of the 2001-2009 Bush Administration hold the latter view of that Administration.

Crises and unforeseen events can further complicate how economic policy is made.  A government executive or ruling party has a particular set of economic preferences which will interact with the news from a crisis in distinct ways.  Selected professional economists will help interpret that crisis which may help justify the already mentioned “disappointments” of expectation of that might occur within the term of an office holder.  The policymaker may point to the professional economists as “bad cops” which are forcing his or her hand to disappoint the political base of the party.  The selection of these professional economists or pundits will itself help pre-condition this turn of events.

Popular Economics and Policy:  The Case of Former Senator and Deficit Commission Chair Alan Simpson

In the last few days, the video below of former Senator Alan Simpson (Republican) of Wyoming has been posted with commentary on a number of sites.  President Obama appointed Simpson as one of two chairs of the National Commission on Fiscal Responsibility and Reform (a.k.a. “Deficit Commission”).  While Simpson is not formally a policymaker anymore, he has arrived at a position of probably even greater power and less accountability in being named to the Deficit Commission by Obama than he had as a sitting Senator.

In viewing this video, you will note that there is real difference of economic opinion between Simpson and the interviewer, Alex Lawson of the Social Security advocacy organization Social Security Works.   Neither Lawson nor Simpson are professional economists and they both show signs of having very different popular economic views of at least the state of Social Security if not some other issues related to the expenditure of government money.  Simpson, in a position of a great deal of influence, seems to have some interesting ideas about how revenue collection for the Social Security system works and, beyond his generally irascible self-presentation, makes statements that are under dispute by a number of commentators:

  1. He claims that Social Security planners had not already anticipated the baby boom retirees (they had but the funds collected had been misappropriated)
  2. He claims that they had not already anticipated our current life expectancies (they had)
  3. He wishes to look away from the three main reasons why the Social Security fund will reach a point in 2037 in which might require cuts without new revenue (tax cuts mostly benefiting the wealthy, unit costs of health care in the US vs. other industrialized nations, and war spending)
  4. He claims that he wants to maintain solvency of Social Security and the government without referring to new or restored revenue sources
  5. The solution he seems to favor involves cutting Social Security and Medicare benefits (he doesn’t mention any others)

Some of these claims are poorly substantiated, partial to solution favoring the wealthy over the “lesser people” (Simpson quote), and assume an unbelievable incompetence among government demographers and economists for at least four decades.  But whatever their basis in facts or the type of opinions he favors, Simpson is definitely not held to any scientific or academic standards of source verification (which are not guarantees either) or consistency: his assertions are definitely a form of popular economics.   He might be able to find some professional economists to support his view but that doesn’t, for the purposes of establishing the importance of popular economic views in politics, negate the fact that his is a popular economics.

His interviewer in the video, as well as the critics of Simpson’s views have different conceptions of what is right for the economy and do not see cutting Social Security as an inevitability as Simpson seems to feel.  One could say that Lawson’s implied solutions in his questioning are another set of popular economic views with perhaps more or less grounding in data but also with no doubt a different perspective on the distribution of economic benefits and costs in society.  Some of these critics are professional economists like Paul Krugman and Dean Baker, who would no doubt be joined by others.

While selecting Simpson’s views so openly displayed in such an unvarnished form may undermine the point I am making, politicians and political pundits will more often than not be operating with their own personal/popular economic theories for which they may or may not mobilize professional economists to either rubber-stamp their views or work with independent economic advisors with differing views from their own to whom they may or may not listen.   Already the Peterson Institute that is heavily in favor of cutting social spending as a means of deficit reduction, has attempted to distance itself from Simpson, in an effort the preserve the appearance that its focus on cutting social spending is justified by professional, “scientific” economics.

Popular Economics and the Science Question

What I have been calling here “professional economics” has the ambition to be a science based on objective findings about the state of the economy and likely future trajectories of that economy.  These claims to science are not loudly trumpeted given the diversity of opinion within professional economics.  While professional economics operates under greater constraint than popular economics and represents a narrower band of opinion, those who hold popular economic views of various sorts can find professional economists who back up their views to a greater or lesser extent.

While there are a number of established definitions of the scientific method, many assume that in science there can be universal agreement between reasonable observers about at least the facts if not the interpretation of those facts (though heterodox and post-modern theorists of science have questioned this).  In the case of Simpson and Lawson, though neither are professional economists, they do agree that revenues from Social Security have been used for other purposes though they don’t agree on what those purposes were and on what would be the responses to that borrowing.  Perhaps some facts can be agreed upon by all observers in this case but others will be disputed.

I will be returning on this blog numerous times to the question of and desirability of having an economic science.  Certainly there are areas of economics where there can be agreement about the facts but how large is this area?   Does it make sense to call the areas in which there is not agreement about facts, also parts of a science?  Should those contested areas be sectioned off?   Isn’t the process of examining those disagreements as important as looking at areas of agreement?

If economics is not just a science but an arena within which shared and conflicting self-interests are fought over and re-negotiated, then validating a role of more or less importance for something like popular economics is also crucial.  Also economics might also be an arena in which new designs for as yet non-existent economic processes are presented and argued over.  Without the ability to “speak” on issues that effect one’s self-interest or potential future designs for the economy or economic policy cannot be discussed, this leaves people and potential improvement out of the discussion.  On the other hand, if these personal economic views, especially those of policymakers, are largely divorced from something like an objective or at least highly likely reality, this can create a great deal of economic pain and suffering.

I am suggesting that meta-economics or a similar concept can function as an inclusive framework to include both scientific and popular economics as well as examine where agreement is possible and where and how disagreement about economic processes emerges.  As we have seen that economics and popular economic theories by those in government can have extraordinary consequential effects in the real world, such a framework is not simply of speculative interest.

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The Case for Meta-Economics Pt. 2: Kwak’s Commentary on Thaler

James Kwak, along with former IMF chief economist Simon Johnson, writes one of the leading blogs on financial reform, Baseline Scenario.   Founded after the financial crisis of 2008, Baseline Scenario is mostly devoted to examining proposals for financial reform and urging legislators, central bankers and government leaders to reduce systemic risk to the banking system by breaking up very large banks that are “too big to fail”.  Kwak and Johnson are highly critical of the current form of proposals in the US Congress and advocated for by the Obama Administration as not going far enough in limiting the power of very large banks, which, because of their size, are able to hold governments and taxpayers hostage if they make bad bets on investments.   Among advocates of rigorous financial reform there is an interesting dispute between those who see bank size as a crucial factor while others are less concerned about the size of banks, a controversy I will take up at another point in time.

Kwak, Berkeley Ph.D. in European history, a software entrepreneur, former McKinsey consultant, and now studying law at Yale, has written a recent post critical of an article by Richard Thaler in the New York Times.  Thaler is one of the two or three leading economists and psychologists associated with behavioral economics and behavioral finance, new fields within economics that attempt through empirical study to examine how people make economic decisions.  Behavioral economics has come to challenge the dominant assumption in neoclassical economics that people are rational “utility-maximizers”.  While rational economic man has not been fully displaced from the structure of economics, behavioral finance is now considered to offer a “respectable” alternative to the assumption of purely self-interested rationality.

While a number of people have drawn the parallel between the Deepwater Horizon blowout and the 2008 financial blowup, Thaler’s Times column suggests that both with BP and the financial collapse we are tapping into a common cognitive problem that people have in assessing low probability risks.  Additionally Thaler feels that complex technology, sometimes beyond the ken of leaders, and diffusion of responsibility via complex inter-corporate partnerships interact with this cognitive difficulty that we have in preparing for unlikely events.  Thaler points out, in an interview in an an accompanying podcast on the Times website, that partners in these multi-company alliances have varying interests which don’t necessarily align with each other or with the common good.  Thaler’s prescription, though not stated clearly and strongly, is for regulators to require higher levels of insurance, where the insurers then would be incentivized to oversee operations.

Though not in principle opposed to the idea that people are bad at assessing risks and that rational economic man shouldn’t be assumed by economists, Kwak in his response takes issue with the way that Thaler’s thesis can be used to whitewash the very specific risks involved with large corporations that have incentives to maximize profits and externalize costs onto the population at large and governments.  Kwak points out that these “cognitive biases” within these companies almost always go the way of minimizing costs and maximizing profits (very much like rational economic man by the way).  Kwak also questions that one can personalize the composite behavior of corporations as he sees Thaler doing.  Kwak sees far more intentional rather than inadvertent minimization of risk in both the culture of large Wall Street financial institutions and BP.  Kwak, an advocate for much more stringent regulation of the financial industry, sees no way out of a return to more stringent external regulation by government.  While Thaler does not come out against regulation, his analysis tends to excuse the specifically corporate blindness to risk in the face of a structure of incentives and a regulatory culture that looks the other way.

Necessarily Creative Interdisciplinary Borrowing

Both Thaler’s and Kwak’s views on the common elements between the BP disaster and the financial crisis require the integration of frameworks and elements from outside of traditional economics.  Thaler’s view draws from cognitive psychology and organizational theory to help explain how our ability to assess economic risk became distorted in situations involving high technological complexity, low-probability events, and split organizational structures and incentives.  Kwak introduces a political discourse (one could say political science though this is not explicit) of power and power differences and a re-valuation of the now conventional economic theory of externalized costs, where externalization is the norm  rather than the exception.

Kwak and Thaler might agree on the individual “nudges” (Thaler co-authored the influential book “Nudge” with Cass Sunstein) or circumscribed regulations but Kwak suggests that overall there is a fundamental lack of government oversight and authority in our current system which were instrumental in both the BP spill and the financial crisis.  Thaler suggests that with a few minor tweaks, the corporations will “regulate themselves” by making sound assessments of risk.  Kwak suggests that there is the need for an entire cultural shift in business backstopped by a strong government regulatory culture.  There is then a fundamental philosophical and analytic difference between the two positions despite what might be some areas of agreement.

While I don’t want to argue out this particular dispute in this context, I am using this as an example, and perhaps not the best example, of smart, thoughtful people (Thaler and Kwak) bringing in a mixture of disciplinary tools in to solve some of the gravest problems of our times.  This “ad-lib” mixture of tools is a sign of personal erudition and analytic flexibility in assessing the reality of a situation but it leaves us not being able to compare their respective positions (not diametrically opposed by the way).  The contest, such as it is, between these two somewhat competing positions, is then consigned to the level of rhetoric:  with which account does  a reader feel more sympathy?  There is a comparison of apples and oranges.

Towards a Meta-economic Framework

My conception of a meta-economic framework could include as “compulsory” a consideration of some of the interdisciplinary elements as well as assumptions which both Thaler and Kwak (as well as others) introduce.  This may make some writing  less “fun” to write and “essayistic”, but it might serve the public better to be able to choose between arguments if assumptions, data, and analyses could be compared side-by-side.   A meta-economic framework would compel writers/”scientists” in this area to consider the vital connections between one disciplinary area and the immediate proximate causes that originate outside that discipline but impinge upon their chosen topic.  Aren’t these issues a matter of life and death, requiring a more serious engagement with reality?

As an example, Thaler might state or declare in some form that “I believe that corporations can accurately assess risk with the right alignment of corporate interests within and among corporations”  and “I believe corporations can share the characteristics of individual people in their ability to assess risk”.   Kwak on the other hand might state, “I believe internal controls will often be insufficient to control speculative excess and the misalignment of incentives within large oligopolistic corporations”.

A joint framework that encompasses both Thaler’s and Kwak’s “narratives” would include cognitive ability to assess risk, ability by economic actors to internalize ethical standards, relative autonomy of corporations vis a vis government, role of corporate internal group dynamics, employee performance metrics, operational complexity, alignment of interests in industry partnership “ecosystems”, and dominant government ethic of and power to regulate the industry in question.   If each author, this is maybe assuming a longer form of exposition perhaps, had touched upon their views of each of these dimensions, then readers would see both the weaknesses and strengths in their “models” for each of these debacles as well as whether they both can be analyzed together meaningfully.

While some may throw up their hands and say:  “we can’t consider every factor!”, I would counter that we clearly are in need of an analytic framework that guides us to either more comprehensive or different points of focus than the frameworks we have inherited prior to either the financial meltdown of 2008 or the BP blowout of 2010.  I am proposing what I am calling a meta-economic framework as a “workspace” to build that framework from the tools of economics and related disciplines.

The Case for Meta-Economics Pt.1: Fiscal Austerity as Prudence…or Madness

The most immediate and obvious case to be made for (something like) a meta-economics, or the equivalent, is the lack of a consensus among respected economists about what to do about the sovereign debt crises in Europe and the push for fiscal austerity that has emerged this year in the US and in many other countries.  We have many politicians as well as economists on the one hand claiming that now is the time to cut budget deficits by cutting spending (mostly on social programs) and on the other hand we have economists and some politicians who are calling this the equivalent of madness, urging steady or higher levels of government spending to stimulate weak economies.

Two Opposed Schools of Thought

The debate can be viewed either from the point of view of individual economists, who show some variability in their opinions, or as a clash of two schools of economic thought with regard to the value and use of fiat (paper) currencies and government spending.  Keynesian economists believe that government (fiscal) deficit spending is necessary in economic downturns to make up for reductions in demand from a troubled private sector.  In the case of our current economic crisis, households and businesses are either loaded down with existing debt and/or cannot get access to credit to buy goods and services.   With a fiat currency (where the government can print money), governments can choose to go into more debt and/or risk inflation of the currency by spending more than they collect in taxes to spur the economy.  The priority for Keynesian economists is to boost employment and spur demand for goods and services by the means available to make up for the slump in private spending.  Keynesian economists point to the relative economic stability of the period 1940 to 1980, as well as the lack of a clear association between government debt and economic prosperity at least in countries that control their own currency, to make the case for deficit spending.

Opponents of deficit spending, deficit “hawks”, many of whom share the assumptions of neoliberal/neoclassical economics, are concerned about how lenders in financial markets will view governments’ apparent disregard for the debts they are running up to stimulate their economies and will impose more stringent credit conditions on lending to these governments.   In general, these proponents of fiscal austerity as a cure to what currently ails us, represent a “hard money” position, in that they fear inflation more than Keynesians, who might even recommend “inflating away” national debts.  Fiscal austerity that cuts government spending and activity has the critical “side benefit” for neoliberals in that it cuts government regulation of industry as well as reduces the role of government as a competitor in the provision of goods and services to the private sector (Social Security competes with investment managers for instance).

A related but subsidiary issue is the type of government deficit spending in a recession based on what Keynes called the multiplier effect.  Some types of spending will circulate more quickly in the economy based on people’s propensity to save or spend.  Spending on wages and social welfare programs will circulate more quickly in the economy producing larger effects, multiplying the economic effects of the initial spending.  The neoclassical school objects to or questions the multiplier effect on the assumption that people will not spend the money assuming that higher taxes are coming to pay off the government debt generated by deficit spending.

For the purposes of this short post, I am going to assume that the dispute is fiscal austerity or no, but a reasonable case can be made that the fundamental dispute between these two groups is about the type of government spending rather than the amount of that spending.  As we shall see below those in the fiscal austerity camp differentially favor cutting social spending rather than defense spending or other programs favored by the political right-wing.

Individual Economists

Paul Krugman,  Brad DeLong, Dean Baker and others who occupy more of a Keynesian position on fiscal spending, are most scathing in their indictments of the calls for fiscal austerity that can be heard now around the world.  Krugman points out, as does Dean Baker and others that measures of what lenders think of the creditworthiness of the US government indicate that there is no current concern about the US’s fiscal health (low CDS spreads).  Krugman and other in the Keynesian camp, like Brad DeLong, point out how deficit hawks tend to blur the distinction between countries that control their own currency (the US, Great Britain, etc.) and the countries of the Euro-zone who are constrained by Euro-wide currency policy.   There are differences in the degree to which Keynesians pay attention to the question of budget deficits:  some think that raising deficits is a temporary fix while others are relatively indifferent to the amount of the deficit.

On the other side of the fiscal austerity debate are also many respected economists, some of whom did predict the financial crisis of 2008.  Ragu Rajan reads a number of macroeconomic signals, including increased employment in Brazil, as indicating that the Fed might think about raising interest rates, which is an anti-inflationary measure and a sign of pulling back on monetary stimulus of the economy.   Krugman lambastes Rajan and others as submitting to a climate in which pain infliction on the economy and especially the poor is considered to be a way to “reassure markets”.  Jeffrey Sachs, also a highly respected economist is caught by Brad DeLong assuming that Obama’s stimulus spending raised interest rates that private lenders charged the government when it didn’t.   Both Krugman and DeLong feel their opponents are ignoring data on the ground and imposing upon and reading into reality their prescriptive model for how the economy should have, is and will behave.

Economic Advocacy Organizations

Driving the debate within and outside the academy are the work of advocacy organizations that, apparently, believe that social spending should be cut instead of targeting military or other budgetary items.  The billionaire and former Secretary of Commerce under Richard Nixon, Pete Peterson has had a major influence in inspiring the Obama Administration’s deficit commission through his funding of numerous foundations, economists and advocacy organizations.  Peterson, through his great wealth and political influence has been able to create a climate of economic opinion within which he has insistently attempts to create concern about government budget deficits while favoring only one of many possible solutions.  As can be seen in this 2003 interview with Bill Moyers, Peterson decries tax cuts and other signs of profligacy by both parties yet almost uniformly prescribes cutting social spending over either cuts in other discretionary programs or tax hikes on people like himself.  Peterson’s perspective is also premised on a theory of political behavior by policymakers who he assumes will never raise tax rates to deal with what he bemoans as a great evil, the imposition of debt upon future generations.  The assumption of this type of political behavior by Peterson does agree with the anti-tax prejudice of Peterson’s political milieu.

Making Sense of the Conflict

In broad terms the conflict in systemic terms is between two economic theories with opposing interpretations of that subsection of the data that they both address and also in this case some variance with regard to how much or which parts of the data are accounted for by the “story” that each side tells.  Furthermore, even if there is or would be some partial agreement on interpretations, the solutions offered are at odds (which part of the deficit to reduce or cut and when).   On the one side we have people who see government spending as a tool that now because of slumping economic conditions must be deployed, despite the negative impact on budget deficits.  On the other side we have people who place a higher negative value on budget deficits and the risk of inflation relative to the potential positive impact of spending on employment and current demand for goods and services.  For the latter group, the tradeoff is so, seemingly, frightening (or they wish to inspire fear in others) that they appear to imagine or invoke the prospect of events for which there is currently little or no data.  Alternatively they may be seeking to inspire “retribution” by private markets on the debts of governments, prospectively, by painting a negative picture of how these governments manage their budgets.

To me, as may be apparent from the way I am presenting the data, the case is better argued from the Keynesian side.  In this case, DeLong and Krugman seem to be presenting more apposite and solid data but the counterfactual “worries” of Sachs and Rajan are not to be entirely dismissed given their positions of authority and the reflexivity of financial markets, where opinion can become reality through the action of powerful and/or motivated stakeholders.  It is not unknown that powerful financial market actors can create chaos because of antipathy towards a government or because they simply want to achieve a higher return.  Claims of fiscal imprudence by authoritative voices can be invitations to markets for attacks on the currency.

While the point of recounting this debate may elude people who are not economic policy “wonks”, the stakes in what passes for an intellectual debate here could not be more immense:  if the austerity group prevails we may see, as in 1937, a very deep second dip to this recession, though these advocates would deny that this would be the outcome.  If the apparent wishes of economic advocates like Pete Peterson are achieved, we will see an undoing of the social and economic stabilizers created by the New Deal and Great Society in the period from the 1930’s to the 1960’s.  Furthermore, and more assuredly, choosing fiscal austerity, especially those who wish to cut social and other domestic spending rather than military spending and not raise any taxes, will bring much of the movement towards a green and oil-independent economy to a halt.  While some politicians and voters may be able to salvage some portion of existing social programs, the “new arrivals” in the areas of climate and energy that may require some deficit spending to be jumpstarted will almost certainly fall by the wayside.

Class Interests and Government Spending

While I am treating this here as a problem of systemic theories of the economy, many imply or state that this is a class conflict between economic groups.  The accusation leveled at Pete Peterson by his opponents can be parsimoniously stated as that he is waging “class war from above” by differentially targeting those social programs that stand in the way of financial capital in maximizing its profits.   Even more insidiously, the effort to stir hysteria about fiscal spending can be seen as effort to create a “balance of terror” by actors from the financial sector to guard its huge profits and downplay its culpability in the 2008 financial crash (“we weren’t the imprudent ones, you were”).  On the other side, deficit spending and social spending combined with progressive taxation redistributes income downward, leading the “haves” to feel that they are supporting the “have-lesses” and the “have nots”.   The implication by the “haves” is that they represent economic virtue while the “have-lesses” and “have nots” have not been prudent and are asking for a hand-out.

Alternatively, if we accept that there are economic classes with different and conflicting interests, the conflict is over a renegotiation of the social contract between those classes.  The post-New Deal, post-WWII consensus was that the “haves” owed a portion of their income to the society at large and to the less fortunate.  The idea was that everybody has an obligation to society and that individual success contains an element of luck.  The Reagan-Thatcher neoliberal criticism of the post-War consensus was that each person earned according to what he or she is due and that the society-at-large did not represent an economically important entity.  Redistribution of income via governmental spending and progressive taxation was and is opposed by neoliberals because it violates this principle and does not reward economic success.  This schematic view overlooks complexities of either position.

If this is a matter of economic class conflict two basic solutions are possible:  either one allies oneself with one or the other class or one attempts to stand apart and negotiate some compromise between those class interests.

Resolving the Conflict:  Three Strategies

I can see at the moment three basic strategies for economists and policymakers in dealing with this critical challenge and the yawning gap between the two positions as regards immediate action.

Strategy 1:  Make Better Arguments for Each Position

Advocates for one position or the other have good reasons, if they believe that what they represent is true, right and good, to make better arguments for each position.  I have a strong bias in favor of the Keynesian position at this point in time because of my concerns both about our overall economic health in the short and medium term as well as long-term environmental sustainability:  I see, at the least in the US, no significant moves to reduce oil dependency and address climate change without some deficit spending.  I am also persuaded by the relevance of the data presented by Keynesians to the questions being asked by both sides, in particular the phantom nature of market “concerns” about the security of lending to the US government at this point in time.  By both sides making clearer arguments, we may see clarification of the issue.  One danger without a strong meta-economic framework is that one side or the other would make arguments that are emotionally persuasive in nature but not well-reasoned and/or would use its considerable financial means to broadcast the less well-grounded argument in emotionally compelling but fallacious terms over the airwaves.

Strategy 2:  Political Compromise Between the Two Positions

While a bipartisan deficit commission and similar bodies may need to engage in compromise to reach consensus, this strategy may only serve to confuse the scientific and intellectual issues involved.  Some items from one “side” will be adopted and some proposals from the other “side” will be adopted in a melange of proposals.  While one sides’ arguments may be popular with politicians but wrong they will appear to be given equal or greater weight to  positions that are well grounded in reality.   If on the other hand there is an implicit recognition that there is no systemic economic theory that works but simply a class compromise between two interest groups, then adopting a political compromise which reflects the balance of power or the outcome of the discussion is the only possible outcome.  Either the compromise between systemic views or the compromise between classes would postpone clarity on the issue, though might prevent a disastrous outcome.

Strategy 3:  Develop a meta-economic framework for evaluating claims of both positions

The final strategy requires more time and preparation but I believe it will ultimately lead to better results: create a meta-economic framework for evaluating as much of the relevant data and positions involved as possible.  Such a framework would be able to weigh the benefits of economic stimulus, perceptions of government debt by private financial markets, other risks associated with debt, inflation costs and benefits, group/class interests and overall social welfare projections that are associated with an number of different scenarios.  I am calling this a “meta-economic” because it would straddle both the Keynesian and the neo-liberal or “hard money” position but create a new and better scientific framework rather than a melange of both positions as would “Strategy 2”.  New factors may be introduced from within economics or from a related discipline like political science, psychology, the natural sciences, etc to create new perspectives on hardened positions rather than to mix perspectives up as part of a political compromise.

None of these three strategies is mutually exclusive.  In upcoming posts here, I will look into this issue as well as other questions that would lead one to build a meta-economics.

Introducing Meta-economics

After thinking about it for a while, I’ve decided to create this blog as a place to discuss matters related to economics, its role in political decision-making, the nature of the discipline itself, and its status as a science.  A non-economist but a student of economics and, of course, a participant in the economy, I believe there is a fundamental scientific and intellectual crisis which has helped lead the world economy to its current impasse.

The discipline of economics is roundly criticized by almost everybody who consumes its products and also by many of its practitioners and its reputation, at least,  remains in a chronic state of crisis.  It claims to be a science, yet, like most social sciences, is in a continual process of trying to justify its “scientific-ness” by liberal and often gratuitous use of mathematics and obscure formalisms.  There is a diversity of schools of thought within economics, factions and individual economists that often come up with opposing or disparate conclusions about how to deal with the state of the world.  The financial crisis of 2008 was predicted by some economists but was not by others, who by their acquiescence or positive projections for continued growth of the housing and asset bubble may have helped spur on what became a monumental collapse.  We are currently facing diametrically opposed opinions about current calls for fiscal austerity as a broad diversity of opinions about the responses of governments in the fall of 2008 and in early 2009.  Sorting through the recommendations of economists requires one to learn as much about the discipline as one can because abrupt turns in outlook and contradictory recommendations can come from the same economist and most definitely from a random polling of these academics and professionals.

Despite its many, often publicly acknowledged, failings,  it is hard to get away from the reach of economics as well as its allied disciplines, business accounting and corporate finance.  Together these fields of study and endeavor, with the exception of a few areas of life, are the “master disciplines” of decision-making in our society as well as the intellectual basis for political and even cultural identity for many.    Economic policy or the policy preferences of politicians informed by their personal “brand” of economics determines what government programs get funding.  Economic policy in turn influences a myriad personal and business decisions through tax policy and, in times of economic crisis, economic crisis management.   Economic policy on national and local levels can determine the opportunities people have to realize long-held dreams as well as the state of the physical infrastructure upon which their livelihood depends.  Furthermore we are facing an enormous challenge in transforming our energy system away from dependence on carbon-based energy, with political and business decision-making in this area heavily influenced by economic assumptions and modeling.

This is a place to discuss the nature of economics as a discipline, where it fits in with other areas of life and how it can either be improved or replaced by something that will do its work better.  I am calling this site/blog “meta-economics” to include the epistemology (theory of knowledge) of economics as well as consideration of related disciplines like political science, psychology, philosophy, and relationships with natural science disciplines like physics and biology.  This is an ordinary usage of the prefix “meta” that usually refers to an inclusive abstraction greater than whatever is the word to which it is affixed.  The word “meta-economics” has been used before by, as far as I know, two other writers, but with a somewhat different meaning.  E.F. Schumacher, the advocate for “small is beautiful”, used the term meta-economics as what he prescribed for a humane economics that would support his “small is beautiful” vision.  Gary Lynne, professor of economics at the University of Nebraska, has used the term “Metaeconomics” to describe an economics that includes a consideration of ethical and communitarian concerns as well as narrowly self-interested motivation.

While I am sympathetic to Prof. Lynne’s vision, I am using the term to refer to a different concept that is less a recommendation for my particular vision for how I would like the economy to function.  Milton Friedman, to whose work I am generally not favorably inclined, however made a valuable distinction between “positive economics”, descriptions of what is actually happening or has happened in the economy and “normative economics”, what the writer thinks should happen in the economy according to some ideal.  Often economists, as will any person engaging in persuasive speech, will mix together these two perspectives in order to advance a vision.  I am intending meta-economics to be an inclusive framework that includes what I would prefer to call “descriptive” and “prescriptive” approaches but would attempt to make transparent where the subjective element of economics, either from the point of view of the writer/analyst or from the point of view of the people being written about, is being introduced. In any case, I hope that my “meta-economics” will not be viewed as simply the advancement of my own prescriptions or preferences for the economy but an effort to create a space where something like an economic science or at least a widely agreed-upon economic knowledge framework can emerge.  I do have my own prescriptions and preferences which I will at some point discuss but this is, I hope, not the only use or purpose for the writing on this site/blog.