The annual Papers & Proceedings issue of the American Economic Review is always a good read. It is literally full of papers from leading scholars on the newest “hot” topics in the profession as well as updates on the status of more enduring topics. The format of the issue is ideal for those who want a fairly quick introduction or refresher on a subject, since each is covered by three to four short papers that made up the corresponding session at the recent winter meetings of the American Economic Association. For those who think that economics is a narrow-minded science, it is recommended to pick up the latest issue to experience the variety of matters being analyzed in economics these days.
In these times where the aftermath of the financial crisis is still felt around the globe, many probably have those sentiments about a profession that by and large did not anticipate the crisis. Indeed, lack of the profession’s forecasting success seems very important in the press and general public as well as among the few who had success. I for one, however, have never put much emphasis on forecasting abilities as a measure of success—a solid understanding of the past is much more important, as that can pave the way for good current policy advice in face of unanticipated shocks. Being right about the future in a pure statistical sense is not necessarily a virtue, as you may be clueless about why you were right. Hence, I have more respect for smart people that make unsystematic mistakes than dumb people who get things right every once in a while. Nevertheless, with the benefit of hindsight, the events that led to the crisis are so important and still sufficiently poorly understood that they can, and should, provide lessons that can help the profession gain new important insights about the workings of modern economies.
One collection of papers in the June 2011 Papers & Proceedings is clearly motivated by the profession’s need for self-evaluation triggered by the financial crisis, and it comes under the heading “Economics as a Moral Science”. It deals with various aspects of the potential interactions between economics and other sciences as well as more philosophical considerations to be made in the further progress of economic sciences (inspired mainly by early works going back to Adam Smith). There is an abundance of food for thoughts in the four papers in the collection, and I will mention and comment on a few aspects in the following.
Anthony B. Atkinson writes on “The Restoration of Welfare Economics”, and as the title suggests he criticizes the current state of economics as one that misses out on fundamental issues in welfare economics. By counting recent publications in AER, he finds that very few deal with welfare economics, and that those who do, usually spend little to no time discussing the adopted welfare criterion. He mentions that the profession typically adopts one of three “avoidance strategies”: 1) The economist assumes a representative agent; 2) The economist purports that the profession implicitly agrees on one particular welfare criterion (say, a utilitarian one); 3) The economist leave it to “others” to take a stand on welfare issues. Atkinson argues convincingly that all of those strategies block analyses of central matters like altruism and fairness in the evaluation of different policy scenarios (and he rightfully asks who these “others” may be in regard to the third “strategy”), and are an unproductive way chosen to avoid taking explicit moral standpoints.
Atkinson ends his paper by suggesting that a reinstatement of moral principles into economics could be helped by the introduction of some guideline of good academic practice. He refers to the American Statistical Association who has set out ethical guidelines for their researchers. He believes that a similar ethical code for economists could help reviving the awareness of economics as a “moral science.”
Some of my current and former colleagues have already suggested this, adding more detail, back in 2009 (see Colander et al.; pdf file). I am sympathetic towards the idea as such, since it is born by genuine and profound concerns for the profession. Having weighted the pros and cons, I have nevertheless come to the conclusion that I think it is not an idea that will bring the profession forward. First of all, one has to define a code that all can agree on. This will prove a tremendous task, and I fear that one can only agree on contents that are very general but then at the same time close to empty. Secondly, how should such a code be enforced, and who should do it? At worst people will start just adding “you broke the code” to the usual line of arguments when debating. At best, it can be used in cases of gross scientific misconduct. But for those cases the profession already has systems that work. Anybody caught in misconduct loses credibility overnight and is banned implicitly or explicitly from the profession forever (it is actually one of those situations where the concept of infinite punishments is very relevant). So a formal code adds nothing. This leaves the arguments that I often hear, and which Atkinson also signals: “What can be bad about adopting an ethical code? It cannot hurt”. My counterargument is that it is harmful to do something that ultimately may prove meaningless. In particular, one may add, in a situation where economists are being scolded en masse for having been doing meaningless things. In such times, there is particularly no reason for collectively and purposefully doing a meaningless thing. Academic trust is not obtained by signing potentially empty statements, on the contrary: Trust is gained by actions.
Robert J. and Virginia M. Shiller raise in “Economists as Worldly Philosophers” a number of critiques against the development of economics and economists in recent decades. One of their main points is that too much research has been directed towards too extreme specialization, where many researchers in the process allegedly lost track of the real world. This, as I read them, seems to be their central explanation of why the profession did not foresee the financial crises. Such an explanation, however, suffers all the dangers of extrapolation that history telling may contain: Even if the story is right, does it necessarily mean that a continuation of such behavior will lead to further disasters? The Shillers’ point indeed seems to be that such research should be downplayed in the future. Instead, economists should return to be “Worldly Philosophers” as they were in the Good Old Days, covering all kinds of related disciplines (like psychology—Virginia Shiller is a psychologist). In that glorious past, economists were the likes of Smith, Marx, Keynes, Malthus, who all were deeply concerned about the moral implications of their discipline.
It is difficult to argue against a position which essentially says that everybody should be smarter and act accordingly. Whether it is productive to try to attain this goal by traveling back in time and reduce specialization in basic research is nevertheless questionable. To suggest that contemporary (academic) economists are incapable of taking moral stands, as well as stating that many have a “general knowledge” that may be “embarrassingly limited”, is very strong and borderline arrogant. Atkinson, I believe, is more reasonable by implicitly saying that it is matters that economists avoid speaking up loud about (as they, in my view, perhaps are insecure about the “adequate” morale).
The writing of the Shillers reminds at this point of the elderly who sneers at the youth for being reckless and devoid of reasonable levels of intelligence. In all fairness, they sympathetically do acknowledge this age phenomenon in the paper (“Perhaps there is indeed something about insights gained with aging”, p. 172). Being still in the middle of life, I naturally think that they get too extreme in their dismissal of the output of younger “non-worldly philosophers”. But I take it that when you have developed a renowned business cycle indicator as Robert Shiller has, and used it to be outspoken about the potential dangers of overheating in the US housing market in the pre-crisis economy, then you are entitled to leave the humble self at home and indirectly compare yourself to Keynes. (I talk, of course, about the Case-Shiller index, which ironically is now maintained by Standard & Poor’s—the rating agency which rubber-stamped toxic assets as “AAA” before the financial crisis.)
In short, both Atkinson and the Shillers suggest that economics move forward by doing more relevant research, and by incorporating relevant insights from other disciplines. It is difficult to disagree, but it is equally difficult to see that these are new ideas. Concepts and fields like bounded rationality, animal spirits, experimental economics and psychology have been on the agenda for decades, and fairness, which plays a large part in Robert Shiller’s recent book with George Akerlof, “Animal Spirits”, was a concept developed by Akerlof and Janet Yellen decades ago. It would be more interesting to see new ideas unfold rather than to watch people dream about a return to the days of the past (and their own youth). Such dreams are as extreme as are assertions that specialization went too far. After all, it is often through narrow-minded thinkers that new ideas are developed (think John Nash). Morality and “general knowledge” doesn’t necessarily guarantee wisdom.
Seen in that light, the paper by Benjamin Friedman stands out as far the most interesting piece. He provides a fascinating account of how religious movements in the 17th and 18th century Europe may have influenced the thinkers of the time, in casu Adam Smith. His “Wealth of Nations” from 1779 defines many central themes in modern economics, in particular, that individuals acting out of pure self-interest (and thus potentially without any of the moral sentiments central to Smith’s 1759 book), under the right circumstances can result in a mutually beneficial situation. This “just” requires a little help from the “Invisible Hand”. Friedman sees this thesis as one that was facilitated by religious movements of the times whereby the predominant orthodox Calvinism is gradually phased out. The orthodox Calvinism considered individuals as being utterly depraved and in vicious pursuit of self-interest. Moreover it preached predestination setting aside any role for human choice, and finally, serving God was the only reason for life. Instead, the opposing Protestants would believe in the goodness of man, the ability of human action to play a role for outcomes (and for who will be saved, after all, this is about religion and salvation). Finally, Protestants believed that human happiness was important; not just that of God.
Friedman notices that during these times, various fields were much more intertwined than today. Therefore, these religious debates and movements may very well have had an influence on Smith (even though he was not religious). Moreover, since many of the people shaping the development of the economic sciences were out of religious movements, Friedman argues that the religious movements of the times have had influence not only on economics previously, but also to present day. As he notes, most modern economist avoid models where initial conditions affect final outcomes. This could be consistent with the passing of predestination as a strong religious belief. In the end it demonstrates that economics is a moral science even though many do not appreciate or notice it.
Friedman has several interesting thoughts and I close by quoting from his ending paragraph, which, of course, nicely sums up his points:
Critics sometimes complain that belief in free markets, not just by economists but among ordinary citizens too, is a form of religion. It turns out that there is something to the idea—not in the way the critics mean, but in a deeper, more historically grounded sense (p. 170).
So, pick up the issue and check your own moral sentiments.