Economists Growing Brains

Economists often say they are embarrassed by their profession. I am not exactly sure why, but it probably has something to do with the common belief that economists are generally poor and work in the "miserable science." As John Keynes famously said, "In the long run, we are all dead."

Mainstream, neo-liberal economic theory, which students learn in most American universities, provides basic tools for understanding the underlying mechanics such as supply and demand.

I personally enjoyed my economics classes in college and grad school, but soon realized that the real world, not the hypothetical world of economics case studies, is far more complicated and even more counter intuitive than one would conclude after reading a microeconomics text book. No surprise. Like, if people maximize utility or wealth, how does one explain charity? A cynic would say that donors get some type of benefit, such as prestige, social standing, or other side benefits. No room for altruism. I remember talking to a brilliant French economist in Tokyo a few years ago and I was trying to make sense of some of his ideas by applying rational choice theory. He scoffed and called "rat choice" passe.

Remember, the answer to any economics question is, "It depends."

Seeing Joseph Stiglitz speak in Tokyo several years ago was also an enlightening experience. The Washington consensus of free trade and low budget expenditures was not the final word on development policies? Top economists, such as Stiglitz, Jeff Sachs, Larry Summers, Alan Blinder, and Robert Reich, are drawing attention to the failings of free market economics. Some thinkers, like our friends Sanjay Reddy, Thomas Pogge, and Christian Barry, are even applying ethics to economics, and asking is this policy just... is it fair?

New York Times reporter Patricia Cohen reports on this cadre of emerging heterodox economists in an article last week titled "In Economics Departments, A Growing Will To Debate Fundamental Assumptions." You can read it here. I remember just a year ago the phrase heterodox economist was alien to some. One person asked me what that was; I simply said, "the opposite of orthodox." Oh.

Cohen's point is that "in recent months" economists are feeling less ashamed about questioning the fundamental assumptions, less fearful of being ostracized. I might put the time frame in "recent years," but here are a couple of nice snippets from Cohen's report:

For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession’s most cherished ideas about not interfering in the economy.

“There is much too much ideology,” said Alan S. Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is “often a triumph of theory over fact.” Mr. Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad. Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.

The article ends with this great story on Dani Rodrick:

Most mainstream economists think that voicing any skepticism or doubt provides “ammunition to the barbarians,” he said, and allows narrow-minded people to “hijack any argument to suit their purpose.”

Mr. Rodrik said he used to worry about this until he realized that “on any issue, there are barbarians on both sides,” so there was no point in shading an argument to “suit one set of barbarians over the other.”

“And I’ve slept a lot better since.”

Trade-Labor Linkage

Policy Innovations innovators Sanjay Reddy and Christian Barry respond to Jagdish Bhagwati's recent op-ed in the Financial Times, "Foes of free trade get a foot in the door" in which he argues that many of those who want the inclusion of labor standards in trade agreements do so out of fear and self-interest. Bhagwati labels such people as foes of free trade.

Reddy and Barry in this June 2, 2007 letter to the FT remind us that not all proponents of linkage are protectionists. They note that there is another way:

"There is an alternative approach to linkage, which would provide an attractive means of furthering the interests of poorer countries. This alternative would extend the transparent, rule-based approach of the WTO system to include an appropriate concern for labour standards (thereby excluding opportunistic actions by wealthy importing countries). It would require that poorer countries undertake only those efforts to promote labour standards that are reasonable to expect in light of their circumstances; while also ensuring that these countries gain by providing them with additional access to northern markets and other forms of reward for their efforts."

Is China Listening to De Soto?

The BBC just reported that China is considering a new law to protect private property, suggesting more openness, transparency, and reform in China. From the IHT:

"China's Parliament began debating landmark legislation to protect private property on Thursday following a rare and lengthy public consultation that suggests the Communist Party may be willing to allow more scrutiny of controversial government policies."

The Chinese government is constantly innovating and reinventing itself. It seems China has wisely taken into consideration the role of private property protection in economic development, an issue often associated with Peruvian economist Hernando De Soto, who wrote in the New York Times a few years ago:

"The single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house. These assets can also provide a link to the owner's credit history, an accountable address for the collection of debts and taxes, the basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities... Third World and former communist nations do not have this representational process. As a result, most of them are undercapitalized..."

Read Christian Barry's interview with De Soto at the Carnegie Council here and De Soto's Carnegie Council Morgenthau lecture here.