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sanity, humanity and science post-autistic economics newsletter Issue no. 5; 13 March 2001 subscribers in over 60 countries back issues at www.paecon.net to subscribe, email "subscribe" to pae_news@btinternet.com                     In this issue:                     - Frank Ackerman,  Autistic Economics vs. the Environment - André Orléan,  Humility in Economics - Hugh Stretton,  Plural Education - Jacques Sapir,  A Rejoinder to James Galbraith - Edward Fullbrook,  Real Science is Pluralist - Gilles Raveaud,  Teaching Economics Through Controversies

Autistic Economics vs. the Environment
Frank Ackerman (research director of the Global Development and Environment Institute at Tufts University)

The unrealistic mathematical models of "autistic economics" would be bad enough if they
stayed in the classroom, detached from the real world. Unfortunately, though, the dominant
school of economics has itself become a powerful political force: at least in the U.S., it is
rapidly reshaping public policy in its own image. In the area I am most familiar with,
environmental policy, the invasion of abstract economic theory threatens to impose the logic
of the marketplace on the very different reality of nature.

Conventional economics has, since Pigou, recognized the importance of unpriced
environmental externalities. Even if all the other assumptions of the competitive model are
granted, market outcomes are not optimal unless all externalities are internalized - through
Pigouvian taxes, or under rare special conditions, through private negotiations a la Coase.

But what is the status of these observations about externalities? Are they one more entry in

a long list of ways in which the model of perfect competition fails to describe reality? Or are

they the only remaining problem, the last obstacle to be overcome in the pursuit of optimality?

The latter, alas, is a very common assumption in environmental economics.

The specific problems caused by the misuse of economic theory in environmental policy include:

1. Reliance on computable general equilibrium (CGE) models. In the realm of mathematical

theory, it has been known since the 1970s that the existence of an equilibrium point in a

general equilibrium model does not imply anything about the dynamics of the model. The

much-discussed static equilibrium point is Pareto-optimal under the usual conditions, but

may also be dynamically unstable under small perturbations, rendering it unattainable or

unsustainable - and hence irrelevant in practice, even if the model were otherwise a good

approximation to reality. (See reference 1.)

However, CGE models have all but conquered the world of American policy analysis. No

signs of theoretical uncertainty can be seen; instead, use of the general equilibrium

framework is taken as the mark of good science. The results are no better than the

underlying assumptions: leading CGE forecasts of the effects of the North American

Free Trade Agreement (NAFTA) on industrial pollution have been wrong by several orders

of magnitude.

2. Mindless monetization. The Pigouvian agenda requires a monetary value for every

significant externality. Yet many environmental externalities involve risks of irreversible

damages, large but uncertain costs, impacts on future generations, or values, such as

human life, that cannot meaningfully be monetized. (2) Economics rushes in, however,

where ethics fears to tread: one common figure, used in many cost-benefit analyses, is

that a human life is worth $6.1 million (in 1999 dollars). About ten years ago, Kip Viscusi

surveyed all published studies of the monetary value of a life, many of them done by himself

and his co-workers, and calculated the average - which, adjusted for inflation, reached $6.1

million by 1999

There are several technical problems with "Viscusi's number", as well as its obvious ethical

and philosophical failures. But the $6.1 million number appeared, and was treated as an

established fact, in a recent U.S. EPA cost-benefit analysis of arsenic standards for drinking

water. Based in part on that analysis, EPA set the standard at more than three times the

technologically feasible minimum level. With the higher standard, more people will die of

arsenic-related cancers, but at $6.1 million apiece, they (we) just weren't worth saving. (3)

3. Advocacy of laissez-faire. Economic theory confronts the world with a tangled mixture

of description and prescription. While it seeks to value externalities and thus make markets

more perfect, it also critiques taxes and policies that deviate from unregulated market

outcomes. Economists are fond of identifying the "distortionary" effects of public policy,

measured relative to a hypothetical, perfectly competitive market economy with little or no

public sector. The implication is typically that the government is misusing resources that

could be better allocated by the market. In particular, too much, or the wrong things, are

being done to protect the environment.

There is an urgent need for a more realistic economics of the environment, with theories

and analyses that can help to create environmentally sustainable economic activity. The

new field of ecological economics offers promising first steps in this direction; and there is

a continuing role for critiques of the misuses of conventional theory in the realm of public

policy. The struggle against autistic economics is far more than an academic debate.

References:

(1) Ackerman, "Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory", on

the website of the Global Development and Environment Institute (G-DAE) at http://ase.tufts.edu/gdae/

(2) Ackerman and Gallagher, "Getting the Prices Wrong: The Uses and Abuses of Market-Based Environmental

Policy", at http://ase.tufts.edu/gdae/

(3) For more discussion of this point, see Ackerman comments on the proposed arsenic regulation at

http://ase.tufts.edu/gdae/

Humility in Economics
André Orléan (Director of Research, CNRS, Paris)

Is economics a science? Are there laws in economics as there are in physics? The answers
to these questions, which divide economists as well as epistemologists, have important
consequences not only for economics itself, but also for the role of economists in society.
Take the following example: is it right to say that "An increase in the minimum wage
necessarily leads to less employment for the least qualified workers"? The answer is
straightforward: no.

The so-called "law of the minimum wage" is an excellent starting point, not only because
it has been at the centre of the recent [French] debate on low wages, but also because it
is one of the very few proposals that can legitimately claim to be an "economic law".
According to a survey, 90% of the economists believe in it. After all, isn't it enough to remark
that when the price of a given good rises, its demand diminishes? One could not find a more
elementary economic truth. Unfortunately, David Card and Alan Krueger have observed
through various North-American experiences of increasing the minimum wage that the
employment level of the least qualified either remained the same or increased. They did not
manage to find the negative effect predicted by the "law". Besides, those who have a bit of
memory know that as early as in the late 1970s, Malinvaud had proposed a macroeconomic
configuration which he baptised "Keynesian unemployment", in which "when wages rise,
so does employment". How is this possible? The reason is that the economy is a complex
web of interdependencies that does not allow us to predict the final outcome of a change in
a single variable. A rise in interest rates may well lead to an appreciation of the national
currency, but the contrary is just as possible. There are no universal laws in economics.
Instead there is only a set of highly various mechanisms, such that when analysing a given
situation it is necessary that we take into account economic conditions, institutions and
specific histories. "Well, even so," one could say. "Don't we simply have to be more precise
about the initial conditions in order to predict the final outcome?"

Here, we face a second obstacle, even worse than the first one. Among the conditions that
affect economic fluctuations, one must include the knowledge of persons, their beliefs, and
the way they understand their surroundings and justify their actions. As it happens, these
beliefs, interpretations and justifications evolve and transform themselves continuously,
because they are social objects. And this is because human beings learn and innovate -
the future is never a repetition of the past. In the human world, what happened yesterday
does not tell us what will happen tomorrow. Which model of the American elections could
have predicted that the failure of some machines to punch little holes in ballots would be
relevant? Similarly, economic competition constantly creates new and unpredicted situations.

So what conclusion follows for the economist? Humility. In teaching, humility is called
pluralism, confrontation with facts and other social sciences, and recognizing the three
demands that one finds in the very interesting petition written by the economics students.
In political terms, this means that no argument from authority is legitimate. This does not
imply that the economist ought to remain outside the public debate. It simply means that
the economist must engage him or herself as a citizen with convictions regarding the public
good and ways of treating it, rather than as the holder of universal truth that he or she
substitutes for discussion in order to impose it on us all. 

PLURAL EDUCATION 
Hugh Stretton (author of Economics: A New Introduction)

Just to show that we can theorize too, how about some pure theory of economic education?
Here follows a five-step theory of pluralism.

(1) Economic life is complex and some elements of it are easier to know than others. Nobody
can know everything about the billions of daily actions and transactions that constitute it.
So (2) any investigation of it has to select what activities to investigate, how far and in what
directions to trace their causes and necessary conditions, and how to go about it: what
language, identities, categories, collectives and simplifications to employ, and so on. 

What you hope to use the knowledge for- or if you are driven by pure curiosity, the aspects
of the subject that interest you - should join with technical considerations in shaping your
selections. That is another way of saying that your values and social purposes should
shape them. Some at least of those values and purposes are bound to be controversial
(there are no perfectly unanimous societies) . So (3) your discoveries are likely to be as
controversial as the values and purposes that have shaped the search. That does not imply
that they must be untrue, or that rival conclusions about similar subjects must necessarily
contradict one another. An example: Neoclassical economists have explained why
substantial unemployment can restrain inflation. Swedes have shown how peak national
wage-bargaining can restrain it. Australians have shown how income policies administered
by independent institutions can restrain it. J.K Galbraith's first book explained how his U.S.
price controls restrained it in wartime. In the conditions of their time and place all four got
their facts right and knew what they were doing. Contradictions only set in if one party
(the neoclassics in this instance) insist that theirs is the only true analysis or the only
workable policy and the others must be mistaken. (There can also, of course, be any
amount of untruth, irrelevance, impracticality or deliberate deception in studies by less
competent investigators than those four.) 

It follows (4) that democracies which value free thought and speech, and access to
government for contending interests and opinions, should encourage similar breadth and
disagreement in their economic education. And (5) in democracies which accord expert
status to their social scientists, there are critical relations between self-interest and
disinterested expertise, both between contending groups and within the minds of their
individual members. It is important that these relations be understood, and acknowledged
and studied in the education of economists. 

A conclusion follows about our present situation. It sketches the role of orthodox
neoclassical economic theory in the prevailing (mis)understanding of what causes what in
modern economic life. 


Conclusion

Consider how you can know what a particular condition or process or event is causing.
Sometimes you can observe and understand the causal process itself. Example: a firm's
sales decline and unsold goods pile up in its warehouse. To sell the surplus goods the
directors have to drop their prices below their costs of production. With the firm losing
money they decide to cut production and dismiss half their workers. The workers happen
to have been agitating for higher wages, and stage a one-day strike as part of their
campaign. The directors identify that offence as the reason for sacking half of them, and
the cause of their losing their jobs. A competent causal analyst will ask what would have
happened if they had not staged the one-day strike. She may discover (if she can get at
the minutes of the directors' meetings) or imagine (if she can't) that because of the
downturn in sales they would still have been dismissed, but on fairer terms. All that their
strike lost them was the month's notice and the severance pay to which they would
otherwise have been entitled. Honest directors, knowing the real cause of their dismissal,
would have given them both. So a causal analyst can reasonably cite some directors'
misbehavior as well as the workers' misbehavior as causes of their loss of some pay. In
that, as also in arriving at the true cause of their dismissal, the analyst has had to imagine
what would actually have happened in the absence of particular causes. 

Now consider what the comprehensive axiomatic neoclassical theory does both for its
users' selection of causal explanations, and for their necessary imagination of alternatives. 

The comprehensive theory models a self-adjusting, single-sector economy. People act in
their own interests. Market mechanisms harness that self-interested behavior to the
common good in three vital ways. They allocate resources efficiently to maximize the
economy's output. They tend to keep the system running in a stable equilibrium. And they
pay landowners, capitalists and workers the value of their individual contributions to output.
As the sufficient causes of those benign effects the theory selects some impersonal market
mechanisms. 

Consciously or not, users of the theory can all too easily assume that if an economy is
working well, it must be those market mechanisms which are causing it to do so. So no
other causal explanation is needed. Serious investigation is only needed if the system is
working badly. Then analysts must discover or imagine what market failure or government
interference is preventing the economy from behaving as modeled. (Failing to behave as
theorized is the neoclassical definition of market failure.) What the theory actively
discourages its users from noticing or understanding is the necessary role of government
in the market mechanisms themselves if they are to work efficiently, or in many cases if
they are to work at all. The government often needs to be quite intricate, tailored to the
peculiarities of particular goods and industries, as it was in most of the developed and
fast-developing economies through the mid-century 'golden age' of steady growth and full
employment.

Sensible neo-classics, of course, acknowledge some market failures and some need for
public intervention, for example to deter monopoly. But the very word 'intervention' implies
an absurd belief in the possibility of an ungoverned market economy. They rarely mention
the Companies Acts by which governments create the fundamental powers of the private
firm, or the need for continual elaboration of the Acts to prevent the inventive misuse of those
powers. (Has any neoclassic theorist ever called the Companies Act an 'intervention' in a
market economy, or tried to imagine a market economy without it? ). There's no space in this
newsletter to explore the many effects of neoclassical theory in blinding its users to
government's necessarily elaborate role in an efficient mixed economy . (Yes, mixed economy.
Except in the blinkered neoclassical imagination there are no pure market or private-sector-only
economies. There could not be.) Or its role in blinding economists to the capital and other
needs, and the productivity, of the public and household sectors which together produce half
or more of the advanced economies' material goods and services. Worse: when privatization,
deregulation and financial anarchy fail to perform as promised by the master-theory, its
believers can only imagine that the withdrawal of government has not gone far enough. The
proposed Multilateral Agreement on Investment (MAI) and General Agreement on Trade and
Services (GATS) are needed to complete the job. 

They surely will, if we don't manage to stop them.

A rejoinder to James Galbraith and a contribution to the ongoing debate
Jacques Sapir (L'École des Hautes Études en Sciences Sociales, Paris)  

In the post-autistic economics newsletter, issue no. 4, James K. Galbraith wrote a very
interesting and convincing reply to Robert Solow. In the same issue, Joseph Halevi aptly
described what he calls a "Franco-American neoclassical alliance", pointing out that
Blanchard's reply to the students' manifesto was dogmatic and hollow. I would like to jump
into the fray and to offer some points in support of a post-autistic approach to teaching,
learning and doing economics. 

Before going to the main points, I want to say that I completely agree that teaching (and
learning) is the basic issue and that to my knowledge, even if some professors have
appealed against the student's views, nothing similar has appeared from the students' side. 

My experience in teaching economics began in the late 70's. After spending 4 years as a
high-school (Lycee) teacher, I have taught macroeconomics at the University of
Paris-10/Nanterre (where the department of economics is probably one of the least
autistic in France), before moving to the École des Hautes Études en Sciences Sociales,
a specifically post-graduate institution. I have also taught regularly in Moscow (at the
Higher School of Economics and at Moscow University), and taught many seminars in the
USA, Italy and the UK. 

What French students described in their manifesto is the plain truth and the result, not of
France deviating from "good economics" as taught in the USA, but, to the contrary of what
Robert Solow suggested, the French system converging with the US one. 

Now, what is the discussion mainly about? The focus is on the link between teaching and
science and the point is realism vs. axiomatism. One of the most important issues raised
by this movement is the very fact that you can not separate tools and contents, teaching
and what you are supposed to teach. By engaging the battle on this field, the movement
already won a major epistemological victory. But, if even Solow acknowledges that the
discussion is not about mathematics in economics, clearly he does not grasp the meaning
of the "realist" requirement. I, however, suspect that some of my post-autistic colleagues
do not either. 

The real issue is not to know if the realistic content of economics is to be increased just
slightly or in a more meaningful way; rather it is to know if realism is a central requirement
or not. This leads to an old but forgotten debate, the one about "natural" or "exact" laws
governing economic activities. Without going back to Carl Menger, we have to remind
ourselves that if there is something like such laws, then realism is not a requirement for
theorizing and a quest for realism not only is not needed but could even prevent us from
reaching a complete understanding of a system obedient to laws. 

Now, what has usually been forgotten by people supporting the axiomatist approach, and
this is fairly obvious with Solow and Blanchard, is the type of conditions required for
"natural" or "exact" laws to exist in economics. Either there is to be no creative interaction
between economic agents (Robinson Crusoe on his island before the landing of Friday), or
an agent's behavioural patterns are to be context independent. The first condition implies
there is no society and no economy. The second one is a key assumption of neo-classical
economics (preferences are supposed to be context independent, transitive and continuous). 

Unfortunately for our neo-classical colleagues, repeated tests have amply demonstrated that
preferences are context-dependant (Amos Tversky's framing effect) and are neither transitive
nor continuous (See Kahneman, Slovic and Lichtenstein works). Unless these tests have
been proved to have been faked or incomplete or wrong in any given sense, the very Popperian
methodology our colleagues are so fond of should have led them to delete this key assumption
about behavioural patterns, with the obvious consequence that there is no "natural" or "exact"
laws in economics. 

It is a well-known fact that very few of them, Kenneth Arrow being the best known exception,
are willing to accept this conclusion. If they were, they would understand why realism is a
central requirement in economics. Therefore, it is important for non-autistic economists to
understand that it is not just "more realism" that they must fight for, but also, and more
importantly, for a methodological posture revolving around the requirement for realism. 

This last point raises another problem, the all too frequent confusion about the level of
abstraction in economics. Having worked for many years on the Soviet, then the Russian,
economy, maybe I have developed a certain sense on that matter. Going back to James K.
Galbraith's contribution, to discuss the market for low wage labor as a specific case of the
labor market is not the same thing as to discuss the market for low wage labor in a given
country, at a given time and with the given set of institutions governing relationships between
the internal market and the world economy. 

By the same token, when we discuss the labor market, the word "market" does not have
the same meaning as when we use it in a discussion about relative pros and cons of market
and central planning. Another extremely dangerous way to do economics is illustrated
when Robert Solow, in his Le Monde article, switches from an highly abstract level to
directly operational issues as if concepts were part of real life. Spinoza wrote that the
concept "dog" does not bark, but nevertheless, if we understand how to use concepts,
"dog" is still useful for understanding life where dogs bark and even bite. Realism is not to
be confused with reality. The fight against the misuse of axiomatism in economics (and
generally speaking in the social sciences) is not an anti-theoretical turn but a different
approach to theoretical thinking.  

Having gone so far in support to the post-autistic approach I must confess some unease
about the widespread use of the term "pluralism" in the PAE-Newsletter. First, . . . . 
to read the rest of this article CLICK HERE or go to the Media Archives section
of www.paecon.net

Real Science Is Pluralist
Edward Fullbrook (editor of Intersubjectivity in Economics: Agents and Structures, forthcoming)  


Fifty years from now, when historians of ideas write about how economics turned
away from scientism and toward science, they may identify the pivotal event as the
appearance of Robert Solow’s article in Le Monde (3 Jan. 2001). Most economists
living today grew up with the idea, even if not always agreeing with it, that there is and
should be a master theory, neoclassicalism. But the idea of a nation, the United States,
claiming mastery over the theoretical core is not one that often has been publicly
proclaimed. Yet that is the implied message that leaps from every paragraph of Solow’s
article, and whose aftershocks are, as I write, awakening economists from their slumbers.

Nevertheless, those future historians will be wrong if they hold Solow to account for more
than being just an average guy who opened his mouth in the wrong place at the wrong time.
Solow’s article merely manifests in nationalistic form an ideology that has choked the
social sciences, economics in particular, for as long as most of us can remember. Let me
try to explain. . . . . . . . . . . . . . .

to read the rest of this article CLICK HERE or go to the Media Archives section
of www.paecon.net

Teaching Economics Through Controversies
Gilles Raveaud (co-founder of Autisme-Économie) 

This is an excerpt, the middle third of Raveaud's essay.  For the full text, CLICK HERE 

. . . .

Looking for controversies

Let’s turn back to the image of science insisted upon by those economists: aren’t there
any conflicts of power, any competing views on the good in economics? Aren’t there
completely opposed conceptions of what a society and an economy is among economists?
Does everybody agree on the way to produce scientific analyses of economic problems?
To put it frankly, the conception of science those economists have is really naïve: many
works, written by sociologists studying natural sciences, have shown how knowledge is
constructed through the conflict of theories[1][1]. Moreover, they’ve shown how the permanence
of such debates is intrinsic to science, and is, one could say, its engine. No science is a
calm and eternally defined pitch. On the contrary, its lines are constantly evolving, and
sometimes scientists do not even agree on the shape of the ball !

Would economics be an exception? Fortunately not. One knows how economics has
been the scene of terrific fights over the years since its very origin, whenever one locates
that beginning. Moreover, the point of such battles was often over the very foundations of
the discipline (the forms of the lines of the pitch), not only its methodology (the rules of the
game) and objects (shape of the ball, if any). Such controversies do exist in economics,
they are numerous and persistent.

What does « controversy » mean? A strict definition of it could be the following : A
formulates a theory, that B criticises, A replies, and so on. Examples of such controversies
are for example, the « Vining-Koopmans » controversy on the place and role of maths and
theory in economics. The controversy started with Koopmans qualifying Burns and Mitchell
Business Cycles of « measurement without theory », because it was not based on
neo-classical grounds. In his reply, Vining pointed out that Koopmans’ judgement relied on
a stringent definition of economics, according to which only his approach (neo-classical
theory) was valid, although he had no firm results which showed the productivity of such an
approach. The controversy concerned the definition of acceptable theory and the reasons
why neo-classical economics should be preferred[2][2].

As one can see, this controversy has never been settled : there is no « scientific answer »
to the problems raised above, even if the majority of economists support one view rather
than the other at a certain time. This is what economics is really about : conflicting views
about problems and the way to deal with them ; competing claims on which policy to
support. This is just so obvious that one is surprised to have to recall this. Newspapers are
filled with economists contradicting one another on the policies to be followed, because
their theories differ. Everyone knows that there is no such thing as an economic science,
at least not in the sense understood above, but the students are required to believe there
is. Only economics students are supposed to believe that there is a knowledge about
economic facts which is coherent, precise, and which leads to clear policy recommendations.

Teaching through controversies

Controversies, even understood in the restricted sense given above, are numerous in
economics (see the classical debates on value ; the question of the nature and
measurement of capital ; Keynes and Hicks on the IS-LM model ; Romer and Solow on
growth theory ; etc.) But one can understand controversies in a broader sense : that is,
the competing views on recurring problems in economics. Theories of consumption are an
excellent example of this: starting with the Keynesian « consumption function », one can
trace back the attempts by Brown, Modigliani and Duesenberry to « save » the Keynesian
function. One can then turn to Friedman’s radical criticism, with his « permanent income
hypothesis », and its revision through the life-cycle model.

All these models are not to be presented as trials and errors on the road to an ever better
theory : on the contrary, they are to be presented as what they are, that is, conflicting
views on an economic problem of central importance. In particular, such theories, and
the differences between them, simply cannot be understood if one is not aware of their
consequences in terms of economic policy. Teaching these models should be quite
different than at present; each theory should be presented on an equal footing, given
its chances in the competition of science. In particular, one should focus not only on
the « model » itself (if any), but also on three crucial aspects of the problems surrounding
the use of the model: the context of the debate ; the role and place of empirical data ; the
consequences for economic policy.

As one can see, teaching is much more demanding in this context, as it is supposed to
encompass all the dimensions of the problem under consideration. In fact, what we are
suggesting here may already exist, in some shape or other, but, even if it is the case, it
is done through various courses, which are not linked to one another. Statistics are taught
for their own sake, with no or little reference to economic theory ; the history of thought
very often overlooks the mathematical contents of theories ; and economic theory is
presented as being autonomous from everything else. The complete absence of economics
textbooks constructed in the way we propose is a clear indication of this disastrous
« division of labour » among researchers and teachers.

As a result of the present state of teaching, the student does not acquire any knowledge
of the economy he lives in, nor of the competing theories that set out to explain it. With
what we propose here, it could be hoped that both lacks would be filled : controversies
make theories lively and real ; and their empirical content gives us knowledge of « facts »,
as we show below.

---

[3][1] See the programme of science studies, and in particular works by Bloor and Latour
(even if their views are themselves quite different).
[4][2] For a full story, see the original texts in The Review of Economics and Statistics,
vol. 29, published in 1947. Mirowski, in (1990?), “The Measurement without theory
controversy : defeating rival research programs by accusing them of naive empiricism”,
Economies et Sociétés n°11, pp. 65-87. puts the story in the broader perspective of the
conflict between the NBER and the Cowles Commission.

__________________________________________________________________________

EDITOR: Edward Fullbrook

CORRESPONDENTS: Argentina: Iserino;  Australia: Joseph Halevi, Richard Sanders:  Brazil: Wagner Leal Arienti;
France: Gilles Raveaud, Olivier Vaury; J. Walter Plinge;  Germany; Helge Peukert;  Japan: Susumu Takenaga;
India: Nitasha Kaul;  Spain: Jorge Fabra;  United States: Benjamin Balak, Daniel Lien, Paul Surlis:  At large: Paddy Quick
________________________________________________________________________________________

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