Economists of Tomorrow

Very good paper by Alan Freeman, read it here :

Titled the Economists of Tomorrow, it talks of what kind of ideas do we want to spread in our economics courses and departments –

The Abstract:

It argues that a pluralist subject benchmark, derived from a pluralist code of conduct, is a prerequisite for the reform of the profession. Critical, pluralistic and independent thinking should be the primary requirement good economic practice, and specific provisions should be made to recognize, promote, defend and guarantee this good practice in teaching and assessment alike.
This is needed because of what Colander et al (2008) term the “systemic failure” of economics –the profession’s inability, taken as a whole, to anticipate and understand the
financial crash and recession of 2008. This exposes a deep-seated weakness in economics: systemic failure requires a systemic solution. The paper explains how the built-in tendency of the economic profession to select for conformity has led to its regulatory capture. Existing UK benchmarks have substituted peer-ranking – the appointment of judges selected for conformity – for collaborative peer review – the pluralistic integration of the strengths of the academic community.
This past practice has become institutionalized at every level. The profoundly non-scientific practice of simply reproducing a politically acceptable consensus has thereby replaced the independent and critical pursuit of knowledge as the primary peer-recognized hallmark of quality. Tomorrow’s economists need to be defended against the systemic failure of the economics of today. This requires a conscious regulatory intervention – benchmarking for pluralism.

Parts of the paper that I liked best:

The “good economist” of the future must do the diametric opposite of what her or his teachers have done. She or he must accept, entertain, and encourage difference and controversy; jettisoning the simple repetition of canon or doctrine in favour of critical independence which challenges and questions all received wisdom.
Such capacities will develop only if the starting point is a recognition which economics has yet to achieve – that it contains more than one approach, more than one theory, and more than one proposed solution, to every problem it faces. Pluralism is the recognition of this fact.

Pluralism draws on a lost economic tradition: controversy. The fertile currents which renew it flow both from the theoretical legacy of economic thought, and from the new and creative ideas, on such issues as feminist economics, sustainable economics, cultural economics, behavioural economics, financialisation, new trade theory and new labour market theory, which have emerged over the past forty years. Such thinking has matured, gaining vitality and confidence, in proportion to its marginalisation by the mainstream.
Pluralism’s sweep extends to the beginning of economics, including both thinkers once
lionised and since discarded, and also numerous thinkers whose ideas were rejected before being claimed as seminal. It includes intellectual giants, in a spectrum from left to right, whose work even when invoked is cited with zero regard for what was actually said, and including, for example, Friedrich Hayek, John Maynard Keynes, Rosa Luxemburg, Karl Marx, Carl Menger, Hyman Minsky, Karl Polanyi, Joseph Schumpeter, and Thorstein Veblen.

How are these alternatives to be placed at the disposal of tomorrow’s economists? Not, we insist, by replacing the present canon with any one of them. Economics over the decades has become used to the idea that progress consists simply of replacing one canon with another. Pluralism is a break with the entire conception that the state of economic knowledge at any given time may be encompassed in a single canon, doctrine, or dogma. It defines economics – in line with the other social sciences – as the co-existence of multiple theories, none of which is taken to be definitively true or false until, and unless, the evidence has accumulated to prove or disprove it.

Uses of the Past

For those unsatisfied with the current trends in economics, going back into the past is a good aid to rethink.

Read Axel Leijonhufvud’s classic piece on The Uses of the Past on when the need to re-examine the past becomes important:

As long as “normal” progress continues to be made in the established directions, there is no need to rexamine the past – and it is then more than likely that increasingly simplistic notions of the development of the field will gain widespread acceptance. Indeed when a group agrees on what is ‘good economics’, on what the ‘relevant’ questions are, and on how to go about answering them, a version of the past that is more legend than history may serve its scientifically ideological purposes very well.

Things begin to look different, if and when the workable vein runs out….when the road that took you to the “frontier of the field” ends in a swamp or in a blind alley…Our fads run out and we do get stuck occasionally. Reactions to finding yourself in a cul-de-sac differ. Tenured professors might often be content to accommodate themselves to it, spend their time tidying up the place, putting in a few modern conveniences, and generally improving the neighbourhood. Braver souls will want out and see a tremendous leap of the creative imagination as the only way out…Another way is to backtrack. Back there, in the past, there were forks in the road and it is possible, even plausible that some roads were more passable than the one that looked most promising at the time. At this point, a mental map of the road network behind the frontier becomes essential. (pp6).

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The Other Canon which is supporting an initiative to document the flow of ideas in the past has this to say:

The greater part of the most influential economics books in history, and their authors, are not mentioned in today's textbooks in the history of economic thought. In fact, these textbooks tend to focus as if economics originated in physiocracy, a tradition that was very short-lived in terms of actual policy influence. The anti-physiocrats, who established the policies that made Europe into a wealthy continent during the decades and centuries to follow, are hardly ever mentioned.

The Kress Collection at Harvard University contains the world's most famous collection of economics books. Its former curator, Kenneth Carpenter, has worked for decades collecting data on the translations of economics books, thus documenting how ideas moved across Europe. The sheer volume of translations is indicated by the fact that only from and into Swedish there were more than 200 translations of economics books before 1850. Kenneth Carpenter has put this material at the disposal of The Other Canon Foundation to be published on the web. He will himself assist in the editing. Carpenter's legendary 'The Economic Bestsellers Before 1850' - out of print for decades already - documents the editions and translations of the 40 economics books that reached the highest number of editions.

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Some places which I have found very useful to source electronic versions of old classics are

http://www.archive.org/details/texts

http://socserv.mcmaster.ca/econ/ugcm/3ll3/

Back to the roots

Rumblings against orthodoxy are growing stronger..here is a piece by Kaletsky on the need for economics to get a 'new' paradigm..its conclusion:

Economics today is a discipline that must either die or undergo a paradigm shift—to make itself both more broadminded, and more modest. It must broaden its horizons to recognise the insights of other social sciences and historical studies and it must return to its roots. Smith, Keynes, Hayek, Schumpeter and all the other truly great economists were interested in economic reality. They studied real human behaviour in markets that actually existed. Their insights came from historical knowledge, psychological intuition and political understanding.

Protectionism debate again!

With the global economy hit badly, the protectionist debate rears up again.
There's a good report out on VOXEU on the collapse of global trade, murky protectionism and the global crisis - worth a read. Murky protectionism (including for instance clauses in the bailout packages that confine spending to domestic producers) now encompasses not just the emerging economies, but also the advanced North.
For those confused about who is right and who is wrong, Duncan Green of Oxfam on the VOXEU gobal crisis debate, who sums up neatly, ' Don’t get me wrong, I still think protectionism is a lousy idea for the North, but we need to be more nuanced when it comes to development. Good thing or bad thing? Answer – sorry - it depends on who you are (and how you do it)."

Will oil boil again?

Just a link to my article in the Business Standard newspaper last month, which discussed Hamilton's paper on oil prices – With crude forecasts moving from $200 to $25 in just a few months, the main point of my piece was :
'swings in crude oil prices will continue, as they are reflective of a market for exhaustible resources, a market which is near capacity and under stress. However, with such oscillations, there are no clear signals for investment in technology change, nor do they induce a search for alternatives to reduce dependence on fossil fuels. This compounds the problem in the long run. This is why a fall in the oil price should not lull people into complacency. This is why understanding crude oil prices is important.'

The recent evolution of the exchange rate in Brazil: a Minsky moment

by Paulo Gala

The current crisis has quite clearly shown the so-called dual nature of the exchange rate: on the one hand, the relative price between tradables and non-tradables, and, on the other hand, the price of a financial asset. It also becomes increasingly clear that the determination of the exchange rate has essentially a financial dynamics, especially in a context of open capital accounts. From the perspective of prices of tradables and non-tradables, the country was getting into a problematic situation, as the real exchange rate appreciation was making it increasingly difficult to insert domestic production in the world economy. Brazilian prices, once converted to dollars, reached surprisingly high levels, thus eliminating the competitiveness of our industries, even the most efficient ones. This can be observed in the reversal of the manufacturing trade balance, with an explosion of imports and a stagnation of exports. Our trade surplus was more and more dependent on high commodity prices, in a bubble that now seems to have burst. The recent path of the current account showed clearly that the Brazilian currency was becoming misaligned towards overvaluation.

The explosive increase in the dollar price of Brazilian non-tradables certainly did not result from an increase in productivity and wages, as we would like it to be. Numerous papers showed that the Brazilian currency was relatively overvalued, whether in terms of measures of PPP (Purchasing power parity) deviations, or in measures such as BEER (Behavioural Equilibrium Exchange Rates). How then to explain the appreciation path that put the exchange rate increasingly “out of place”?

Now comes the financial nature of the exchange rate. As the country received the investment grade and investors showed a strong appetite for investments in emerging countries, there was a flood of capital to Brazil. Last year only the capital account accumulated a surplus in excess of US$90 billion. Investments in the stock market, securities, and derivatives caused an increasing appreciation of the Brazilian currency, which seemed more and more undervalued in the eyes of financial market. The period of relative stillness in the world markets during the last few years stimulated the "Minskyan" spirits of the financial agents that were increasingly betting on uncertain positions in emerging markets. In Brazil, the exchange rate continued to appreciate as long as these operations were highly profitable. Domestic companies betting on derivatives related to the appreciation of the Brazilian real, as well as capital flows to the stock market and securities, caused one of the highest exchange rate appreciations in the emerging world in the last years.

And now the “Minsky moment” comes, in which deleveraging and deflation of assets predominate. The appreciation movement built during 2 years is undone in 2 weeks. In a troubled way, to say the least, the exchange rate returns to a more reasonable position in terms of prices of tradables and non-tradables. For those who have been studying Keynes and Minsky, there is nothing new in this type of financial dynamics.

It is worth mentioning, however, the negative consequences of the type of arrangement we are living in today. As the relative price between tradables and non-tradables, the exchange rate strongly affects the country's technological dynamics, as long as it impacts decisions regarding investment, production, and innovation. The level of the real exchange rate plays a fundamental role in macroeconomic dynamics from a long-term perspective. By influencing the determination of sector specialization, particularly regarding incentives to industry, the impact of the exchange rate level on the dynamics of productivity is high. Exchange rate overvaluations are particularly harmful to processes of economic development, since they substantially reduce the profitability of production and investment in manufacturing tradable sectors. By reallocating resources to non-manufacturing sectors, especially to the production of commodities (with decreasing returns to scale), and to non-tradable sectors, exchange rate overvaluations eventually affect the economy's whole technological dynamics.

To conclude, it is worth mentioning the impacts of exchange rate volatility in the economy's performance. In an open capital account setting, the exchange rate is financially determined and depends on the traditional Minskyan “boom” and “bust” dynamics. The relative price between tradables and non-tradables is now determined in the financial market, with very complex dynamics. That is to say, the profitability of manufacturing production, which it is essential to long-term economic development, begins to depend on the whims of financial markets.

Debating a new order

There’s a bunch of articles in the Guardian, starting last month with Jeffrey Sachs ‘Amid the rubble of global finance, a blueprint for Bretton Woods II’, Ha-Joon Chang replies to this article adding on many more points on trade and development that have been missed by Sachs – a strengthened IMF without reform of its missions and governance structure is likely to make matters worse, MDGs are important but development needs upgrading a country’s productive capabilities etc.

Check out the whole series at Comment is Free