Felix Martin: How the new economics outgrew the academies

Reports of the death of popular economics turn out to have been greatly exaggerated, as two new books by Edmund Phelps, Sendhil Mullainathan and Eldar Shafir, make clear.

Scarcity: Why Having Too Little Means So Much 
Sendhil Mullainathan and Eldar Shafir 
Allen Lane, 304pp, £20

Mass Flourishing: How Grass-Roots Innovation Created Jobs, Challenge and Change 
Edmund Phelps
Princeton University Press, 392pp, £19.95

1. Eighteen months ago, I attended a conference on the crisis facing economics. Its title posed a blunt question: “Are graduate economists fit for purpose?” That it was sponsored by two of the largest employers of professional economists in the country – the Bank of England and the Government Economic Service – suggested that their polite answer was no.

There was worse to come. The conference heard that the teaching of economics at universities had been in decline for more than two decades. In 1992, the government’s Research Assessment Exercise indicated that there were 60 fully fledged university economics departments. By 2001 the number had fallen by a third to 41, and by 2008 to only 35. It seemed that not only were employers no longer confident of the value of modern economics, but students did not want to study it – and the government had given up funding it.

Yet we all knew there was something that didn’t quite add up about this dismal picture. Whatever problems might be plaguing economics at the universities, a quick glance at the bestseller lists shows that public interest in the subject is in ruder health than ever. Books such as Freakonomics by Steven D Levitt and Stephen J Dubner, Tim Harford’s The Undercover Economist and Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism are among the most popular nonfiction titles of the past decade. What is going on? How is the apparent death spiral of economics at universities to be squared with the enormous resurgence of interest in the subject among the general public? Anyone who wants to know the answer could do much worse than turn to the two books under review.

2. Scarcity: Why Having Too Little Means So Much is by two of the coming men in US economics, Sendhil Mullainathan of Harvard University and Eldar Shafir of Princeton. The book is representative of a growing library aimed at popularising the new school of “behavioural economics”, in which the strict assumptions concerning individual rationality built into old-school microeconomics are jettisoned in favour of a more realistic understanding of individual decision-making derived from experimental psychology. As Daniel Kahneman, a winner of the 2002 Nobel Prize in Economics (who, like Shafir, is a psychologist by training), likes to say, traditional economics studied how individuals would act if they were rational; behavioural economics studies how they actually do.

In Scarcity, Mullainathan and Shafir set out to summarise their research on what they believe to be one of the central lessons of modern psychology for economics. This is that there is a generic mindset associated with the experience of scarcity, of money, of time, of friends; indeed, of more or less anything. This mindset, they argue, has its own logic, which has to be understood before a vast array of economic, business and personal problems can be properly addressed.

The authors’ basic argument is as follows. Experimental psychology has shown that the experience of scarcity produces both good and bad results. The good result is “focus”: increased attention and therefore potentially increased effectiveness. Who hasn’t been in a meeting, for example, which was directionless and unproductive until everyone realised that there was only 15 minutes left and everyone got down to business?

This effect of scarcity can also be bad, however. In that case, it should be called not “focusing” but “tunnelling”, in order to emphasise how, as well as concentrating attention on one objective, it draws it away from others that may be just as (or more) important.

The problem with tunnelling is that it shrinks the mind’s capacity to do anything else. It reduces cognitive capacity, or what Mullainathan and Shafir colloquially call “bandwidth”. That then creates a vicious circle – because operating with reduced bandwidth makes it more difficult to escape the circumstances that induced scarcity in the first place. A poor single mother experiences scarcity of money and time; therefore she is constantly stressed out; therefore she can’t think straight about financial matters or planning; therefore she fails to get a better job, or even to register for her benefits on time; therefore she sinks further into poverty and experiences even greater scarcity, and so on.

A criticism often made of behavioural economics is that many of its findings sound suspiciously like statements of the bleeding obvious. Even Kahneman likes to recall how he and his long-time collaborator Amos Tversky used to joke to one another that they hadn’t discovered a single thing that their grandmothers didn’t know. Those who take this view will find much grist to their mill in a book that serves up “discoveries” such as how poor people get more stressed than rich people do when presented with a large and unexpected bill, or that it is harder to sleep well when you have things on your mind.

Though there is some truth in these objections, I think they miss the merits of the approach. It was John Maynard Keynes who mused, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” What he meant was that it is easy in economics to come up with vast and abstract theories but very difficult to come up with useful, practical solutions.

A distinctive claim of behavioural economics is that it generates practical ideas for public policy and personal conduct. For the behavioural economists, there is no more sitting alone in dusty faculty offices working out hard problems with nothing but a pencil and a bit of algebra – all in the name of knowledge for its own sake. On the model of proper scientists, they work in “labs”, leading “research groups” and collecting empirical data from randomised experiments run across many continents, all with the aim of informing “evidence-based policy”.

Hence, in the last third of Scarcity, Mullainathan and Shafir present a variety of principles for the design of aid and welfare programmes, for management practices in business and for various kinds of personal decisions and habits. One such principle is that anti-poverty programmes should be more tolerant of faults by the recipients (because, being under stress, they are likely to make mistakes): so, for instance, deadlines for registration should not be too strictly observed. Another is that, because bandwidth per se is an important determinant of poverty, programmes should value it and be designed to build it, or at least make sure not to tax it. So, to all the other benefits of providing convenient childcare should be added the benefit that mothers have a chance to think clearly about whatever else they are doing. These ideas make sense and they sound implementable.

I was less persuaded by the claim that the results of this fascinating research agenda constitute “a radical reconceptualisation of poverty”. I fear that this might be an example of the tunnelling the authors do so much to warn against. Scarcity certainly convinced me that it is important to understand that indigent rag traders in India experience debilitating stress from constant threats by the moneylenders on whom they depend for working capital and that schemes to alleviate this would be highly worthwhile development interventions. Yet that should not distract us from the dominance of the cultural, social and political roots of poverty – the iniquities of caste, political disenfranchisement and the failings of the judicial system – and students of development economics will, I hope, continue to learn also about old-fashioned ideas such as land reform and political revolution.

However, Mullainathan and Shafir never claim to have all the answers. They style their book as “an invitation to read about a science in the making” and it is indeed a succinct, digestible and often delightfully witty introduction to an important new branch of economics.

3. For all Keynes’s criticism of economists’ overweening ambitions, he also believed in the value of big-picture thinking. He taught that economics is “a moral science and not a natural one” and that the good economist should therefore be a “mathematician, historian, statesman [and] philosopher – in some degree”. As such, he would have been equally in favour of another branch of economics that has thrived in the past decade and a half – one that operates at the opposite end of the spectrum to the behavioural and experimental economists. Its exponents collaborate not with psychologists but with historians and political scientists and they have returned to the macro-historical questions of classical political economy; above all, to Adam Smith’s ur-question of why some countries are richer than others. This field, too, has encountered no shortage of interest from the general public, with the popularity of books such as Gregory Clark’s A Farewell to Alms and Daron Acemoglu’s and James Robinson’s Why Nations Fail, published last year.

Mass Flourishing by Edmund Phelps, the Nobel Prize-winning economist, is recognisably representative of this genre – yet highly unusual, both for the breadth of its scope and for the manner in which it confounds ideological categorisation. It begins by arguing that while material wealth is important, what defines a truly prosperous society is the degree to which its citizens achieve the intangible benefit of living a good life. But what is a “good life”?

Phelps traces a consistent, humanist conception of this from Aristotle to Thomas Jefferson: a life in which the individual is able to grow, to realise herself and, indeed, to create her human identity through her search for knowledge and understanding and the exercise of her creative faculties. To be able to lead such a life is to flourish – and when most people in a society are able to do so, we have arrived at the book’s first core concept: mass flourishing.

Historically speaking, Phelps further argues, very few economies have provided the conditions for such mass flourishing. Those that have succeeded have been characterised by the second core concept of his book: economic modernity. It was only once Renaissance humanism, Enlightenment rationalism and baroque vitalism had mixed together to produce the culture of modernity that economies oriented to experimentation, innovation and self-improvement at the grassroots level evolved. The result was a century-and-a-half-long golden age – from around 1825 to roughly 1975 – in countries such as the United States and Britain that developed “modern economies”.

These modern economies were different, Phelps argues, not only from the static economies of the medieval world but also, crucially, from the numerous capitalist and materially prosperous economies of today that are no longer or never were properly modern. Just to be a dynamic economy – that is, to be open to social change and capable of rapidly adopting new technologies, as continental Europe and Japan were after the Second World War – is not enough. Nor is it sufficient to be a nation that makes significant advances in science or technology, as the Soviet Union did. It is the economic culture of modernity that leads to grass-roots innovation and so the self-realisation that matters. That and that alone is the philosopher’s stone.

It is easy to be suspicious of an argument as wide-ranging as this – and, summarised in this way, Phelps’s thesis may sound simplistic and his historical claims naive. His unequivocal approval of modernity might not be to everyone’s taste: after all, the mindset of modernity was the backdrop to the nightmare of Kafka’s Trial as well as the humanity of Joyce’s Ulysses and was responsible for the delusions of Italian futurists and Soviet communists as well as the Whiggish optimism of Bloomsbury and the Fabians. I, too, was sceptical when I started Mass Flourishing. Yet, overall, I found that the more I read of it, the more my expectations were confounded and the more I found myself thinking that its basic thesis has a great deal of truth to it.

So ashamed was I of my initial assessment, once I had finished reading through Phelps’s fascinating, versatile and profound book, that I was put in mind of those immortal lines by Mark Twain: “When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years . . .”

4. So what do these two very different books have to tell us about the elusive crisis in economics? The answer is that they are excellent examples of two things. The first is the huge variety of fascinating new thinking (and new applications of old thinking) that many leading economists have been engaged in over the past 15 years. The second is that the pioneers in these new fields have curiously succeeded better at communicating directly to the general public through popular writing than they have in convincing the rest of their profession to reorient what is taught by economics degree courses and how.

Fortunately, that conference’s pronouncement of the death of economics has turned out to have been greatly exaggerated. The Financial Times recently reported that more than 26,000 students took economics at A-level this year, which represents a bigger year-on-year growth than in any other subject and a 50 per cent increase from 2007. The ongoing economic crisis is no doubt an important factor in stimulating their interest. Yet the huge impact of efforts by innovative academic economists to bring their subject steeped in history, psychology and the real world to the general public has surely played a critical role, too. It only remains for orthodox curricula to catch up.

Felix Martin is an NS columnist. His book “Money” (Bodley Head , £20) has just been longlisted for the Guardian First Book Award

Magic numbers: the public's interest in how economies work is in ruder health than ever. Photograph: Larry Sultan/Gallery Stock.

Macroeconomist, bond trader and author of Money

This article first appeared in the 02 September 2013 issue of the New Statesman, Syria: The west humiliated

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At Labour conference, activists and politicians can't avoid each other – but try their best to "unsee"

My week, from havoc in the Labour family to a sublime act of real-life trolling – via a shopping centre.

I like to take a favourite novel with me to party conference for when it all gets too much, and this year I took China Miéville’s The City & the City. It takes place in the fictional cities of Besžel and Ul Qoma, two metropolises that exist in the same geographic space but must dutifully “unsee” one another or risk the sanction of Breach, the secret police force. It turned out to be a better allegory for what was going on outside my hotel than I had expected.

Labour, as I don’t need to tell you, is badly split on almost everything. Now that the acrid leadership race has reached its inevitable conclusion, activists and politicians on both sides are operating as if they had a standing duty to “unsee” each other. The atmosphere feels a bit like a family dinner after a blazing row: everyone is aware that things have been said that will take years to be forgiven, if they ever will be, so the conversation is largely banal and superficial.

The exception is the conference floor, the only place where Corbynites and Corbynsceptics cannot unsee each other, which was therefore the scene of several acrimonious confrontations after tricky votes. It’s difficult to predict where Labour goes from here. The Parliamentary Labour Party (PLP) is largely against a split, but its members surely can’t spend the next four years dutifully pretending not to see one another,or their activists?

 

Chaos and confusion

Would it have been better for Jeremy Corbyn if his defeated challenger, Owen Smith, had done a little bit better against him – not just in the final vote but throughout the contest? All summer, Smith distinguished himself only through his frequent gaffes, to the point where it felt more appropriate to describe him as a participant in the leadership race rather than a combatant.

The difficulty for both Corbyn and his critics is that his opponents in the PLP have no clear leader. As a result, their dissatisfaction is amorphous, rather than being productively channelled into a set of specific demands or criticisms, which Corbyn could then reject or accept. The overwhelming feeling about his leadership among the PLP is that “something must be done”. So whenever an MP embarks on a freelance assault – Margaret Hodge’s no-confidence motion, say, or Clive Betts’s attempt to bring back elections to the shadow cabinet – the majority leaps on the scheme. Corbyn’s critics reason that at least it’s something.

Although fractious Labour MPs might not see it that way, the decision not to restore shadow cabinet elections helps their cause. Taking away the leader’s ability to choose his ministerial team was a recipe for chaos – chaos that would, rightly, have been blamed on them.

 

Custody rights

If the Labour family would be, as I suspect, better off seeking a divorce, there is an irony that one of the things that they all agree on is the fate of the kids. The party is entirely united behind its leader in his opposition to grammar schools – as is almost every serious thinker on education policy, from Policy Exchange on the right through to Melissa Benn on the left.

Still, Labour will encounter a visceral type of resistance to its stance from the alumni of grammars, who, regardless of what the studies show, attribute their success to their attendance at selective schools. I can understand that. Although I went to a comprehensive, the emotional pull of one’s upbringing is hard to escape. I can, for example, read all the studies that show that children in single-parent families do worse – but I find it hard to experience it as anything other than an awful attack on my mother, to whom I owe everything.

Winning the argument over schooling will require a sensitive ear to those for whom the argument against the schools seems like an attack on their parents.

 

Pudding and pie

One of the nice things about being from a single-parent family is that I don’t have to admit to flaws – merely to unresolved kinks that would have been ironed out had my absent father stuck around. One such kink is my capacity for procrastination, which
results in my making decisions too often at the last minute.

This always comes back to bite me at party conference. At dinner events, I frequently put off picking my meal options to the point that I have to eat whatever the kitchen has left. At one meal this year, I was lucky enough to have three courses of pudding, but at another, my hastily cobbled-together starter seemed to consist entirely of pesto, taramasalata and rocket.

 

Too late

The best thing about party conference is sharing a panel with a politician you don’t know very much about who turns out to be highly impressive. It’s particularly cheering now, when my optimism about politics is at a low ebb. I try to meet them properly for coffee afterwards, although because of my capacity for putting things off, that doesn’t always happen.

Last year, I was chairing a particularly testy fringe on the Israel-Palestine conflict. The then shadow foreign secretary, Hilary Benn, was running late and an MP from the 2015 intake had to field all the questions on her own. She did this with immense poise and knowledge, while clearly having a sense of how unhelpful some of the louder, angrier voices were – during one lengthy monologue from the floor, she turned and rolled her eyes at me. Her name was Jo Cox.

I kept meaning to get to know her, but I never got around to ringing her office, and now I never will.

 

Banter and bargains

A colleague alerts me to a sublime act of real-life trolling. When Everton opened a second branch of its team store in Liverpool’s shopping centre, it picked an innocuous name: Everton Two. Innocuous, that is, until you realise that the shopping centre is called Liverpool One. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics. 

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories