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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In defence of orientalism, the case against Twenty20, and why Ken should watch Son of Saul

My week, from Age Concern to anti-semitism.

Returning late from a party I never much wanted to go to, I leap up and down in the middle of the Harrow Road in the hope of flagging down a taxi, but the drivers don’t notice me. Either they’re haring down the fast lane or they’re too preoccupied cursing Uber to one another on their mobile phones. My father drove a black cab, so I have a deep loyalty to them. But there’s nothing like being left stranded in NW10 in the dead of night to make one reconsider one’s options. I just wish Uber wasn’t called Uber.

Just not cricket

Tired and irritable, I spend the next day watching sport on television – snooker, darts, cricket, anything I can find. But I won’t be following the Indian Premier League’s Twenty20 cricket again. It’s greedy, cynical, over-sponsored and naff. Whenever somebody hits a boundary, cheerleaders in cast-off gym kit previously worn by fourth-form Roedean girls wave tinsel mops.

Matches go to the final over where they’re decided in a thrashathon of sixes hit by mercenaries wielding bats as wide as shovels. Why, in that case, don’t both teams just play a final over each and dispense with the previous 19? I can’t wait for the elegant ennui of a five-day Test match.

Stop! Culture police!

I go to the Delacroix exhibition at the National Gallery to shake off the sensation of all-consuming kitsch. Immediately I realise I have always confused Delacroix with someone else but I can’t decide who. Maybe Jacques-Louis David. The show convincingly argues that Delacroix influenced every artist who came after him except Jeff Koons, who in that case must have been influenced by David. It’s turbulent, moody work, some of the best of it, again to my surprise, being religious painting with the religion taken out. Christ’s followers lamenting his death don’t appear to be expecting miracles. This is a man they loved, cruelly executed. The colours are the colours of insupportable grief.

I love the show but wish the curators hadn’t felt they must apologise for Delacroix finding the North Africans he painted “exotic”. Cultural studies jargon screams from the wall. You can hear the lecturer inveighing against the “appropriating colonial gaze” – John Berger and Edward Said taking all the fun out of marvelling at what’s foreign and desirable. I find myself wondering where they’d stand on the Roedean cheer-leaders of Mumbai.

Taking leave of the senses

My wife drags me to a play at Age Concern’s headquarters in Bloomsbury. When I see where she’s taking me I wonder if she plans to leave me there. The play is called Don’t Leave Me Now and is written by Brian Daniels. It is, to keep it simple, about the effects of dementia on the families and lovers of sufferers. I am not, in all honesty, expecting a good time. It is a reading only, the actors sitting in a long line like a board of examiners, and the audience hunched forward in the attitude of the professionally caring.  My wife is a therapist so this is her world.

Here, unlike in my study, an educated empathy prevails and no one is furious. I fear that art is going to get lost in good intention. But the play turns out to be subtly powerful, sympathetic and sharp, sad and funny; and hearing it read engages me as seeing it performed might not have done. Spared the spectacle of actors throwing their bodies around and singing about their dreams against a backdrop painted by a lesser, Les Mis version of Delacroix, you can concentrate on the words. And where dementia is the villain, words are priceless.

Mixing with the proles

In Bloomsbury again the next day for a bank holiday design and craft fair at Mary Ward House. I have a soft spot for craft fairs, having helped run a craft shop once, and I feel a kinship with the designers sitting bored behind their stalls, answering inane questions about kilns and receiving empty compliments. But it’s the venue that steals the show, a lovely Arts and Crafts house, founded in the 1890s by the novelist Mary Ward with the intention of enabling the wealthy and educated to live among the poor and introduce them to the consolations of beauty and knowledge. We’d call that patronising. We’re wrong. It’s a high ideal, to ease the burden of poverty and ignorance and, in Ward’s words, save us from “the darker, coarser temptations of our human road”.

An Oscar-winning argument for Zionism

Speaking of which, I am unable to empty my mind of Ken Livingstone and his apologists as I sit in the cinema and watch the just-released Academy Award-winning Son of Saul, a devastating film about one prisoner’s attempt to hold on to a vestige of humanity in a Nazi death camp. If you think you know of hell from Dante or Michelangelo, think again. The inferno bodied forth in Son of Saul is no theological apportioning of justice or deserts. It is the evisceration of meaning, the negation of every grand illusion about itself mankind has ever harboured. There has been a fashion, lately, to invoke Gaza as proof that the Holocaust is a lesson that Jews failed to learn – as though one cruelty drives out another, as though suffering is forfeit, and as though we, the observers, must choose between horrors.

I defy even Livingstone to watch this film, in which the Jews, once gassed, become “pieces” – Stücke – and not grasp the overwhelming case for a Jewish place of refuge. Zionism pre-dated the camps, and its fulfilment, if we can call it that, came too late for those millions reduced to the grey powder mountains the Sonderkommandos were tasked with sweeping away. It diminishes one’s sympathy for the Palestinian cause not a jot to recognise the arguments, in a world of dehumanising hate, for Zionism. Indeed, not to recognise those arguments is to embrace the moral insentience whose murderous consequence Son of Saul confronts with numbed horror. 

This article first appeared in the 05 May 2016 issue of the New Statesman, The longest hatred