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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Jeremy Corbyn's fans must learn the art of compromise

On both sides of the Atlantic, democracy is threatened by a post-truth world. 

Twenty years ago, as a new and enthusiastic Labour MP, I wrote an article for The Observer in praise of spin. I argued that if citizens are to be properly informed and engaged in their democracy, politicians - and in particular governments - have a duty to craft their messages carefully and communicate them cogently. It was a controversial notion then but less so now that we have entered the era of post-truth politics. In the old days, we used to "manage" the truth. Now we have abandoned it. 

We’ve probably come further than we think, for when truth is discarded, reason generally follows. Without a general acceptance of the broad "facts" of any matter, there can be little basis for rational debate nor, therefore, for either the consensus or the respectful disagreement which should emerge from it. Without a commitment to truth, we are free to choose and believe in our own facts and to despise the facts of others. We are free too to place our faith in leaders who make the impossible seem possible. 

We condemn the dictatorships which deny their citizens the right to informed and open debate. But in our own societies, unreasoned and often irrational politics are entering the mainstream. 

The politics of unreason

In the UK, the Leave campaign blithely wedded brazen falsehood to the fantasy that Brexit would cure all ills – and millions of voters enthusiastically suspended their disbelief.  “We want our country back” was a potent slogan - but no less vacuous than the pledge to “make America great again” on which Donald Trump has founded his election campaign. On both sides of the Atlantic, people want to take back control they know they never had nor ever will.

Both campaigns have deliberately bypassed rational argument. They play instead to the emotional response of angry people for whom reason no longer makes sense. Since the time of Plato and Aristotle, democracy’s critics have warned of the ease with which reason can be subverted and citizens seduced by the false oratory of charismatic leaders. Trump is just the latest in a long line of the demagogues they feared. He may not make it to the White House, but he has come a long way on unreasoning rhetoric - and where he leads, millions faithfully follow. He has boasted that he could commit murder on Fifth Avenue without losing votes and he may well be right.

But if Trump is extreme, he is not exceptional. He is a phenomenon of a populism of both right and left which has once more begun to challenge the principles of parliamentary democracy.

Democracy in decline

All over Europe and the United States, consumer-citizens are exasperated by democracy’s failure to meet their demands as fully and as fast as they expect. If the market can guarantee next day delivery, why can’t government? The low esteem in which elected politicians are held is only partly the consequence of their failings and failures. It is also evidence of a growing disenchantment with representative democracy itself. We do not trust our politicians to reflect our priorities. Perhaps we never did. But now we’re no longer prepared to acknowledge their unenviable duty to arbitrate between competing political, social and economic imperatives, nor ours to accept the compromises they reach - at least until the next election.

We have become protesters against rather than participants in our politics and, emboldened by hearing our chosen facts and beliefs reverberating around cyber space, have become increasingly polarised and uncompromising in our protest. 

The Trumpy Corbynites

Which brings us to Labour. Despite the obvious political differences between Jeremy Corbyn and Donald Trump, there are striking similarities in the movements which have coalesced around them. For many of their supporters, they can simply do no wrong; each criticism provides further evidence of a corrupt establishment’s conspiracy against them; rivals, including those who share many of their beliefs, are anathematised; unbelievers are pursued across the internet; inconvenient facts are reinterpreted or ignored; rational, civil debate is shut down or drowned out. 

There are other similarities in these insurgencies: both mistake slogans for policies and mass rallies for popular support; both are overwhelming and quite possibly destroying their own parties – and both, ultimately, are movements without practical purpose.

Trump may give vivid expression to his followers’ grievances but, other than building a wall along the Mexican border, his plans for government are obscure. Similarly, while Corbyn and his supporters know what they’re against, they have not yet articulated a clear vision of what they’re for, much less how it can be achieved. For many of them, it is enough to be "anti-Blairite". 

But in disassociating themselves from a Labour prime minister’s mistakes, they are also dismissing their party’s achievements under his leadership. Their refusal to acknowledge the need for compromise may well enable them to avoid the pitfalls of government. But government’s potential to bring about at least some of the change they want does not come without pitfalls. In wanting it all, they are likely to end up with nothing.

The art of compromise

Democracy cannot be sustained simply by what passionate people oppose. And though movements such as Momentum have important roles to play in influencing political parties, they cannot replace them. Their supporters want to be right - and they often are. But they are rarely prepared to test their principles against the practical business of government. The members of political parties want, or should want, to govern and are prepared, albeit reluctantly, to compromise – with each other, with those they seek to represent, with events -  in order to do so. Parties should listen to movements. But movements, if they are to have any practical purpose, must acknowledge that, for all its limitations, the point of politics is power.

We have to trust that the majority of American voters will reject Donald Trump. But closer to home, if Labour is to have a future as a political force, Corbyn’s supporters must learn to respect the historic purpose of the Labour party at least as much as they admire the high  principles of its current leader. There isn’t long for that realisation to take hold.

In the UK as in the US and elsewhere, we need to rediscover the importance of common cause and the art of compromise in forging it. The alternative is a form of politics which is not only post-truth, post-reason and post-purpose, but also post-democratic. 

Peter Bradley is a former MP and director of Speakers' Corner Trust, a UK charity which promotes free speech, public debate and active citizenship.