On The Limits of Economics

Upon winning the Nobel Prize for Economics, Paul Krugman re-posted an autobiographical essay he had written in 1992. In that essay he wrote about the appeal of economics over other social sciences:

Those who read the stuff may be aware of the classic Foundation trilogy by Isaac Asimov. It is one of the few science fiction series that deals with social scientists — the “psychohistorians”, who use their understanding of the mathematics of society to save civilization as the Galactic Empire collapses. I loved Foundation, and in my early teens my secret fantasy was to become a psychohistorian. Unfortunately, there’s no such thing (yet). I was and am fascinated by history, but the craft of history is far better at the what and the when than the why, and I eventually wanted more. As for social sciences other than economics, I am interested in their subjects but cannot get excited about their methods — the power of economic models to show how plausible assumptions yield surprising conclusions, to distill clear insights from seemingly murky issues, has no counterpart yet in political science or sociology. Someday there will exist a unified social science of the kind that Asimov imagined, but for the time being economics is as close to psychohistory as you can get.

In his recent book, The Conscience of a Liberal; however, Krugman seems to have moved slightly away from this pessimistic view of the social sciences. In his book Krugman attempts to understand how America could have gone from relatively low levels of inequality in the 1950s to the outrageous levels of inequality we see today – levels not seen since the twenties. After going through various typical economic explanations, such as “skill-based technological change,” globalization, etc, he comes to the conclusion that it is “largely due to changes in institutions, such as the strength of labor unions, and norms, such as the once powerful but now weak belief that having the boss make vastly more than the workers is bad for morale” (p. 136). He then goes on to argue that these institutional and normative changes were closely tied to America’s changing political structure. In particular he focuses on the Republican party’s “Southern strategy” of appealing to disaffected Southern white men, which was first successfully adopted by Nixon and used with great effect by Regean and both Bush I and Bush II. He uses this to explain how it was that “advocates of a smaller welfare state and regressive tax policies [were] able to win elections, even as growing income inequality should have made the welfare state more popular” (p. 172).

I won’t go into the details of Krugman’s argument, or its merits, instead here I want to focus on the fact that even though Krugman arrived at the questions he asks via his economic models, his answers stray far outside the territory of traditional economic analysis. He hasn’t exactly taken up anthropology here — his arguments read like a combination of Talcott Parsons and Douglas Massey, both sociologists — but it’s a start.

More controversially, at least among my friends and colleagues, I’d also like to suggest that we anthropologists take more seriously “the power of economic models to show how plausible assumptions yield surprising conclusions.” I was shocked by the way in which many anthropologist friends reacted to the bailout bill recently before congress. There seemed to be widespread misunderstanding about the causes and magnitude of the crisis, as well as the importance of acting quickly (historical research on previous economic crises shows that timely intervention is one of the most important factors in averting disaster). Considering how much anthropologists write about globalization and other issues, it might behoove us to read some economists besides Michael Moore and Naomi Klein. Krugman might be a good place to start…

12 thoughts on “On The Limits of Economics

  1. I think most self-aware economists would admit that we don’t read nearly enough outside our field – I don’t think that’s unique to economists but it is perhaps a bigger crime because we tend to tread into the territory of other disciplines (i.e., applying our methods and models to subjects that have traditionally been the domain of other social scientists) more often than vice versa. But I just wanted to make sure that it’s just rhetorical hyperbole for you to call Michael Moore and Naomi Klein economists, right?!? Anthropologists don’t honestly think that those two are economists, do they?!? If you want exposure to real economists, I’d suggest checking out Voxeu.org, Tyler Cowen’s Marginal Revolution blog, or Mark Thoma’s Economist View blog.

  2. Along the lines of Kerim’s post, I found that my reading, a couple of years ago, of (anthropologists) Edward LiPuma and Bejamin Lee’s small book Financial Derivatives and the Globalization of Risk (Duke University Press, 2004) had been a powerful bit of preparation for making some sense of what we are experiencing now. It is a book that takes the chaning global economic order seriously from a seriously anthropological point of view.

    I recall finishing the book on the day that the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade was announced. I really appreciated how LiPuma and Lee helped me realize that this was only minimally about pork belly futures and actually about global derivatives markets and such things as the now famous credit default swaps. Beyond the specific financial mechanisms, they explore the nature of risk in what was for me a powerful way.

  3. Thanks for the post Kerim. I’ve been on the lookout (if that term is valid for the casting a kind of web2.0 net of rss feeds) for good Anthropological coverage of the crisis. So far it’s been predominantly Sociologists stepping up (though the utility of that distinction has diminished over recent years)

    I’ve found Don Mackenzie’s commentary head and shoulders above other non-econ social scientists. His broader project of ‘opening the black boxes of finance’ has been running this whole decade and looks like it may culminate with his forthcoming book ‘Material Markets’.

  4. Without reading really closely, I’d say that the last paragraph implies that anthropologists opposed the bailout and that people who opposed the bailout are ignernt yokels. Yet the first part of the posting lauds Krugman, perhaps the loudest of the opponents to the bailout, and for reasons that this anthropologist finds convincing. Unfortunate coincidence? Ugly contradiction?

  5. Well, while I’m on topic: one way in which interesting anthropological research could immediately be done about all this, and in a way that brings economics in as an object of study, is to try to understand the dynamics by which belief in this crisis spread.

    We’re talking about things (credit default swaps, subprime mortgages, etc.) about which 2 months ago most of the US had probably never heard of, and about which most of the US still probably has only the foggiest idea. Yet because, in part, of the proclamations of economists (masters, supposedly of this esoteric stuff) and of the right politicians and pundits–many of us are convinced that there is an immediate threat of economic doom that allows of only one possible solution.

    Now, this assertion may be true or false (and I’m personally dubious). But how relevant US publics went from a state of near-zero knowledge to near-total certainty about these matters is an interesting anthropological question (and popular ideas about the power of esoteric economic science certainly are part of the puzzle).

    Another question of anthropological interest here: what’s the sociological overlap between doubters of the ‘Saddam Hussein is going to blow up NYC unless we immediately invade Iraq’ thesis and the ‘it’s 1929 all over again unless the state immediately buys up 700billion of bad assets’ thesis? Clearly it’s not perfect. Many on the left, for instance, who doubted the first claim believe the second, and many on the right who bought the first claim have doubts about the second. Of course there are many reasons that different groups believe or disbelieve these expert proclamations as true or false, but (hint to grad students out there) figuring it out would be a great ethnographic project.

  6. Hm. The preceding comment (#6) was supposed to follow my first comment, but the first one didn’t seem to post. Here it is:

    I agree with the substance of JP’s comment: there are many good reasons to be against the bailout (as I am). Particularly worryingly, I’d say, is that by preemptively emptying the treasury, it makes much more difficult any New-Deal-like Keynesian , job-creating approach to the crisis that I hope an Obama administration (with a heavily Democratic Congress) would attempt–although I hope to be proven wrong on this. That this massive upward redistribution of wealth is being criticized as some kind of socialism by the libertarian crowd is beyond ridiculous.

    But I’m writing here also to quibble with the details of JP’s comment. Krugman was against the first ‘King Paulson’ plan and cautiously in favor of the revised plan (the one that ended up becoming law).

    As to the substance of Kerim’s post, yeah, we should read more economics (to learn from it but also, in the spirit of “Stone Age Economics”-type of work, to critique and broaden the narrow and ethnocentric conceptions of value and action that tend to prevail in economics).

  7. For those of you interested, you might look into the field of so-called behavioral economics. Called a revolution in economic theory by its proponents (and something less than that by its detractors), in essence it is a blend of economics, psychology (especially with decision making under uncertainty), and “moral” factors–that is, fear, envy, cooperation, and things that are indeed social in their impact and import. Anthropologists may well learn something useful from this, and it is clear to me that anthropologists can offer much to them about how such moral and social factors influence economic decisions. A good place to start is the Wikipedia entry–behavioral economics. Once there, you can tap into blogs, fact sheets, bios of important figures in the field, and more.

  8. @JP For people who don’t want to read my post too closely, the gist of it was that perhaps you should read what Krugman actually says about the bailout.

    @seantmitch I don’t think it is just “the public” which began learning about these things. From the NPR report I link to it seems that many people at the Fed didn’t understand them before either.

  9. @kerim “I don’t think it is just “the public” which began learning about these things. From the NPR report I link to it seems that many people at the Fed didn’t understand them before either.”

    Oh yeah, I completely agree. That’s why I referred to “various US publics,” which can, of course, include policy makers or whomever.

    And as to reading Krugman, yeah he’s worth reading.

  10. Kerim, I re-read your post and you nowhere distinguish the first from the second. Instead, you talk about the selling of the need to act quickly, which we can assume Krugman did not buy, since he opposed the first bailout even when the entire Bush executive branch were squeaking loudly about “immediate measures” being necessary and twisting the arms of representatives. Man, I should try this “reading closely” deal more often!

  11. Just to introduce a different tangent, I find it interesting that Krugman apparently assumes that the other social sciences are behind economics in the quest for predictive certainty; rather than ahead of it in accepting the inherent turbulence of dynamical systems like economies and societies, involving also humans making decisions.

    It would be an incredible doubling of current capability for scientists to be able to predict the grosser characteristics of local weather a week in advance. Meanwhile, he’s inspired by science fiction in which prediction encompasses a whole galaxy over thousands of years. My confidence is not inspired.

    Incidentally, he is correct that the craft of history is better at the what and the when than the why – in high school and sometimes freshman surveys.

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