Meanwhile, In the Media


I’m a bit busy today but there are a few interesting things in the media this week that I wanted to highlight. First of all is a piece by me on research being done in University College London (UCL) about decision-making under uncertainty. I am fascinated by this work for a number of reasons. First of all, it is actual true empirical work into decision-making under uncertainty. This has led the researchers to undertake the bold step to actually formulate a true measure for ‘animal spirits’.

Secondly, the project is headed by David Tuckett. He is a psychoanalyst that is quite consciously opposed to what is being done in behavioral economics. This is a breath of fresh air for me for two reasons. Firstly, because I am very keen on psychoanalysis and dynamic psychology. And secondly because I think behaviorism is pretty awful. Finally, I am enthused that the Bank of England and the European Central Bank are very interested in this work.

Anyway, I have a four-page feature article commissioned on this topic which will explore it from a more journalistic angle. For now, here is the op-ed that went up today.

Volatile emotions are driving the world economy

Also in the media this week was an extensive interview with the institutional economist Bill Lazonick on Sam Seder’s Majority Report. I have not written much on Lazonick’s work before because institutional economics is not really my field. But I think that his is some of the most important work out there. The interview starts around the 6 minute mark.

Anyway, hope that’s enough to keep you occupied over the weekend.

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Understanding the Current/Capital Account and the Value of the Currency


One thing that I notice on the blogs is that I don’t think I have ever seen anyone give a clear description of the external trade account of a country. Nor have I seen anyone give a clear explanation of what determines the value of a given currency. Now, I am sure that you can find some mainstream garbage where the external account always tends toward equilibrium and so forth. But that is obviously useless nonsense and anyone who has ever looked at the trade balances of countries and the currencies of those countries knows it.

Basically the mainstream theory states that if there is a trade deficit in a country two things will happen. First of all, interest rates will rise as the money supply contracts due to money ‘flowing out of the country’. Secondly, the value of the currency will fall in value as the domestic currency saturates foreign exchange markets. A combination of these two dynamics will reestablish equilibrium on the external account. The rise in interest rates will cause investment, GDP and, hence, imports to contract. While the fall in the value of the currency will decrease imports and increase exports.

There is so much wrong with this presentation that it would take a blog post in its own right to pick all the necessary holes in it. The most obvious error is the idea that interest rates would rise when these are obviously set by the central bank. In addition to this currency depreciations will not always correct the trade balance and trade imbalances will not always lead to currency depreciations. I could go on. I won’t.

Anyway, here I more so want to lay out a clear explanation of the external account and, in doing so, describe what determines the value of the currency in a floating exchange rate system like we have today. In fact, I do not need to do much of the heavy lifting here because G.L.S. Shackle has one of the clearest explanations of the external account that I have come across in his book Economics for Pleasure.

Since the book is hard to come by I’ve provided the chapter on the payments system here. I hope it will encourage people to seek it out because it is one of the best overviews of economic theory I have ever read. Shackle was a very gifted writer. Anyway have a quick read of the chapter, it is only a few pages, and then you should have a fair comprehension of the accounting involved.

I assume that you’ve now read the chapter. Good. Let’s turn to what determines the value of the currency in a modern system. The claims that foreigners make within the country that has a trade deficit can, as Shackle says, be either in the form of currency or securities. These are recorded in the capital account of the country running the trade deficit.

Let us break this down slightly. The trade balance is a flow. When the trade balance is in deficit more goods flow into the country than out of the country. A corresponding amount of claims flow out of the country into the hands of foreigners. Now, if the foreigners don’t want to hold these claims they may sell them and then convert the money they receive into money from their own country. This will drive down the price of the currency of the country with a trade deficit and drive up the price of the country with the trade surplus.

But we should be clear: this need not happen. There is every chance that the foreigners will hold the claims on the country running the trade deficit. If they do this there will be no effect on the value of the currency. Why might they do this? Any number of reasons really. Maybe they think that the country is a good investment. Or maybe the government of the surplus country wants to hold foreign reserves.

“But,” the reader might say, “these claims eventually have to be paid back and so the effect will eventually be felt on the currency.” Again, that is not altogether clear. For example, let’s say that all the claims are held in the form of stocks. Now let up say that these stocks were worth a total of $1bn. Basically what has happened is that foreigners have traded goods for these stocks. But what if these stocks half in value? Well then, the whole amount of the claim need not be ‘paid off’.

The key point to take away from this is that in order to understand trade dynamics in the modern world we must appreciate the financial dimension. Mainstream economists are altogether incapable of doing this and it completely blinds them to the real world. For them finance is just a veil. But for Post-Keynesians finance is very, very real. Most of the trade imbalances in the world today can only be understood by taking both finance and politics seriously. If you want to see how the mainstream prove unable to do this and why the Post-Keynesians give the only realistic view, check out this recent paper by Tom Palley.

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Capital Theory: An Austrian-Marxian Synthesis


Readers of this blog will know that I am not generally very sympathetic to Austrian economics. There is one point on which the early Austrians did contribute an interesting idea to the world of economics: namely, their theory of capital. This does not mean that the Austrian theory of capital is valid — as I shall show in a moment it is deeply flawed — but there is an idea that can be salvaged from the wreckage that is Austrian capital theory.

To my mind there are only two coherent theories of capital — and the mainstream possess neither. The first is what might be called the Ricardian or the Marxian. This is what might be called the ‘labour theory of capital’. The idea is that capital is effectively embodied labour or, to use Marx’s colourful phrase, ‘dead labour’. Marx unfortunately contaminated this concept with moral judgements, as he so typically did. In Das Kapital he wrote:

Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks. The time during which the labourer works, is the time during which the capitalist consumes the labour-power he has purchased of him.

But it is perfectly possible to extract the interesting point being made here: capital is accumulated labour. That is, when a machine is built it is built using human labour and in that regard it ‘stores up’ this labour. To the extent that it is built using previously accumulated capital, it is also effectively using previously accumulated labour time.

The second approach to capital is the Austrian one. In the Austrian theory capital is effectively embodied time, in the sense that it is time spent on the production of one good or service rather than another. G.L.S. Shackle provides an interesting gloss on this in his book Economics for Pleasure. He writes:

[Böhm-Bawerk] gathered ‘produced means of production’ of every kind under the heading of capital. And capital, he said in effect, is the visible symptom of the part played in the productive process by the lapse of time between the putting-in of services of labour and land, the ‘original means of production’, and the enjoyment of the fruits of that process at a later date. How can we say that ‘time’ is productive? Because given quantities of human effort and of ‘land’ can yield a larger quantity or better quality of product if we are willing to wait longer for it. (pp212-213 — Emphasis Original)

Do you see the slight inversion taking place here? What Böhm-Bawerk did was to change the emphasis. Rather than saying that capital was embodied labour, he said that it was embodied labour time that could have been spent on something else. The emphasis was laid less on the ‘labour’ and more on the ‘time’.

The idea here is that we as a society could work to produce consumption goods in lesser quantity/quality now or we could use our efforts to produce investment goods that will in turn produce consumption goods in greater quantity/quality in the future. While this is not a bad way of looking at the problem it quickly runs into problems when Böhm-Bawerk and the Austrians try to turn it into a theory of the interest rate.

This was because they were pre-Keynesian and the Austrians did not understand that real capital — machines etc. — must be firmly distinguished from financial capital and that the market for the latter operated in an unusual way. They assumed, implicitly, some sort of perfect knowledge on the part of the market. So, left to itself the interest rate would tend to equality with the profit rate on investment goods. Thus, the rate of profit would come to represent the ‘reward for waiting’, as Alfred Marshall would put it. Of course, after Keynes we came to know that what determined the interest rate was actually the liquidity preference of the market.

This is because financial actors — that is, savers and their investment managers — are faced with an uncertain future. They thus evaluate various investments not so much by their real return but rather by their prospective liquidity. When people feel pessimistic about the future they increase their holding of liquid assets, causing interest rates to rise, while if they feel optimistic about the future they increase their holding of non-liquid assets, causing interest rates to fall.

Another way to think about this was that the Austrians and the other marginalists confused stocks with flows. They assumed that the interest rate was reflective of savings flows. So, savings would flow into a pool of investment at a given rate. This rate of savings would determine the interest rate which would in turn determine the profit rate and thus the investment rate. But the way this really works is that there is already in existence a big pool of accumulated savings. There is also the ability for financial investors to borrow and thus create additional financial savings. When sentiments change this pool of investments may suddenly shift. For example, if people become pessimistic more people will hold more liquid assets and interest rates on everything else will rise. The financial markets are thus a bit like that scene in Alice in Wonderland where the Mad Hatter tells everyone at the tea party to change places.

There is also a disconnect between the interest rate and investment. The Austrians and the other marginalists assume that there is some sort of linear relationship here. But there is not. The rate of investment in real capital is dependent on the state of confidence. This, in turn, is mostly dependent on the level of effective demand that is present in the economy at any given moment in time. You can see that there is no relationship in the graphs below which plot the rate of investment against the real interest rate.

INVESTinterestLagging the investment rate by a quarter to allow for time for the interest rate to transmit to increased investment makes basically no difference. The R-squared remains basically the same. This can be seen intuitively from the chart anyway.

If we detach Austrian capital theory from the Austrian theory of the interest rate, however, we get something far more usable. We can also easily couple Austrian capital theory with Ricardian/Marxian capital theory. Once an economy reaches full employment — which we need not assume as some sort of ridiculous teleological end-point — the main constraint on production is labour. We then recognise that the question becomes for society where they want to allocate its labour time. Here we can emphasise either the Austrian time component or the Ricardian/Marxian labour component. It really makes no difference. If the amount of labour time is constrained then we have to decide how much is channeled into consumption and how much is channeled into investment for future consumption.

There is one more point, however, that needs to be stressed and which is not contained in either theory: namely, that of technology. How do we conceive of technology in this framework? We cannot, after all, consider it like land; an ‘original’ or ‘given’ means of production. Rather we must see it as a product of a type of labour; namely, intellectual labour.

Now this where another approach might be interesting to supplement the above mentioned ones. This is actually a neo-Marxian approach that has recently been developed in philosophy by the French philosopher Bernard Stiegler in his three volume work Technics and Time. Stiegler draws on the work of the phenomenological philosophers to argue that technology is actually a physical embodiment of human memory. Think of it this way: all technology is the embodiment of human intellectual labour. In other words: all technology is the embodiment of human thought. Technology is then a sort of ‘deposit’ of human thought. In this sense it is very similar to memory.

Thought of in this sense capital becomes a number of things. It becomes, first and foremost, embodied labour time — whether we want to emphasise the time aspect or the labour aspect is completely arbitrary. But it also becomes embodied memory or embodied human knowledge.

Ultimately though these are all just metaphors. And really capital theory is a very secondary, perhaps even tertiary, part of macroeconomic theory. We really cannot say a great deal about it. We can tell stories and create metaphors but beyond that we can say little else. Trying to understand the interest rate, for example, in terms of the theory of capital is a total dead-end. But also trying to come up with some ‘objective’ theory of distribution as Marx did is also a dead-end.

This shows us something interesting: any economic theory that gets overly bogged down in the theory of capital is probably not a very interesting or useful economic theory. Thankfully, since the 1970s Post-Keynesians have moved away from capital theory. Indeed, Joan Robinson said it was a dead-end after the capital debates in the 1970s — something that Nicholas Kaldor recognised in the 1960s while everyone else was obsessed.

The Austrians and the Marxians are still obsessed. But all they are doing is weaving ideological narratives out of metaphors and in doing so thinking they are doing something scientific. What they are really doing is engaging in storytelling that justifies their a priori political belief systems. As we have seen above we can tell very nice stories and deploy very nice metaphors. But they are just stories and metaphors.

Interesting work is being done on capital accumulation, however, by the Schumpeterian school. The most popular of these is Mariana Mazzucato. They eschew the model-oriented approach and instead go out and look at how technology and knowledge become embodied empirically. Their results are very interesting. In a later volume of Review of Keynesian Economics (ROKE) I will be publishing a review of Mazzucato’s book (see early draft here) where I tie what they are doing back to Post-Keynesian economics using the old, and still very flexible, Harrod-Domar growth model.

Posted in Economic Theory | 17 Comments

On Open-Mindedness, Open-Systems and Open Economics Education


I recently came across a fascinating paper by Victoria Chick entitled ‘The Future is Open: On Open-System Theorising in Economics‘. I want to focus on a specific aspect of the paper; namely, Chick’s discussion on the psychological possibilities of actually teaching open systems. But first I suppose I should make clear what the term ‘open systems’ means. The Wikipedia page actually has a rather nice summary.

In system theory, an open system is a system which continuously interacts with its environment or surroundings. The interaction can take the form of information, energy, or material transfers into or out of the system boundary, depending on the discipline which defines the concept. An open system is contrasted with the concept of an isolated system which exchanges neither energy, matter, nor information with its environment.

The first sentence is, I think, the most important. The key to open system theorising is the notion of constant interaction. In philosophy there is a long tradition of this type of thinking which goes right back to Socrates. It is known as the ‘dialectical method’. This was given its modern dynamic form by the likes of G.W.F. Hegel but much reasoning you find in philosophy is quite dialectical even if it does not explicitly say so.

Basically the idea is that thinking is a process of development. I suppose the best way to think about this is to consider how you interact with your environment. You do not go out into the world with rigidly prescribed rules — of what direction to walk, how fast, when to turn, when to extend your arm to open a door and so on — rather you continuously interact with the world around you. Likewise, if you engage someone in conversation you tend not to approach it with pre-established sentences. You may have a general notion of what topics you want to address — or you may not — but the conversation will evolve through continuous interaction.

Open systems thinking or, if you prefer, dialectical thinking applies the same idea to economic theorising. The idea is that you don’t want to produce a closed-system that gives you a single answer. Rather you want to have a series of tools, concepts or ideas which you approach the world with. This is the method adopted by Keynes in The General Theory. Indeed, I believe you can trace actual exposure to dialectical ideas in Keynes’ interaction with the likes of the philosopher G.E. Moore who was heavily inspired by the British Hegelians of the late-19th century.

Now, back to Chick’s paper. She makes the case that teaching open systems thinking to students risks encountering particularly difficult problems. Chick draws on studies in the psychology of education to argue that some people have an innate conservativism when it comes to thinking. What she means by that is not that they are politically conservative but rather that they tend to think in a very specific manner. Chick, following the psychologist Milton Rokeach, distinguishes between open minds that are capable of handling open systems and closed minds that are averse to them. She writes:

As a ‘primitive’ belief, the closed mind perceives the outside world as hostile, threatening, the open mind as friendly. Although we rely on external authority to tell us more about the world than we can experience directly, the belief that the world is threatening is responsible for the closed mind’s conflation of the course of information and the information itself. Authority for them, in the learning context as elsewhere, depends on the ability to mete out reward and punishment. Knowledge thus imparted by the subject’s authority figures is taken as a ‘package’ that the subject cannot dismantle into its components, making it difficult, if not impossible, to evaluate particular ideas on their merits. New ideas that do not conform to her/his belief structure are either rejected or modified to fit into that structure. (p64)

Regular readers will, of course, recognise in these words many of the problems with the mainstream economic profession. Some of it is manifest in the structure of the theory itself. The threatening world is represented by the cynical, self-interested agents that only interact with each other to obtain some sort of personal gain. Other aspects are inherent in the sociology of the discipline. The authoritarianism of the profession and the inability to pick apart models to examine their components, for example, and the slavish devotion to authority figures particularly manifest in the fact that it doesn’t so much matter what is being said as who is saying it (the idea of ‘stagnation’ that has been popular in Post-Keynesian circles since the 1930s is only picked up when Larry Summer and Paul Krugman start talking about it and even now experts in the field are not consulted when the topic is broached etc).

The economics profession has, for the past six or seven decades been sustaining itself by attracting students that have this type of mindset. It has evolved in such a way that students that do not have this sort of mindset will generally migrate into another more ‘open’ discipline. But the students with innately closed minds will tend to stay. Every generation the number of open-minded economists grows thinner and thinner until we reach the point where we are today. The halls of economics become populated by a certain personality type that literally cannot even understand some of the criticisms being leveled at it, much less the fact that thousands of students with a more ‘open-minded’ personality type launch a worldwide campaign against the curriculum and method of teaching. But when the world begins to look scary the closed-mind retreats in upon itself.

The difference could not be more marked. Chick writes about the characteristics of the ‘open’ personality type.

Openness can be characterised by the degree to which a person can react to relevant information from outside her/his belief system on its own intrinsic merits, without contamination. The extent of rejection of the disbelief system is less for the open minded, so new information, if considered valuable, is assimilated not by distorting the information to fit but by altering the belief system. The borders of the belief system are permeable. (p65)

The open systems approach is one that is inherently — and one might even say: primarily — empirical. Rather than altering the facts to fit the theory, one alters the theory to fit the facts. And if the facts begin to look like they completely overwhelm the theory then the theory is easily dropped and another one constructed in its place. In an open systems approach theories are mutable and non-permanent. Different theories may suit different situations and the thinker is always ready to create a new, provisional theory if the facts seem to merit this.

Because of the fact that in economics we deal with non-homogenous, historical time where two situations are never exactly the same, any closed system approach will always necessarily fail. It would be like if historians were still using the same historiography of the Ancient Greek historian Herodotus to try to understand events in the 20th century. The result would be a mess. Since economics effectively deals with historical material the same is true for the approach that it must take.

The key problem here is pedagogical. It is obvious that those who possess closed minds and who have been trained to think in terms of closed systems will not be able to alter their views. Indeed, if attacked they will bunker down and use every means necessary to try to maintain their monopoly so that they never even have to entertain the idea that there might be a fundamental criticism directed against their systems of thought. But what about students? Chick notes that many psychologists in the field claim that such personality traits are developed in childhood and cannot be truly overcome. She does not like this and she writes:

Rokeach’s and Rotheim’s characterisations seem static, reflecting the importance of childhood experience in the formation of personality. If character were so fixed, about all the teacher could do is identify the students to whom open systems will make sense and those to whom it will not. But hope is at hand: Rokeach speaks of learners becoming ‘more and more open in their belief systems’. (p65)

I would err on the side of pessimism here. I do think that some people who are inherently closed-minded, if caught at an early age — maybe their late-teens or early-twenties — can be made to open up a bit. But I think this should be a secondary concern. My reading of the student movement for economic reform is that it is made up of the portion of the economics class — and they are typically the majority in first year — that have more open minds. What they are fundamentally reacting to is that the find the modes of reasoning employed strange and alienating.

Their call for pluralism can thus provide a satisfactory solution to the problem at hand. If economics were allowed to be taught in a multitude of different ways then every personality type could find their natural homes. The closed-minded students would gravitate toward the closed-minded lecturers while the open-minded students would gravitate toward the open-minded lecturers. A sort of evolutionary process would then do the rest of the work. By introducing competition into the field it would soon be clear who was producing better and who was producing worse economists. What is more, this would involve no coercion but simply a more open-ended and pluralistic approach to teaching. But be sure that the closed-minded types will guard against this zealously as it will appear to them a threat. For all their talk of competition they are, in practice, monopolists.


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Against Gold-Buggism: The September Issue of The New Internationalist

newintThe September issue of The New Internationalist is in shops now. The theme is all about the rise of gold on both the right and left of the political spectrum. It includes a piece by me on the economics of the whole thing entitled ‘Bunker Economics’. So, if you’re bored, don’t have access to the internet and see a hard copy of the magazine for sale somewhere feel free to pick it up.

I noticed the goldbug trend way back when the crisis started and I’ve been on the front-lines of fighting that nonsense since it started. What I found so fascinating was that many people on the political left were picking up the narrative. But anyone who knows the history and the economics of the gold standard knows that it is an inherently right-wing device. The main rationale for the gold standard is to prevent governments from being able to run large deficits and debt. Thus, with the gold standard much of the counter-cyclical aspect of government spending is automatically reigned in.

If the gold standard were reenacted today most countries around the world would have to engage in extreme austerity of the type we see in Greece. What I found so fascinating about the rise of the goldbug narrative on the left was that the same people who supported it as a means to supposedly stop ‘private banks creating money’ were completely shocked and appalled by what was happening in Greece. Yet they were implicitly calling for it to be applied elsewhere when they demanded a return to the gold standard.

The most interesting outlet for this contradictory narrative was the television station Russia Today. Russia Today generally takes a very left-wing perspective on most issues. But from time to time you will see them drag on some right-wing conspiracy nut. Still, the main editorial stance is generally left-wing. But after the crisis the goldbugs completely took over the station.

What was so interesting about this to me was that it became clear that at the time the left had no coherent economic narrative that it could push. Thankfully this has largely changed due to pioneering blogs (like Naked Capitalism, New Economic Perspectives and The Financial Times Alphaville, especially the work of Izzy Kaminska), David Graeber’s bestselling book Debt: The First 5,000 Years (which I think was the big game-changer on the left and which launched after the interview I conducted with Graeber back in the summer of 2011) and the collapse of the gold market (which I called just before it happened).

I think that the latest issue of The New Internationalist is really the final nail in the coffin of this nonsense. But a few people will likely hold out. That is unfortunate. But many in the financial markets think that gold has a long way to go yet before it reaches a bottom. Perhaps what an appeal to Reason cannot chip away at, a very large hit to their portfolio can.

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Econometricians, Financial Markets and Uncertainty: An Anthropological View

manaI recently read a paper by the anthropologist David Graeber entitled ‘The Sword, The Sponge, and the Paradox of Performativity: Some Observations on Fate, Luck, Financial Chicanery, and the Limits of Human Knowledge‘. Graeber sent it to me because we are hoping to write an article on the emergence of probability theory and its application in the financial markets.

The working title of our paper is ‘The Betrayal of Freedom and the Rise of the Future Machines’. The basic idea is to show that the predictive powers of social sciences — including economics and finance — were shown to be fairly vacuous in the 1960s from a variety of different directions. The response by the horrified professions was to bury the evidence and double down on probabilistic prediction. This coincided with the rise of finance and the whole thing produced the weird world of meaningless numbers and extreme instability that we face today.

Anyway, here I will provide a gloss on Graeber’s excellent paper as an accompaniment to my recent piece on the anthropology of the economics profession. It is not available online except behind a paywall but I urge readers to seek it out. It is one of the best psychological/anthropological descriptions of how and why people — from village elders to econometricians — try to use arcane and difficult methods to predict the future and dictate how people should organise themselves socially and economically. In order to discuss the paper I must first introduce to non-anthropologists two key terms.

The first is ‘mana‘. This is a difficult term to pin down as it has any different dimensions in many different cultures. But Graeber’s main angle of attack in the paper is that mana is a power that people believe they can gain control over to predict and influence the direction of future events.

The second is ‘performativity‘. Performativity is a sort of ‘thinking/doing makes it so phenomenon’. For example, the Queen of England is the Queen of England because everyone believes her to be the Queen of England. If everyone in the world stopped believing tomorrow that she was the Queen of England she would cease to be the Queen of England. Her social position is literally only real insofar as we believe it. Her royal actions and symbolism are thus a way to ‘perform’ this belief and reinforce it.

Now, onto the essay. Graeber thinks that many of the phenomena that anthropologists know as mana are actually very similar to concepts that we in the West employ such as fate, luck, chance and probability. Graeber notes that we as a society have been taught to think of events in terms of probabilities. But this is not present in non-Westernised cultures. He cites the following conversation he had with an educated Malagsy while he was in Madagascar doing fieldwork:

David: What do you think the chance is that a bus will come in the next
five minutes?
Zaka: Huh?
David: I was thinking of running up the hill to get some cigarettes. I figure
it’ll take maybe five minutes. What do you think the chance is that
a bus will come before I’m back?
Zaka: I don’t know. A bus might come.
David: But is it likely to?
Zaka: What do you mean?
David: You know, what’s the chance? Is there a very large chance it will
come? Or just a small chance?
Zaka: A chance can be big or small?
David: Well, is it more like 1 in 10? Or more like 50–50?
Zaka: How would I know? I don’t know when the bus is going to arrive. (p32)

It is clear that Zaka the Malagasy thinks David the American’s questions to be absolutely bizarre. It simply does not make any sense to him. Despite being educated he does not even think to ascribe to chance a numerical estimate. Graeber concludes:

Even when my Malagasy did become fluent, I never heard people employing language in the way that people would do so in America, for example, “I’d say 3 to 1 the cops won’t even notice that I’m parked here.” In fact, I discovered not only that such a way of thinking was unknown to most Malagasy, but also that, once explained, it seemed just as peculiar, exotic, and ultimately unfathomable as any of those classic anthropological concepts, such as mana, baraka, or s´akti, regularly employed in other parts of the world to put a name on the play of chance or to explain otherwise inexplicable conjunctures or events. Once I began to think about it, I realized that this puzzlement was a pretty reasonable response. Chance actually is a very peculiar concept. Zaka was right: the main thing is that we do not know when the bus is going to arrive. This is the only thing that we can say for certain. Anything could happen—the bus might break down, there might be a strike, an earthquake might hit the city. Of course, all these things are, from a statistical perspective, very unlikely, million-to-one chances, really. But it is that very application of numbers to the unknowable that struck my Malagasy interlocutors as bizarre—and not without reason. What a statistical perspective proposes is that we can make a precise quantification based on our lack of knowledge, that is, we can specify the precise degree to which we do not know what is going to happen. (pp32-33)

I am entirely in agreement with Graeber here. We can assume that the bus was not on a strict timetable because we are not dealing with an advanced and well-organised society. Thus giving the chance that the bus would arrive while Graeber went to get cigarettes a numerical estimate was a pretty mystical thing to do altogether. (I do find it amusing that Graeber said that the chances of a strike, the bus breaking down or the earthquake hitting were ‘a million-to-one’ though… it seems like even he finds it difficult to get away from his pre-conceived cultural way of thinking about such things!).

Think about this. If I have a coin that is fairly balanced I can give an objective probability estimate. The chance of the coin landing on either heads or tails is 0.5 or 50%. This number is not mystical. It is objective. But when Graeber asks what the chance of the bus turning up is or whether the cops will notice that he is parked illegally, these estimates are not objective. They are entirely mystical. They are, in fact, as Graeber rightly points out, the same sorts of magical thinking that many so-called primitive cultures use to try to grapple with the future.

The amusing thing, however, is that we actually employ people and give them social prestige to engage in these mana-like numerical concoctions. This is just like in supposedly more primitive societies where soothsayers and astrologers are given status as village elders and power to decide how the society should be organised. In our Western societies we hire economists and financial experts. Graeber writes:

Almost invariably, too, there are certain specialists who claim privileged, exclusive knowledge. In very hierarchical societies, elites will either try to monopolize such matters themselves (e.g., Azande princes maintain exclusive rights to officiate over the most important oracles) or attempt to forbid them as forms of impiety (both Catholic and Sunni authorities have been known to do this at one time or another). There is also a frequent, although not universal, tendency for these techniques to draw on forms of knowledge seen as foreign and exotic: the Arabic lunar calendar in Madagascar, Chinese numerology in Cuba, Babylonian zodiacs in China, and so on. (It is not the past, perhaps, but the future that really is a foreign country.)
From this perspective, it is quite easy to see that economic science has become, in contemporary North America above all, but in most of the industrialized world (or, perhaps better said, financialized world), exactly this sort of popular ‘technology of the future’. There are specialists who try to keep a monopoly on certain forms of arcane knowledge that allow them to predict what is to come, although in a way that, insofar as the situation becomes political, inevitably slips into performativity. At the same time, fluctuations in the financial markets, speculation on stocks, investments, and the machinations of commodities traders or central bankers, all these have become the stuff of everyday arguments over coffee or beer or around water coolers everywhere—just as they have become the veritable obsessions of certain cable watchers and denizens of Internet chat pages. There is also a tendency—quite typical of such popular technologies of the future as well—for idiosyncratic (‘crackpot’) theories to proliferate on the popular level. (pp39-40)

Graeber is absolutely correct here. This is where we come to the notion of ‘performativity’. If we examined the situation objectively we would quickly see that these people are mostly engaged in soothsaying but we do not. Why? Because the performance buttresses our hierarchical social and economic structures and lends them credibility and weight. We do not want to know the reality: namely, that our social structure is determined in line with political and social power. And thus we create fictions that ground it as being somehow ‘objective’.

The statistical estimations are mostly about performance in this regard. They are similar to a symbolic ceremony by the Queen of England. And in the financial markets this performance generates dynamics of its own. For example, when everybody is convinced that the markets will be calm they will get statistical read-outs saying that the markets will be calm precisely because they are acting as if the markets will be calm. But when they start to panic because something unseen happens, their statistical read-outs will suddenly change.

In truth their ‘future machines’ are just feeding back to them their own activity. It is like an animal looking in a mirror and thinking that another animal is staring back at them. In reality, it is just their own reflection. The whole situation would be hilarious but these dynamics are wreaking havoc on our societies. They are also trapping us as political actors because they give us a sense of fatalism about the future. They encourage us to think that the ‘experts’ have the whole thing figured out and that ‘politics’ should be structured in line with this. This is the true poison of modern economics and it is what makes modern economists such dangerous clowns. The unfortunate thing is that almost every single one of them, wrapped in their socially-sanctioned delusion of scientificity, have absolutely no idea what they are doing.

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Economists: An Anthropological View


Life Among The Econ‘ is a satirical paper written by the economist Axel Leijonhufvud and published in 1973. In the paper Leijonhufvud refers directly the great work of cultural anthropology The Savage Mind by the French Structuralist anthropologist Claude Levi-Strauss. Before moving on to the paper it is probably best to understand something about Levi-Strauss’ work as I think that the content of the paper would otherwise be lost on many economics-oriented readers.

Levi-Strauss argued that cultural life in primitive societies rested on haphazard and rather arbitrary organisation. People would create symbols and systems of organisation the only purpose of which was to facilitate smooth social relationships. While the members of a tribe might imbue the symbols with seemingly enormous value — and people who violated them might be severely punished — looked at from the outside they seemed rather arbitrary and changed from tribe to tribe mainly based on chance.

Anthropologists had long recognised that tribal structures — indeed, all cultural structures — require norms and myths which to live by. Myths are stories that give life meaning, while norms are somewhat like laws or prohibitions. Perhaps the best way to think about this is to take a recent law in our own societies that now seems antiquated but which was taken seriously only a few decades ago: namely, laws against homosexuality.

Why were there laws against homosexuality throughout most of the 20th century? Does homosexuality harm anyone? Today I would say that most people would say that it does not. So, why the laws? Simply because our cultures developed in that way. Other cultures did not. In Ancient Greece, for example, homosexuality was by no means against the law. The laws that remained in place until the end of the 20th century mostly derived from the Judeo-Christian tradition that we inherited. There was nothing functional about them. Things just happened that way. (Indeed, readers of cultural history will know that our own culture is basically unique in attributing to homosexuality an actual sexual identity. In most cultures sexual activity is dealt with based on acts, not proclivities that are supposed to be immutable).

The point is that much of cultural organisation is arbitrary. It often serves no real purpose. Evolutionary psychologists might tell you otherwise, but they are just modern day myth-makers telling stories that try to give us meaning and, ultimately, justify certain cultural patterns that we hold dear by appealing to the narrative structure of evolutionary biology and imposing it on cultural development metaphorically much in the same way as marginalist economics transferred metaphors from physics to the social sciences. Levi-Strauss introduced the idea of the ‘bricoleur’ as the person who engages in such constructions.

The bricoleur is not a person conceived of acting in line with a plan or toward a goal. For example, if I go to the shop, buy foodstuffs and cook food I obviously have a plan and a goal. A bricoleur — or, more accurately, a person partaking in the process of ‘bricolage’ — just throws things together in line with how he or she sees fit. There is no real point to the activity but it persists in all human cultures and makes up a key component of our cultural organisation. Perhaps the easiest way is to think of a child playing with lego bricks or an artist painting an abstract piece of art.

Society bestows upon bricoleurs important roles. In primitive society shamen or priests or some other caste are typically anointed to serve this role. They come up with stories of various kinds, contact the spirit world and even engage in fake healing in societies without medicine in which people feel like they need to do something in the face of illness and disease. Basically their role is to give meaning to those around them. In order to do so they are imbued with a certain aura that we do not find in, for example, the case of a modern dentist or the advertiser.

This aura allows their interpretations of the world to be accepted largely without question as these men are supposed to possess abilities and traits that the lay person could never understand. Obviously, modern day religion serves basically the same function, as do cults and even con-men who sell fake medicine to desperate and gullible people.

Leijonhufvud’s paper is written as a satire. But like all the best satires it serves a serious purpose. He makes up a tribe that he calls the ‘Econs’. He is referring to economists, of course. He is perfectly correct in doing so, economists do indeed serve basically the same function in society as shamen do in primitive society: namely, they tell stories about how the economy works and about how society should organise itself. He then goes on to say that the economics profession has actually developed as a sort of micro-tribe within society. He particularly notes the fetishisation of the model — which he jokingly refers to as the ‘modl’. He writes:


Anyone who has dealt with economists will be all too familiar with this. The model is actually part of the person’s identity. They internalise it and, when they engage in rivalry with other economists, they compare their models.  Viewed from the outside with a critical eye it is actually a very strange process. But if you have an appreciation for anthropology you will quickly see what is going on. The whole thing is about group formation and social alliances. Because the economists have long turned away from the real-world (unless it is viewed through the model, of course!) they need another way to argue about things (after all, aren’t academics supposed to argue about things?). So, what they have done is formed into various social groups that then build and compare models. It is really rather amusing when you have a sense of irony about the whole thing.

Leijonhufvud also noted something more ominous though. He saw clearly that the tendency was actually moving further and further away from empirical reality. He wrote:


For a while economics survived the turn to weird ‘savage mind’ style behavior. People who were more inclined toward the reality of doing practical work had a set of tools that were at least somewhat workable. But Leijonhufvud could see this changing especially with the rise of the general equilibrium theorists. Today this has completely taken over. DSGE models are claimed to be cutting edge for policy analysis and some even believe that Real Business Cycle models say something about the real world. Whereas the likes of Frank Hahn knew well that the general equilibrium framework was just an intellectual game, the students took it literally. That is when we entered what we might call the ‘dark age of economics’ and that is where we remain today.

You need only read the altogether strange defences of model-based forecasting to see that something properly weird is going on in the land of the Econ. It is well-known that the models don’t do much better than ‘intelligent guesswork’. (I would say they do worse than ‘intelligent guesswork’ but then I do not apparently have the authority to decide who is doing guesswork and whether they are ‘intelligent’ enough to be considered…). Wren-Lewis, for example, comes up with the following justification:

Take output for example. Output tends to go up each year, but this trend like behaviour is spasmodic: sometimes growth is above trend, sometimes below. However output tends to gradually revert to this trend growth line, which is why we get booms and recessions: if the level of output is above the trend line this year, it is more likely to be above than below next year. Using this information can give you a pretty good forecast for output. Suppose someone at the central bank shows that this forecast is as good as those produced by the bank’s model, and so the bank reassigns its forecasters and uses this intelligent guess instead.

This intelligent guesswork gives the bank a very limited story about why its forecast is what it is. Suppose now oil prices rise. Someone asks the central bank what impact will higher oil prices have on their forecast? The central bank says none. The questioner is puzzled. Surely, they respond, higher oil prices increase firms’ costs leading to lower output. Indeed, replies the central bank. In fact we have a model that tells us how big that effect might be. But we do not use that model to forecast, so our forecast has not changed. The questioner persists. So what oil price were you assuming when you made your forecast, they ask? We made no assumption about oil prices, comes the reply. We just looked at past output.

Woah! What the hell just happened there!? If I were working for a central bank and someone said to me “what will happen to output if oil prices rise substantially?” I would dutifully go and examine the relevant statistics. I would look to see if the data showed that large oil price increases had large effects on output. If the data showed that they did I would return to the person and say “after examining the evidence it looks to me like there is a good chance that a substantial rise in the oil price will affect output”. If I had a little more time I would then go and try to get data for countries and see what it said to substantiate my findings.

Wren-Lewis, on the other hand, would consult his model which would give him whatever result that he himself had built into it. Do you see the difference here? I hope you do. What I would be doing would be evidence-based research. It would be by no means perfect for any number of different reasons. But it would at least be evidence-based. Wren-Lewis would consult a model that comes pre-built with an estimate of how oil price increases should affect output. This is absolutely ‘savage mind’ behavior. Wren-Lewis would have us construct what anthropologists call ‘totems‘ and then consult these totems when we need insights into our social problems.

This is what I mean by the fact that the economists have come to believe their own fictions. It is very strange stuff altogether. They build the models based on the a priori assumptions that they hold. Seemingly they then forget these assumptions. Then when they need an answer they consult the model which spits back at them what they already built into it. This output is then assumed to be Truth because it comes imbued with a sort of aura. In more practical, real-world sciences this has a name: its called GIGO which stands for Garbage-In, Garbage-Out. In more primitive societies this is similar to constructing altars to supposed oracles and then going to these altars to find out about the future, only to find a Truth that you yourself have already built into the altar. (For a more colloquial example think of when people read images into clouds).

Sometimes after a few beers some of my friends — many of whom have PhDs — ask me about this modelling stuff and how it all works. They really do view it as being a sort of opaque practice, albeit one that they are inclined not to trust. When I explain it to them they literally don’t believe me a great deal of the time. There is one exception though — and he is a rather well-known anthropologist. Make of that what you will.

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