Wednesday, 27 April 2016

Pluralism since the ‘1992 Plea’ in the AER

First published on the Rethinking Economics Blog, March 12th 2014

In May 1992, a ‘Plea for a Pluralistic and Rigorous Economics’ was published in the American Economic Review (Vol 82 No. 2). It was signed by Harcourt, Galbraith, Goodwin, Kindelberger, Minsky, Pasinetti and other eminent economists. The Plea was funded by FEED who launched a second ‘Plea’ in 2009 and support the 2012 ‘Manifesto for Economic Sense’.  Geoffrey Hodgson, Research Professor in Business Studies at the University of Hertfordshire and one of the co-organisers of the ‘1992 Plea’, is interviewed here about the history of economic pluralism, and the challenges facing economics today.

NL: Twenty two years after the ‘1992 Plea’, do you think the mainstream has changed?
GH: I think things have changed in economics, to some degree. It’s not entirely positive, but in some senses economics is more diverse now that it was twenty two years ago… for example, new areas like experimental economics and behavioural economics have gained respectability. The main problem now with economics is not so much its diversity, or its insufficient internal pluralism, but the way that technique dominates and gets in the way of substance. Economists are engaged with mathematical puzzle solving rather than real-world problems…
NL: By that you mean things like regression analysis and theoretical model building?
GH: Theoretical model building and econometrics … that is all that now seems to matter in terms of publication in top journals or academic promotion. The whole discipline has become dominated by people who are very clever in technique but innocent of many important aspects of the real world and the history of their own discipline.
NL: In that 1992 Edition of the AER there were some pluralist surveys of economists, do you think the AER would publish that kind of qualitative research today?
GH: Generally it is very difficult to publish anything like that, and not just in the AER. I include other leading journals, like the Quarterly Journal of Economics or the Economic Journal in the UK… although occasionally they publish qualitative pieces, to spice up interest in their journal.
NL: What successes have you seen in the campaign for pluralism?
GH: The ‘1992 Plea’ was an early ringing of alarm bells about the nature of the discipline and the way it had been developing. It may have stimulated further similar complaints, such as from the French student movement… and dispersed attempts in Cambridge and also in the US… but the real change came with the 2008 crash. This provoked a much larger tide of complaint among students and others about the alleged inadequacies of mainstream economics.
NL: Was there a pluralist movement prior to the ‘1992 Plea’?
GH: Several prominent economists had made complaints. The petition was preceded by an important 1988 report by a commission of the American Economics Association, called ‘Report by the Commission on Graduate Education’ (Krueger et al, 1991), which complained about the dominance of technique in the discipline. A number of leading individuals, including Milton Friedman, also complained about the subject turning into advanced mathematics.  The most important event was the 1988 commission and its critical and scathing report.
NL: Did it have any success at the time?
GH: No.
NL: So why do you think the profession keeps coming back to these very inward-looking methods?
GH: The economics profession has an internal reward system that gets reinforced and replicated. Someone once compared it to the peacock’s tail. Once this positive feedback loop gets established, then people look for the glorious tail feathers despite their questionable usefulness. Fancy mathematics gets economists published and gets them promoted. As those people rise in the profession they will recruit people who perform similarly and the same kind of behaviour gets replicated. Other people, who think more widely or philosophically, or are more interested in the history of the subject or how it has changed, or who look more deeply at the conceptual assumptions, don’t get considered for influential positions in the discipline.
NL: What advice would you give Rethinking Economics?
GH: I hate to be pessimistic, because I don’t want to dampen the enthusiasm of those people committed to this, but unless you get some of the top universities appointing professors who are more broad-minded, who are not dominated by technique, who have influence, and some of the top journals consider more conceptual, historical material rather than simply technique-driven material,  then it will fail. Mark Blaug, who was a friend of mine who died a couple of years ago, got very pessimistic about this, and so did Ronald Coase who died last year. Another problem is that American economics is now overwhelmingly dominant. I often ask people… can you name a living British economist…  and they really have difficulty thinking of anybody. When mainstream economists took over the Cambridge department in the 1980s, after the era of Robinson and Kaldor, their explicit aim was to make Cambridge a rival to the top American Universities In other words, they aimed not to develop Cambridge’s own niche, but simply to follow what America was doing. You are inevitably 5 years behind if you are lucky, and that US emulation has led to the near-destruction of British economics… with this subservient mentality it is very difficult to change things in the UK.
NL: Can we talk about your hope for the future?
You may have heard of a new association called WINIR: the World Interdisciplinary Network for Institutional Research. What we are trying to do is create a new field for study. It’s not just about economics, but institutional economics is a part. I think that this is a more productive strategy than trying to change economics…  but the problem with WINIR is it doesn’t cover everything. At the moment, it omits crucial areas like finance… we can’t do everything. We are hoping to find new ways of promoting realist approaches and developing new ideas
NL: When you look at Blanchard’s work at the IMF…  is there at least a sense that more reflective research is coming out, even on the finance side?
GH: That’s right, and there are other good examples, like Thomas Piketty’s work on capital and inequality…. but these are the exceptions. All the incentives, all the ways that you get promoted in the system are not by thinking outside of the box. When I gave a talk to the Post-Crash group in Manchester, I said you have to take the institutions of science seriously. One of the problems with heterodox criticism is that it’s a fragmented growth of people who can’t agree amongst themselves on much, except that they are opposed to the mainstream: that will never generate cumulative knowledge. We actually need an alternative centre of orthodoxy. Science cannot progress by questioning everything, all the time….  some assumptions or knowledge has to be taken for granted. These assumptions may need to be changed later, but we need consensus as much as pluralism. Hence I’m against organising opposition to mainstream economics on the basis of a ‘heterodox’ label…  in fact there are many good and interesting things going on in the mainstream.  Heterodox organisations and leading figures who work under that label often overlook potential allies in the mainstream…
NL: One of the things we are struggling with in the UK curriculum review is the word ‘CORE’… this Popperian idea of a heuristic around which everything else revolves…  is the idea of a ‘CORE’ something the profession can escape?
GH: I think the CORE idea is important: the problem with things at the moment is that the core is defined in terms of technical skills. An undergraduate doing an economics degree has to understand key aspects of game theory, to understand key certain econometric techniques, and these take up the time of teaching and testing for the student… and as the bar is always being lifted… because the complexities of game theory and econometrics are always increasing…  so it’s not so much changing the subject matter of the core, it’s changing the preoccupation of the core. We need to establish that the first and foremost job of an economist is to understand the economy…  all other things are subservient to that.
Many heterodox economists blame Marshall, among others, for what went wrong. He was part of the neoclassical revolution of the 1870s and 1880s. But if you actually look at how Marshall wrote and how he behaved he was extremely tolerant and open minded…  he wrote in his Principles and also in his letters that economic theory is not a mathematical toy. He argued that we have to understand the real world. For him, mathematics was a tool, but not the main part of the subject…
NL: Several of the petitions for pluralism talk about solving climate change, global warming, inequality, wealth accumulation, capital flight, all of these issues. Do you agree that economics is that broad? Can economics solve all of these problems or is that too grand a claim?
GH: Marshall’s definition of economics was the study mankind in the ordinary business of life: by that he meant processes concerning the generation of wealth and its distribution, which include problems like the impact of climate change…  we need to develop economic policies to deal with climate change in some way.
NL: Which includes solving these issues…
GH:  Yes.
NL: Could you recommend three pieces of your work to a student interested in pluralism?
GH:  My 2004 book on institutional economics; my 2013 book on evolutionary economics; and my book on capitalism that is coming out this year. Each book addresses the issue of pluralism and challenges mainstream assumptions.
NL: Thank you very much.

Hodgson, Geoffrey M. (2004) The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism (London and New York: Routledge).
Hodgson, Geoffrey M. (2013) From Pleasure Machines to Moral Communities: An Evolutionary Economics without Homo Economicus (Chicago: University of Chicago Press).
Hodgson, Geoffrey M. (forthcoming) Conceptualizing Capitalism: Institutions, Evolution, Future (Chicago: University of Chicago Press).
Krueger, A.O. Arrow, K.J. et al (1991). Report of the commission on graduate education in economics.  Journal of Economic Literature. 29(3):1035-1053
Various (1992). A Plea for a Pluralistic and Rigorous Economics”, American Economic Review, 82(2):25

Friday, 8 April 2016

Black holes and free lunches

This is a response to a blog post and Twitter chat about the persistence of UK and US current accounts deficits. It's a hot topic: see Frances Coppola. The worst case scenario is generally assumed to be capital flight and devaluation: a return to the summer of 1976 when Callaghan went to the IMF for a loan. This post is an attempt to dig a little deeper, and address the politics and ethics: whose free lunch is it anyway?

The biggest problem for any researcher is the poor quality of the balance sheet data. In theory, if you knew the gross position on the financial and capital account, you could run various stress tests on sustainability: currency and asset price shocks; illiquidity; loan defaults; and so on. I can imagine there are wannabe financial stability super-regulators salivating at the thought of this kind of real-time, country-level portfolio analytics. However, the data are poor and the time series are incomplete.

I know of two major efforts to improve the balance sheet data: the External Wealth of Nations dataset from Lane and Milesi-Ferretti, and the Hidden Wealth of Nations dataset by Gabriel Zucman. Having tried, and failed, to work with the underlying datasets, I consider both these efforts akin to the story of David vs Goliath: heroically correcting the data errors that accumulated in international financial statistics under the laisser-faire stewardship of the IMF and UN.

I'm not very familiar with Zucman but, from what I can see (Table T1) he agrees with Lane and Milesi-Ferretti that the official US external position is, effectively, bankruptcy: assets-liabilities net at around -35% of GDP in 2012. However, both Zucman and Lane/Milesi-Ferrretti argue that this is due to the under-reporting of foreign assets. The most plausible explanations for this are tax avoidance (the purchase of domestic assets by non-residents, who are nonetheless UK residents but moving domestic assets offshore) and capital gains on foreign assets (favourable yields, foreign exchange gains and asset price rises). This somewhat out-of-date graph from Lane and  Milesi-Ferretti (2007, p.232, below) shows the world's aggregate current account deficit disappearing into an offshore 'black hole':

At a first order approximation, Lane and Milesi-Ferretti agree with Zucman's estimate that ~8% of World GDP (or $7.6 trillion) that is being held offshore in tax havens: a 'black hole'.

So far, so good. However, the problem with other parts of the 'dark matter' theory is that it has a poor track record for prediction. Consider Hausmann and Sturzenegger (2006) who, just before the GFC, cast 'doubts on the need for a major adjustment of the dollar or a large rebalancing of the global economy'. I suspect that this poor prediction is partly due to methodology: Hausmann and Sturzenegger inferred the size of the 'assets from their returns... (which) is just like valuing a company by calculating its earnings and multiplying by some price-earnings ratio, or valuing a property based on its rental value ' (p.5-6): akin to driving by only using the rear view mirror.

However, Hausmann and Sturzenegger are also naive in their theoretical framework. They think about 'dark matter' not as the offshore spoils of tax avoidance, but as embedded financial services that the US and UK provide to the rest of the world: 'surprises, risk premia and embedded services [insurance and liquidity]' (page 6). Longeran says something similar in his blog: 'the US has an edge in trading assets and making superior foreign direct assets and selling financial “insurance” is a core US competitive advantage'.

There are well-rehearsed heterodox theories that explain an edge in financial trading, where developed countries exploit their information advantages. If financial markets are rigged ('markets for lemons') then the rest of the world will demand reform: Bretton Woods II might be vetoed by the UK and US, but other players can demand centralised clearing, alternative forms of collateral, breaking up trading cartels; and so on.

What about other embedded services: insurance and liquidity? Does the rest of the world pay a fair price for these? According to Godley and Lavoie (2007), provided UK and US trading partners accept IOUs, they can always issue new IOUs in return for goods and services. There is no need for a Walrasian auctioneer, or equilibrium. If the UK or US issue securities at a higher yield, such as an expensive nuclear power stations or high yield sub-prime/PFI debt, then they only hasten their demise. There is some evidence, at least for the UK, that an obsession with issuing higher yield private debt is doing exactly that, with direct investment income accounting 'for more than 80% of the increase in the (UK current account) deficit since 2011' (Hamroush et al, 2016).

We can also use exchange rate movements to estimate, in part, the historical insurance premium payable on 'safe haven' assets. The following graph takes the known reserves of major exporters (China, Germany and Japan) and estimates foreign exchange losses (the currency composition of reserves is taken from COFER). For China, these unrealised exchange losses approached $1 trillion during the period of USD and GBP weakness after the GFC:

A similar exercise, using Japan's trade surplus as a proxy for Japanese private holdings of US T Bills (not shown) suggests that private Japanese citizens paid out a similar insurance premium. From 1975 to 2013, the YENUSD exchange rate fell from around 300 to around 90. In simple terms, imagine a Japanese exporter in 1979 who had accepted USD in exchange for a Sony Walkman. After 30 years of low returns, they finally decide to convert back to YEN and spend it: their YEN buying power has fallen by about two-thirds.

The foreign exchange losses are consistent with superior trading by the UK and US, but we come full circle: the Walrasian auctioneer is sluggish, unpredictable, greedy and avoiding tax. The insurance premia for safe havens are expensive, and the auctioneer is constantly demanding privatisations to satiate foreign demand and to feed the 'black hole'. The sustainability question is reduced to something simpler: are the insurance premiums too high, and are offshore 'black holes' desirable or sustainable?


Godley, W. and Lavoie, M. (2007). Monetary Economics: an integrated approach to credit, money, income, production and wealth. Palgrave MacMillan. Basingstoke, Hampshire, UK.

Hamroush, S., Luff, M., Banks, A. and Hardie, M. (2016). An analysis of the drivers behind the fall in direct investment earnings and their impact on the UK's current account deficit. Office for National Statistics. Available from: 

Hausmann, R. and Sturzenegger, F. (2006). Global imbalances or bad accounting? The missing dark matter in the wealth of nations ( No. 124). Centre for International Development at Harvard University, Centre for International Development. Cambridge, Mass. Available from:

Lane, P. and Milesi-Ferretti, G. (2007). The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities, 1970-2004. Journal of International Economics. 73(2007): pp223-250.

Wednesday, 21 October 2015

Hinkley Point C: who benefits?

Since mid-2013 I have made about ninety edits to the Wikipedia page for Hinkley Point C. It's personal: I was born in Taunton and my parents live about ten miles from the site. Most edits relate to the economics of the project. I also use Hinkley Point C in my corporate finance lectures to discuss uncertainty, discounting and risk.

The figures below use discounting* to estimate different scenarios for the project. The project is very difficult to estimate without knowing the operating profits - in this case, the estimate is from from Peter Atherton at Liberium Capital. I am in favour of renewable energy and the benefits of trade. However, the project appears expensive for consumers from every angle taken.

'Best case' scenario
i) Construction costs** of £18bn from EDF ii) operating profits at £5bn/year iii) decommissioning costs at the lower end of the range of estimates for a similar sized Magnox reactor and iv) a 2.2% discount rate, as used by the UK's Nuclear Decommissioning Authority (NDA) (p. 17) to represent the cost of government borrowing. Remarkably, the NDA now uses negative medium-term discount rates, on the basis these "represent the real-term cost of government borrowing which at the present time, creates a negative rate because the interest payable on UK gilts is less than the rate of inflation – typically in the past the rate was higher than inflation which produced a ‘positive’ discount rate". 

This 'best case' scenario at a 2.2% discount rate has lifetime profits of around £100bn, but if Hinkley Point C were funded by the UK government at lower discount rates the 'best case' would be even more profitable for the producer.

'Worst case' scenario
i) Construction cost estimate of £18bn from EDF  ii) operating profits at £2bn/year, which is 40% of the estimate from Peter Atherton iii) decommissioning costs at the higher end of the range of estimates for a similar sized Magnox reactor*** and iv) a 13% discount rate, as used in Green and Staffall (p.38) for the no support scenario. High discount rates mean higher subsidies because the project is considered more risky. Disappointingly, the authors distance themselves from their assumptions, saying that "Commission staff specified the WACC [discount rate] values that they wished us to use for nuclear stations and the policy scenarios that we are testing" (p.3). Even with these pessimistic assumptions, the 'no support' scenario only just fails to break even: 

Alternative discount rates
Assuming financial support, i.e.: less risk, a 10% discount rate was proposed by Green and Staffall. Now, all scenarios are profitable, with the 'best case', as above, showing lifetime profits for the producer of around £100bn:

Taken together, it is difficult to imagine this project as anything other than an expensive burden for consumers: with government support from the UK and France, the project is more likely to be financed at lower discount rates. Alternatives, given the falling costs of wind and solar technologies, would be less of a burden on the consumer. If these predictions are even approximately right, other renewables will continue to fall in price but consumers will be locked into a 35-year contract for difference at £92.50/MWh plus inflation.

The tragedy here is that HM Treasury have failed to publish their cost-benefit analyses and justify their use of such high discount rates and pessimistic assumption regarding other technology costs. If they had, the project would have had greater public scrutiny. Instead, the estimated costs to consumers, and returns to investors, remain shrouded in unnecessary secrecy****.

Calculations are available here.

*  For these estimates, the project is assumed to have a 35-year lifetime and steady cash flows, hence the discounting formula used is PV=C*1/r(1-1/(1+r)^n). For decommissioning, the discount formula is C/(1+r)^n).   
** Compared with Taishan NPP (China), Flamanville (France) and Olkiluoto (Finland), Hinkley Point C is the most expensive.  
*** Estimated as 43% of the costs to decommission Magnox reactors (p.14). Hinkley Point C will generate 3200MWh, compared with 7405MWh for the ten Magnox reactors. Because of the effects of discounting over 35 years, the decommissioning costs are relatively low, from £0.1bn (best case) to £5.7bn (worst case). The best and worst case scenario are based on the range used by the NDA (p. 12) using the discount rates above. 
**** There is some good news, in that the European Commission adjusted the 'gain-share mechanism'. Rather than a 50-50 profit share if the project returned above 15%, the revised mechanism will see the UK taxpayer get 60 per cent of any profits above a 13.5% return. However, from the figures above, it appears this is above the project's expected return and the bulk of the profit goes to the producer. There are measures to claw back profits if the construction costs are lower that expected (p. 66), i.e.: EDF will bear the bulk of the construction risk.

Tuesday, 23 June 2015

Liberté, égalité, fraternité

This is a short(ish) review of the INET Paris Conference (8-11 April 2015 at the OECD).  INET announced that Clive Cowdrey, of the Resolution Foundation, has joined their Governing Board. To get an idea what this means for INET, watch his speech about inequality at the Opening Plenary here (32:45 to 41:50).

My personal opinion is that INET are sucessfully challenging the orthodoxy. At times, however, this can be slow and inward-looking, especially when the grounds of the debate themselves are unchallenged. My conference notes include examples of speakers referring to 'negative equilibrium real rates', the 'Bernanke-Summers debate', 'QE being better than nothing' and 'the transition to markets (as) the challenge ahead' - as if the agenda were only set by the world's media.

However, I didn't go to hear familiar debates, but to hear new ones. Andrew Sheng joked about adding 'tragédie' to the conference title 'liberté, égalité, fraternité'... to spell 'LEFT'. In that vein, he spoke about central banks 'not knowing how to reduce their balance sheets' and the spillover costs of QE to developing economies. He concluded by arguing that central banks have minimal control of 'final settlement' in the markets. Given there is so much media rhethoric about returning to normal, the illusion of central bank control needed to be challenged.

On that same, LEFTish theme, Lord Turner discussed fiscal policy, suggesting we should not accept slow growth but consider 'debt write offs, defaults or monetizations' with explicit and permanent government deficits financed by the central bank. On Greece, Lord Turner thought that 'exit or restructuring are inevitable'. Given almost everyone in the UK talks about balancing the government's books, this puts Lord Turner somewhere alongside the Greens, SNP and Plaid Cymru.

Gerald Epstein's research strikes me as a little odd, given the general public are in little doubt that central banks have been captured by financial interests. However, the ensuing discussion led me to this post by Rob Parentheau, where he describes Eurozone QE as 'a mutual assisted suicide pact with finanzkapital in the eurozone'. Presumably, there is no Hippocratic Oath to prevent the doctor/economist/finance minister administering long bouts of intolerable pain.

INET finally had a panel on Africa and capital flight. The problem was defined by Vera Mshana: 'Africa loses more from capital flight than it receives in aid'. The chief beneficiaries of these flows are European banks, who are often closely entangled with corrupt regimes according to Léonce Ndikumana. Surprisingly, data on who might, or might not be, considered corrupt is co-ordinated by Reuters via World Check. The panel were passionate about making the system better and, as the discussion reminded us, much of the capital flight from Africa is a consequence of profit-seeking and transfers to an offshore parent company.

In summary, this was a good conference, provided you avoided familiar names and re-hashed debates. With the Resolution Foundation on board, the direction of future research looks promising.

Tuesday, 16 June 2015

"We should all be pluralist now"


At the first QAA meeting to discuss the UK economics curriculum, a senior academic said that "we should all be pluralist now". After 15 months, the review of standards against which UK degrees are peer reviewed is drawing to a close. The revised subject benchmark statement for economics (SBSE) will be published this summer, in time for the 2015-16 academic year.

During the consultation, I finished my PhD and took up a Senior Lecturer position at De Montfort University. However, I continued to work with the committee, along with Joe Richards from Rethinking Economics, and to push for a statement that meets academic and student calls for greater pluralism.

Below are my comments after the last meeting, on 1st June 2015. The final decision on wording lies with the committee chair, and RES Executive Committee member, Eric Pentecost. I am broadly in favour of the changes agreed so far, on the basis that it is better to publish than delay another 12 months, and be stuck with the more narrowly defined 2007 SBSE QAA.

I collected a lot of material during this process. Where these are in the public domain, I have added them to an open Mendeley project. I also archived the ISIPE student letter materials and correspondence from their Basecamp project, including the supporters list: this material is available to ISIPE members on request. I have early correspondence from setting up Rethinking Economics, and was given a copy, by Robert Skidelsky, of his correspondence regarding INET and the CORE project. If you are interested in using this material for research, please get in touch.

Although I am no longer a PhD student, I am actively involved as a Trustee for Post-Crash Economics... the campaign for pluralism goes on!

Post-Consultation Draft SBSE Comments
Neil Lancastle
1 June 2015

Nature and context of economics

This section is improved by dropping the word ‘scarce’; re-wording to include ‘phenomena’, ‘past and present’ and ‘evolve’; including finance (‘financial stability and instability’) and distribution as dynamic analyses; adding ‘historical, political, institutional, social and environmental contexts’; ‘evidence-based’ and including 'qualitative data analysis'.

I preferred the previous wording ‘the study of economics requires an understanding of resources, agents, institutions and mechanisms’ to ‘various interpretations of commonly observed economic phenomena exist, due to observational equivalence, and hence explanations many be contested’. The new sentence would be improved without the middle phrase, ie: simply ‘various interpretations of commonly observed economic phenomena exist, and hence explanations may be contested’.

The addition of ‘ethical’ as a context would deal, in part, with consultation suggestions to emphasise ethics.

The additional wording ‘methodology of science’ seems unnecessary.

Section 2.3 is much improved, and suggests interdisciplinary thinking.

The aims of degree programmes in economics

This section is improved with the bullet point ‘to foster an understanding of alternative approaches…’ although I prefer the wording ‘different and frequently contested ways…’

There are other improvements: appreciate ‘the criteria for simplification’; including the word ‘welfare’ and adding the bullet point ‘to develop in students an ability to interpret real world economic events and critically assess a range of types of evidence’.

Subject knowledge and understanding

This section is much improved, in particular dropping the phrases 'core' and ‘a coherent core’; including a study of ‘financial cycles… the role of money creation, banking and the financial system’; and removing the repetition of numeracy skills in multiple paragraphs.

I would prefer ‘understand different methodological approaches’ rather than ‘appreciate different methodological approaches’.

Subject-specific skills and other skills

This is much improved by the addition of Section 5.2 on skills that employers value (evidenced research, communication, economic history and context, pluralism, interdisciplinary synthesis, critical judgment, proportionality and awareness of limitations).

The transferable skills have been improved by the inclusion of ‘psychological biases’; expected re-wording by the chair of the sections around equilibrium, dis-equilibrium and dynamics; inclusion of ‘conflicts of interest’; and a bullet point on markets and market failure.

The subject-specific skills would appear to be common to other subjects (abstraction; analysis, deduction and induction; quantification; and framing)…I don’t think it makes sense to delay publication, but perhaps the QAA can advise on a more appropriate section heading.

The section on numeracy is improved: it is written in simpler English, and includes critical thinking about the sources and selective use of data. The more general wording would seem to address the consultation suggestion to encompass big data and new data sources.

Teaching, Learning and Assessment

This section is improved by including ‘use of practitioners’ as a teaching approach; and by the broadening of 'context' to include historical, political, institutional, international, social and environmental (but see above regarding ethical context).

Benchmark Standards

This section is improved by replacing ‘economic theory and’ with ‘economic theories (and) interpretations’; and by the broadening of 'context' to include historical, political, institutional, international, social and environmental (but see above regarding ethical context).

Monday, 23 March 2015

The Boom Bust Boys

I've seen the new film Boom Bust Boom at two private views: with an audience at De Montfort University and again at SOAS: there was a third private view as part of the excellent INET 2015 Conference "Liberté, égalité, fragilité" (blog post to follow).  The film is great fun... an overview of a Minskian alternative to neoclassical economics, the debate about reforming economics education, and a reminder that private credit is behind almost every bubble. However, at both private views the audience highlighted the film's superficial analysis of power. Ben Timlett, one of the co-directors, liked the suggestion from the SOAS audience to include a puppet of Marx.

The issues of power and gender are endemic to economics. When we were collecting signatures for the ISIPE open letter, we had a real problem finding senior economists to represent our campaign. The early signatories were 90% male, based mainly in Europe and the US. We were so concerned that we began a campaign within the campaign to make our supporters list more diverse. As Daniel Kahneman said in the film, we might not find it easy to de-bias ourselves as individuals, but organisations should be able to. This lack of diversity exists across academia, with only 11% of UK economics professors being female. Things are a little better at Reteaching Economics, with over 40% female members. To borrow the slogan from another campaign, reforming the economic system 'has to be about more than white men' and the film might have done more to counteract these biases.

With these caveats, the film does a great job of outlining a Minskian alternative to neoclassical macroeconomics; discussing the history of financial crises from tulips to railways to sub-prime mortgages; and giving a very accessible critique of neoclassical models. All done with cartoons and puppets, interspersed with interviews, including a double act between Hyman Minsky (the puppet) and his son, Alan. For this Minskian alternative, things are not as bad as Paul Mason suggested when he wrote that 'the radical, pro-Minsky faction is at a disadvantage because it does not possess a complete alternative model of capitalism'. There are plenty of stock-flow consistent Minsky models with debt, including my own, and this modelling tradition has depth and breadth. However, the problems within economics cannot be solved by new models alone.

The film made some useful policy recommendations, including a reminder by Andy Haldane of the need to separate the dangerous (speculative, Ponzi) activities of banks from their steady (hedge) activities. There could have been more discussion of the nature of crisis today, which Kahneman wryly observed 'hasn't ended yet'. The role of offshore finance could also be explored more deeply. Like Kindleberger's 'Manias, Panics and Crashes', the film identifies the role of private credit in forming bubbles, but might have dug into Eurodollar markets, financialisation and offshore credit markets. Creditor-friendly regulators bailed out these powerful, private interests, sowing the seeds of present crises.

Would I recommend this film?  Yes. The cartoons and puppets are great fun; it makes a useful contribution to the debate about alternatives to neoclassical economics; and it is a reminder that private credit is behind almost every bubble. The film is very accessible, to a non-technical audience, which has to be a good thing. Perhaps the solution is to follow up with a second film that analyses the power and politics behind private credit: central banking, offshore finance, gender, tax avoidance, inequality, austerity and so on. Minsky is ignored, not because everyone is swept up blindly by euphoria, but because it is in the interests of those in power to keep the bubble going.

Saturday, 31 January 2015

It's out! The revised UK economics curriculum

Update 4/12/2015 
There was a final review meeting on 1st June 2015, after this Blog post was written. My summary of these discussions is available here. Some changes were accepted  in the final version of the SBSE, available here, in particular:
The phrases 'due to observational equivalence' and 'methodology of science' were dropped
Different methodological approaches are 'understood' rather than the weaker 'appreciated'
'Psychological biases' are included
'A range of evidence' is critically assessed, and methods are 'critically understood'
Despite intense lobbying, 'ethics' was not accepted as an acceptable context alongside 'historical, political, institutional, international social and environmental'. Instead, ethics is a subject area that is 'linked to'.

It's out! The UK's subject benchmark statement for economics (SBSE), against which the quality of UK economics degrees is judged, has been published online. The QAA can withdraw degree awarding powers and the right to be called a university if it is not satisfied with standards and quality. This draft 2015 SBSE appears nine months after Rethinking Economics represented student voices at the QAA committee. The QAA have a survey to gather comments from 'anyone with an interest in higher education in the UK' including students, academic staff and graduate employers.

This brief post is to review changes since the 2007 SBSE, by mapping them against student calls for theoretical, methodological and interdisciplinary pluralism.

Theoretical pluralism

There is a new statement that ‘various interpretations of commonly observed economic phenomena exist, due to observational equivalence, and hence explanations may be contested. It is therefore important that economic phenomena are studied in their relevant historical, political, institutional and international contexts' (Section 2.2). Resources are no longer 'scarce' (Section 2.1) and economics is more modestly described as 'a social science' rather than 'a key discipline in the social sciences’ (Section 2.3). The phrase ‘a coherent core of economic principles’ has been replaced with the more open-minded 'relevant principles' (Section 4.1) and the threshold levels required by students refer to 'economic theories and interpretations' rather than just a single 'theory'. Finance and income distribution have been reclassified as dynamic analyses (Section 2.2.) and the subject specific skills include 'market failure' and 'conflicts of interest' (Section 5), perhaps in recognition of Minsky and Marx.

Methodological and interdisciplinary pluralism

The problems with abstraction have been highlighted, with students expected ‘(to appreciate) the specific assumptions that guide the criteria for simplification’ (Section 3.1). Students will be assessed on their ability to use 'evidence and knowledge of institutional and historical context' (Sections 6 and 7). In terms of their role in the broader academy, economists are said to engage with a wider range of disciplines, including ‘finance, international relations, law, ethics and philosophy’.

What is left out?

There are notable absences, and this list is not exhaustive. Although governments were accepted as economic entities, financial institutions were not; and legal and ethical contexts are not included (Section 2.2). The relationship with mathematics and management remains muddled: mathematics is used and management is informed (Section 2.3). Evidence is evaluated and assessed, but never critically. The role of government and the System of National Accounts were rejected as topics, as was re-wording to encompass qualitative and mixed methods. Students are asked to 'appreciate history (of economic thought)' but not to understand it; and there is no requirement to appreciate or understand ethical issues.