LAW-2390, PED-233, SW-31

Political Economy After the CrisisSpring 2014

Michael WoolcockWeek 1

January 30, 2014

Overview

• Setting the tone and terms of debate• The crisis and its intellectual discontents– Crises as “terrible things to waste”

• The economics, the social science, we need– Looking around, backwards, forwards– Who we need, what we need, and why

Setting the tone and terms of debate• Economics as a social science

– Economics as key part of, but not substitute for, the social science and social movements we need to promote prosperity, justice, inclusion, opportunity

– Scholarly and policy progress through “good struggles”• Because the solutions to our most vexing problems are unknown, unknowable, ex

ante; legitimacy of change process is key• Harnessing high priests, heretics, and humanists

– Monopolies (in ideas, as in shoes) are inefficient, constraining

Setting the tone and terms of debate• Economics as a social science

– Economics as key part of, but not substitute for, the social science and social movements we need to promote prosperity, justice, inclusion, opportunity

– Scholarly and policy progress through “good struggles”• Because the solutions to our most vexing problems are unknown, unknowable, ex

ante; legitimacy of change process is key• Harnessing high priests, heretics, and humanists

– Monopolies (in ideas, as in shoes) are inefficient, constraining• With great power goes great responsibility

– And great temptations, hubris, weakness borne of strength – Genius of countervailing power; limits of self-regulation

Setting the tone and terms of debate• Economics as a social science

– Economics as key part of, but not substitute for, the social science and social movements we need to promote prosperity, justice, inclusion, opportunity

– Scholarly and policy progress through “good struggles”• Because the solutions to our most vexing problems are unknown, unknowable,

ex ante; legitimacy of change process is key• Harnessing high priests, heretics, and humanists

– Monopolies (in ideas, as in shoes) are inefficient, constraining• With great power goes great responsibility

– And great temptations, hubris, weakness borne of strength – Genius of countervailing power; limits of self-regulation

• Be smart and ‘stupid’– Critique is (relatively) easy and safe, but necessary– Imagining, exploring alternatives is harder– Creating, sustaining something better is really hard

The crisis and its intellectual discontents

• The 2008 global financial crisis as the latest in a series of such crisis – Reinhart and Rogoff (2011) This Time is Different

• Effects still endure– GDP still not back to pre-crisis levels in many countries– Stubbornly high unemployment– Greece, Iceland, Spain, Ireland: to/over the brink, still not fully back

• Key constituent elements (now) well understood…– Easy credit, housing bubble, lax regulation, complex new instruments, etc

• …but how, why it happened – and why a crisis of this magnitude wasn’t anticipated – remains contested– (Next slide)

• Crises (of all kinds) expose, exacerbate fault-lines in societies, in theories, in ideas. Our focus:– less about diagnosing/assessing details of the 2008 crisis as such

• Though this might be a good topic on which to write your paper(s)

– more about how to complement, substitute prevailing ideas about what an economy is, what it is for, and how alternative policy agendas (where necessary) might be pursued

The crisis and its intellectual discontents• Explanations (with “20/20” hindsight…)

1. Globalization + Deregulation + ‘Innovation’ = Frankenstein• Complexity run amok (Friedman 2009)

2. Capture , Collusion, Complicity 1: Disaster waiting to happen• High finance, top government, senior regulators, ratings agencies in

revolving door• “Too big to fail is too big to exist” (Johnson 2009)

3. Capture, Collusion, Complicity 2: Rigorous, objective analysis? • Assumptions – rationality, self-correction – as ideological, policy pre-

commitments• Shape, preclude what is thinkable, say-able, do-able• ‘Inside Job’: Many elite economists themselves bought in (e.g., Iceland

analysis)– Academics as consultants: serious ‘conflict of interest’ issues

The crisis and its intellectual discontents• Explanations (with “20/20” hindsight…)

4. “Perfect storm”: alignment of separate, idiosyncratic events• “Irrational exuberance” + Great Moderation + Asian savings glut +

Technical mistakes• Unfortunate, but no need for major re-think• Ex-post attempts to “correct” market “failures” only make matters worse

5. Fragile by Design: Weakness of underlying US institutions• US had has 12 banking crises since 1840; Canada has had none…• Paucity of serious thinking about “institutions”• Calomiris and Haber (2014)

6. Models as beauty contests (not science + ethics)• Dubious micro/behavioral foundations of macro phenomena• No routinized professional obligation to specify a model’s limits, margins

of error• Collander et al (2009)

“Fundamentally recasting the way we think”: Some first principles

• From economics itself– The discipline of economics “was not created to explain the

process of economic change . . . . Standard theories are of little help in this context. Attempting to understand economic, political and social change (and one cannot grasp change in only one without the others) requires a fundamental recasting of the way we think” (North 2005: vii)

– Comparative advantage, division of labor, free trade, the inefficiencies of monopolies… All apply to ideas as much as to goods, services• Alas… Economics too often an intellectual autarky, monopolist• But rivals can’t be merely ‘critical’

• From sociology– Disciplines as ‘epistemic communities’, bound by…

• Creedal beliefs (impervious to evidence)• Internal status hierarchies

– see ‘Life Among the Econ’, Leijonhufvud (1973)

• Distinctive language (‘cultural capital’)

– …which create, defend ‘barriers to entry’– Thereby defining, determining

• Who is ‘us’, who is ‘them’, price of ‘fraternizing’• What counts as a question, what counts as an answer• Why bad ideas persist, why new ideas are inconceivable

– Institutions as political, historical, social constructions

“Fundamentally recasting the way we think”: Some first principles

In search of new ideas:Look around, look backwards

Adapted from Matt Might, matt.might.net

What it feels like to you

What it feels like to you What it really is

The quest for new ideas:Exploring, assimilating, pushing

Training

Education

The economics we need will…• Follows its core precepts

– Esp. comparative advantage, free trade, …• Embrace the ‘social’ in social science

– Big 21st C breakthroughs from diverse teams • Page (2008), The Difference

• Shed physics envy, acknowledge ‘multiple intelligences’ – Gardner (1983 et al)

• Produce well educated, not just well trained, people• Concede the limits of its ‘objectivity’

– Esp. vis-à-vis the alleged ‘advocacy’ of neighboring disciplines– Ethics: Specify magnitude of uncertainty

• Uphold questions-drive-methods principle• Ask, answer big questions

– ‘Better to be vaguely right than precisely wrong’ • Cultivate a “propensity for self-subversion” (Hirschman)

– Every dominant idea, institution, discipline needs countervailing force