ProMarket — “The World Has Changed”: the New York Times on Luigi Zingales, the “Chicago School,” and the Threat of Tech Monopolies

A New York Times profile summarizes the work done by Luigi Zingales and the Stigler Center on regulating digital platforms and describes it as a necessary evolution in the traditional Chicago approach....

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
“The World Has Changed”: the New York Times on Luigi Zingales, the “Chicago School,” and the Threat of Tech Monopolies

See also at ProMarket
Presenting: The Stigler Center’s Report on How to Rein in Big Tech

Brian Davey — Mismodelling human beings – “rational economic men” in love, politics and everyday life

This chapter explores the assumptions about human nature on which mainstream economics is based. The description of “rational economic man” ignores most psychological and psychotherapy understandings of people. — Brian Davey, Credo: Economic beliefs in a world in crisis, Chapter 9

Key to the conceptual confidence trick are assumptions about what people in general are like. It is all based on an implicit modelling of human beings. Certain types of behaviour (the type that allows economists to model people and markets) are called “rational”. Now, you might think that this description of people is meant by economists to be applicable only to economic and market activities. Certainly this was the point of view of one of the founders of the famous Chicago school of economics, Frank Knight. Although committed to the alleged virtues of the market, Knight was not naive about how far you could take economic analysis. In his book Risk, Uncertainty and Profit he concluded that economics only applied to the satisfaction of wants, and that this business of satisfying wants by no means accounted for all of human activity. Indeed Knight questioned how far one could go with a “scienti c treatment” of human activity and wrote of his own views:

In his views on this subject the writer is very much an irrationalist. In his view the whole interpretation of life as activity directed towards securing anything considered as really wanted, is highly artificial and unreal. (Backhouse, 2002, p. 204)

Some contemporary economists of the Chicago school don’t see it this way. If people are calculating their individual self interest in their economic dealings why should one assume that they do not do the same thing in their political, their social and their interpersonal dealings? Should we not also assume that government ocials are calculating their interests too? At the very least, why should contact between business and government not lead to a cosy relationship, particularly if people can leave government posts and get lucrative jobs with industry? What about bribes and kickbacks from business for special favours? 

As I argued earlier, we can take the idea from Anaïs Nin that we do not see things as they are – we see things as we are. There is likely to be a loop in which a theory which describes how people are assumed to be, when powerfully propagated in textbooks as “social science”, will have an influence on how people behave. With economics we have a theory which argues that if people just look after their own interest that’s OK because “an invisible hand” described by wizard intellectuals delivers an approximation to an optimal allocation of resources. Under the influence of a view like this, concern about what is in a wider interest is not likely to blossom. It is unlikely to figure as a motivation or concern. As individualists people will look no further than themselves. They do not need to look further than themselves because the “invisible hand” will do the rest.

It is quite logical to believe that if people are actually like this then their attitude to the community and to the state will be framed in the same terms. Such people, customers of the state, rather than citizens and members of communities, will then have an interest in getting the best deal from the state to pursue their own individual agendas.…

This is an interesting post and the book is a free download.

Frank Knight assumed that utility maximization applied only to economic behavior, while Gary Becker extended that assumption to human behavior in general. This assumption that humans act in their self-interest to gain maximum satisfaction "naturally" or "by nature" rests on the assumption of methodological individualism, which in turn presumes an assumption of ontological individualism.

Extreme individualism contradicts the longstanding assumption that humans are social animals dating at least to Aristotle's Politics.* The assumption of sociality that has greater biological and psychological evidence than the assumption that humans are chiefly individualistic in interests, motivation, decision making and behavior, and act independently of other factors and influences.

The Western intellectual tradition has viewed "rationality" as the distinguishing characteristic of humanity and since its inception in ancient Greece, the Western intellectual tradition has also viewed rationality as moral and pro-social.

Radical (Jacobin) and reactionary (liberal) individualism are innovations that developed in reaction to overbearing government as a residual of the feudalism system that was an obstacle to rising capitalism. This was also a reaction of the Protestant Reformation to the Church's dogmatism and monopoly on knowledge asa means of social control. While these forms of individualism are "rational" in terms of the historical dialectic, given conditions prevailing at the beginning of the modern period, they are neither intrinsic to humanity as indicative of "human nature," nor naturalistic in terms of the course of human development and history.

Emphasis on individualism ignores the broad and deep social and economic influence of culture and institutions, for instance. Conventional economics excludes institutionalism as heterodox, for example, and ignores economic sociology.

Radical and reactionary individualism are pernicious assumptions both socially and also personally, for they are separative. Rather than resulting in spontaneous natural order, pursuit of self-interest primarily leads to egotism and social dysfunction. Extreme liberalism is opposed by both traditionalism and socialism for this reason. Freedom without responsibility confuses liberty with license.

Credo
Mismodelling human beings – “rational economic men” in love, politics and everyday life

Brian Davey

* From these things therefore it is clear that the city-state is a natural growth, and that man is by nature a political animal, and a man that is by nature and not merely by fortune citiless is either low in the scale of humanity or above it (like the “ clanless, lawless, hearthless” man reviled by Homer,1 for one by nature unsocial is also ‘a lover of war’） inasmuch as he is solitary, like an isolated piece at draughts. And why man is a political animal in a greater measure than any bee or any gregarious animal is clear. For nature, as we declare, does nothing without purpose; and man alone of the animals possesses speech. The mere voice, it is true, can indicate pain and pleasure, and therefore is possessed by the other animals as well （for their nature has been developed so far as to have sensations of what is painful and pleasant and to indicate those sensations to one another）, but speech is designed to indicate the advantageous and the harmful, and therefore also the right and the wrong; for it is the special property of man in distinction from the other animals that he alone has perception of good and bad and right and wrong and the other moral qualities, and it is partnership in these things that makes a household and a city-state.

Bill Mitchell — Another Milton Friedman legacy bites the dust

Milton Friedman and his gang at Chicago, including the ‘boys’ that went back and put their ‘free market’ wrecking ball through Chile under the butcher Pinochet, have really left a mess of confusion and lies behind in the hallowed halls of the academy, which in the 1970s seeped out, like slime, into the central banks and the treasury departments of the world. The overall intent of the literature they developed was to force governments to abandon so-called fiscal activism (the discretionary use of government spending and taxation policy to fine-tune total spending so as to achieve full employment), and, instead, empower central banks to disregard mass unemployment and fight inflation first. Several strands of their work – the Monetarist claim that aggregate policy should be reduced to a focus on the central bank controlling the money supply to control inflation (the market would deliver the rest (high employment and economic growth, etc); the promotion of a ‘natural rate of unemployment’ such that governments who tried to reduce the unemployment rate would only accelerate inflation; and the so-called Permanent Income Hypothesis (households ignored short-term movements in income when determining consumption spending), and others – were woven together to form a anti-government phalanx. Later, absurd notions such as rational expectations and real business cycles were added to the litany of Monetarist myths, which indoctrinated graduate students (who became policy makers) even further in the cause. Over time, his damaging legacy has been eroded by researchers and empirical facts but like all tight Groupthink communities the inner sanctum remain faithful and so the research findings haven’t permeated into major shifts in the academy. It will come – but these paradigm shifts take time.

The latest research effort to wipe Friedman’s theoretical legacy off the map was presented to the ASSA Annual Meetings (in Chicago, this year) at a session on January 8, 2017 by two young Harvard economists.…

Arguably, "Friedmanism" led to the Global Financial Crisis (system failure) that is still unfolding around the world, resulting in a discrediting of conventional economics, the unwinding of the post-WWII liberal order, and the inception of a new world order that is now in the making, unfortunately led by the right since the left is absorbed in navel-gazing and blaming.

Bill Mitchell – billy blog
Another Milton Friedman legacy bites the dust
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — De Vroey’s Chicago style History of Macroeconomics

Preferring theory to reality. Is it science or ideology? Looks like ideology to me, but I'm only a philosopher and logician rather than an economist. You decide.

Lars P. Syll’s Blog
De Vroey’s Chicago style History of Macroeconomics
Lars P. Syll | Professor, Malmo University

Lars P. Syll — The tiny little problem with Chicago economics

John Cochrane and Robert Lucas going off again. Government spending "crowds out" private spending. Bill Vickrey points out the mistake.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking to much of freshwater economists like Lucas and Cochrane to concede that, but it’s still a fact that ought to be embarrassing. My rational expectation is that 30 years from now, no one will know who Robert Lucas or John Cochrane was. John Maynard Keynes, on the other hand, will still be known as one of the masters of economics.

Lars P. Syll’s Blog
The tiny little problem with Chicago economics
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Robert Solow on Chicago economics

Don't get sucked into debates where the framing is based on erroneous assumptions and inappropriate methodology.

Lars P. Syll’s Blog
Robert Solow on Chicago economicsLars P. Syll | Professor, Malmo University

Also

On using economics as propaganda.

Neoclassical immunization strategies

Scandalous and dangerous economics

Diane Coyle — Capitalism and the law

Short review of The Great Leveler: Capitalism and Competition in the Court of Law by Brett Christophers. 

I greatly admired his previous book, Banking Across Boundaries, and this new one has the same compelling combination of analysis and historical detail. The theme this time is capitalism as a constant balance between competitive markets and market power, these two forces applied by laws and their enforcement. Anti-trust laws are enacted or enforced with greater rigour when monopoly power gets out of hand. Intellectual property laws are strengthened after periods of cut-throat competition. In contrast to those – often Marxist – writers who have seen a single direction of travel toward ever-greater monopoly power, Christophers argues here that there is a cycle. He cites Kalecki, but also Marx’s dialectics: “Monopoly produces competition, competition produces monopoly,” Christophers quotes Marx as writing in a letter of 1846.…

Christophers ends with Lenin’s prediction that the future is capitalist monopoly on the international stage, monopoly imperialism. I have more confidence in self-correcting mechanisms. We will see.

The Enlightened Economist
Capitalism and the law
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Yanis Varoufakis — How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory

The ‘haves’ of the world are always convinced that they deserve their wealth. That their gargantuan income reflects their ingenuity, ‘human capital’, the risks they (or their parents) took, their work ethic, their acumen, their application, their good luck even. The economists (especially members of the so-called Chicago School. e.g. Gary Becker) aid and abet the self-serving beliefs of the powerful by arguing that arbitrary discrimination in the distribution of wealth and social roles cannot survive for long the pressures of competition (i.e. that, sooner or later, people will be rewarded in proportion to their contribution to society). Most of the rest of us suspect that this is plainly false. That the distribution of power and wealth can be, and usually is, highly arbitrary and independent of ‘marginal productivity’, ‘risk taking’ or, indeed, any personal characteristic of those who rise to the top. In this post I present a body of experimental work that argues the latter point: Arbitrary distributions of roles and wealth are not only sustainable in competitive environments but, indeed, they are unavoidable until and unless there are political interventions to keep them in check.…

Evonomics
How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory
Yanis Varoufakis

Lars Syll — ‘How I became a Keynesian’ — Richard Posner

When my information changes, I alter my conclusions. What do you do, sir? — John Maynard Keynes 

Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in "The Keynes Centenary" by Paul Samuelson, in The Economist Vol. 287 (1983), p. 19; later in The Collected Scientific Papers of Paul Samuelson, Volume 5 (1986), p. 275; also in "Understanding Political Development: an Analytic Study" (1987) by Myron Weiner, Samuel P. Huntington and Gabriel Abraham Almond, p. xxiv; this has also been paraphrased as "When the facts change, I change my mind. What do you do, sir?" — Wikiquote

Richard Posner apparently agrees. What about the rest of them?

Lars P. Syll’s Blog
‘How I became a Keynesian’ — Richard Posner
Lars P. Syll | Professor, Malmo University

Paul Romer — Mathiness and Academic Identity

Paul Romer clarifies his position on mathiness.

I see a marked deterioration in the progress that economics is making as a scientific discipline. I point to objective evidence that economics is not functioning as a scientific discipline should. The problem seems to be getting worse. 

Science is about establishing what is true. Scientists say what they believe. They support their claims with evidence and logic. They evaluate seriously the claims that other scientists make. They admit when they are wrong.

Science is not like an inter-faith congress, where everyone is supposed to listen, in tolerant and respectful silence, to recitations of dogma that maintain sub-group cohesion.

I could be wrong. I’ll listen and admit it if I am persuaded that I am wrong. But until logic and evidence show that some other position is closer to being right, I will say what I think because I care about more about protecting science in general and economics in particular than about avoiding hurt feelings.

Paul Romer
Mathiness and Academic Identity

Btw, in the post Romer makes clear that the issue is about economic power and economic rent, although he does not use those words.

For example, one of the things that the people I criticize are campaigning for is a methodological restriction to models with price-taking. For them, price-taking is dogma. To make the case for this restriction, they are not presenting scientific arguments grounded in logic and evidence.

I do not think that the outcome of this campaign over methodological dogma will have any effect on national politics or actual policy decisions. Nor do I think that the proponents of price-taking are fooling themselves into thinking that the outcome of this campaign will have any affect on national politics or actual policy decisions. They are fighting to preserve a sense of academic group identity grounded in a common defense of this dogmatic position.

I have written that Stigler and Friedman opposed Chamberlin’s theory of monopolistic competition because they did think that letting this deviation from Marshallian price-taking into mainstream economics could influence national politics and actual policy decisions. But that was then. This is now.

I suspect that path dependence explains why economists at the University of Chicago still make hostility to monopolistic competition central to their sense of academic identity, but if so, it is a vestigial holdover from battles about national politics from the 1950s to the 1980s, not part of an ongoing battle over national politics.

Many of us don't view this argument as "vestigial" and about academic politics. It is very much an article of faith of neoliberal dogma that the Chicago School largely initiated, promoted and continues to maintain as an ideological political lever.

Paul Romer — Research without Reading

The ultimate takedown of Robert Lucas and the Chicago School.

ROFLMAO. Romer hits a homer on this one. Bonus:  it is short, too.

Paul Romer
Research without Reading

ht Mark Thoma at Economists View

Lars P. Syll — David Andolfatto and the Chicago dismissal of ‘involuntary unemployment’

Roger Farmer schools David Andolfatto on some history of economics. 

The dismissal of ‘involuntary unemployment’ from the lexicon of the modern economist was introduced as part of a deliberate attack on Keynesian economics. It is time to roll back that attack. As I have shown here, ‘involuntary’ unemployment is a useful way of distinguishing unemployment that is part of a social optimum, from unemployment that is not.

Ten dogs, nine bones.

It doesn't matter how much job seekers are willing to reduce their offers if there are too few bids for workers. Some workers will be unemployed "involuntarily," the veil of Pareto optimality notwithstanding. And Keynes explained why there are too few jobs for those willing and able to work regardless of wage flexibility.

Lars P. Syll’s Blog
David Andolfatto and the Chicago dismissal of ‘involuntary unemployment’
Lars P. Syll | Professor, Malmo University

David F. Ruccio — Bad ideas of mainstream economics

The following post was contributed by Richard McIntyre, in response to Alan Blinder’s review of Jeff Madrick’s book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, in the New York Review of Books.

Occasional Links & Commentary
Bad ideas of mainstream economics
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Eric Schliesser — The Technocratic Conception of Politics (The Economists and Rawls redux)

By a 'technocratic conception of politics,' (recall) I mean to capture the following three features of an enduringimage of politics present in (social) science:

first, it is characterized by the ideal that with social knowledge and its progress, substantial political disagreement can be eliminated.… 

…second, this ideal of conflict-free politics presupposes … considerable value-unanimity in society.… 

Third, the conception requires an image of science in which one of the central aims of policy scientists is to achieve consensus (or lack of disagreement).

In short, this is the assumption of the possibility of achieving a universally true conceptual model free of the cognitive-volitional-affective-sensory biases of ideology. This assumption is based on a level of symmetry that evidence does not support.

The assumption of universalizability of knowledge is grounded in an assumption of methodological individualism, namely, that human individuals are "atomic" in the sense of "rational" human behavior being capable of being modeled in terms of a representative agent. What this type of thinking leads to is generalization from introspection on the part of theorists, assuming lack of bias even admitting bounded rationality: Rational individuals will come to the same conclusion based on the same information. This assumes away ideological bias, as well as the logical problems associated with criteria being foundational to the construction of different world views and ideologies.

There's also a link to download Kenneth Boulding's Economics as a Moral Science.

Digressions&Impressions

The Technocratic Conception of Politics (The Economists and Rawls redux)

Eric Schliesser | BOF Research Professor in Philosophy and Moral Sciences, Sarton Centre for History of Science, Ghent University, Belgium

Eric A. Posner and Glen Weyl — Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel

Piketty’s conjecture that we will reach the same or worse levels of wealth inequality than in the nineteenth century is implausible. Moreover, his focus on inequality misses that something great is also going on—that more and more people can live off society’s accumulated wealth and so don’t have to work. The real danger is not inequality per se but bad policy that suppresses growth and thus the accumulation of wealth, delaying this utopia for the masses longer than necessary. So while progressive taxes may serve as a short-term palliative, we should focus on giving the most capable part of the population better incentives to innovate, while allowing everyone else to benefit from their brilliance as rentiers.

"America Will Never Look Like a Jane Austen Novel." Right, it looks like an F. Scott Fitzgerald novel.

No surprises here. What you'd expect from the "unlimited growth solves all problems" Chicago School. They are thinking in terms of a Horatio Alger novel. This is caricature, not analysis. Like most of the commentariat, they also misrepresent what Piketty actually wrote.

But the authors do put forward some good analysis and propose reasonable solutions, so it is not all bad.

The New Republic
Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel
Eric A. Posner and Glen Weyl

(h/t Greg Mankiew)

Eric Posner is a professor at the University of Chicago Law School and Glen Weyl is an economist at the University of Chicago, currently on leave with Microsoft.

Corey Robin — The Calculus of Their Consent

Remembering Gary Becker (et al)

Kathy also mentions this article that Becker wrote in 1997 about the Chicago Boys who worked in or with the Pinochet regime. Becker’s conclusion about that episode?

In retrospect, their willingness to work for a cruel dictator and start a different economic approach was one of the best things that happened to Chile.

No real surprise there. Many free-marketeers, including Hayek, either defended the Pinochet regime or defended those who worked with it.

Oh, what the heck, the Allies forgave all the capitalists and scientists that worked with Hitler on the Nazi war machine.

Crooked Timber
The Calculus of Their Consent
Corey Robin

Daniel Little — Poverty and economics

How important should the subject of poverty be within the discipline of economics? Some economists appear to think it is a very small issue compared to the magnificent mathematics of general equilibrium theory. Others believe that economics should fundamentally be about the sources of human well-being and misery, and that understanding poverty is absolutely fundamental for economics. How should we try to sort this out?

Understanding Society — Innovative thinking about social agency and structure in a global world
Poverty and economics
Daniel Little | Chancellor, University of Michigan at Dearborn

Rowan BosworthDavies — How the legacy of Thatcher and Reagan made the 2008 financial crisis inevitable

The consequences of Thatcher and Reagan's Friedman and Hayek-inspired free market utopianism and market fundamentalism. Adds more detail to Bill Black's exposé.

Max Keiser
How the legacy of Thatcher and Reagan made the 2008 financial crisis inevitable
Rowan BosworthDavies