Remora

First, a note. LI begged the Enigmatic Mermaid to post about the Lula election. She did so. In Brazil, we believe, the feuilleton is called the cronica. It is a form known to Americans from the translation of Clarice Lispector's cronicas, of which a review is here. Well, we don't want to flatter the mermaid (well, maybe we do, a little), but while we sometimes find Lispector's cronicas a little, shall we say too caught up in their own sentimental intelligence? a bit too self appreciative? we feel that E.M. would rather buy a used Che Guevara bikini than aphorize hollowly.

Although perhaps we are being unfair to Lispector. Someday we are going to do a post about the influence of Jules Renard's writing, especially the journals, on the cronica/personal essay format.

And now for our feature presentation.

"The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species." -- Adam Smith


LI was agreeably surprised to see the Arts and Letters website back on-line, thanks to the Chronicle of Higher Education. We've taken a lot of links from that site.



The one we are taking today is to Diane Coyle's column in the Financial Times, which presents a skewed and problematic defense of economics as a science. LI uses problematic in the sense that someone might say, the verticality of the Tower of Pisa is problematic. Or, the election of President Bush is problematic. There�s a telling strain, in other words, between semantics and reality. Coyle�s defense is flawed both in the main line of its attack and in its examples.

As in, primero: Coyle is defending economics against common sense. This is much like a biologist defending biology against the amorous habits of the toad. Common sense, whether deluded or not, shapes organized social behavior. This is, in fact, the whole import behind the work of Kahneman and Tversky, which we have been discussing lately. The resistance to experimental work in economics is quite hard to root out. It isn�t resistance to economics � it is the data to which economics must attend. This is how Coyle puts the issue:

"The trouble with this chasm between the economist and the ordinary person is that when economics and common sense conflict, common sense is almost always wrong. This signals a profound failure in the typical education. Most people - even, I daresay, some readers of the Financial Times - are economic illiterates. Education authorities would do a great service to future generations if they ditched woolly lessons in citizenship or even worthy ones such as geography in favour of economics."



Now, that first sentence is a disaster from every point of view. What Coyle probably means is that conventional assessments of the economic situation at various points in the business cycle are usually wrong -- or at least that is how LI read it, at first. But of course those assessments drive the expectations that create economic activity. Economists are notoriously bad predictors. The Economist annually summarizes the correctness, or lack of it, of the collective predictions of economists, and what they find, usually, is that those predictions are pretty startlingly off. It is for this reason that economics is not considered a real science by, say, your usual physicist. It has the trappings of a science -- that is, it can produce thoroughly mathematized models -- but it can't seem to produce a good model of the real system that it supposedly studies. It is as if we had a science of water that couldn�t explain ice.



However, LI's first reading of Coyle's paragraph was wrong � it isn�t the economic errors of businessmen to which Coyle is pointing, but to the opponents of free trade between nations. Let�s grant Coyle this much: there are reasons to think that this is the core of economics -- after all, Adam Smith's book was about the wealth of "nations" -- but Coyle's example shows a peculiar blindness to variability of models. It is, in fact, an excellent proof that economics, divorced from common sense, is blind.



"Take one area where common sense and economics often clash: international trade. To the economist, the point of trade is imports. The more of them, the cheaper they are, the better for the nation's welfare. Exports are simply what the country has to do to pay for imports, just as work is what the individual has to do to pay for food and clothes. Thus unilaterally reducing tariffs on imports, even if no other country reciprocates, can be a sensible policy.



To the earthling, though, the point of trade is exports: national strength rather than the welfare of citizens. As Paul Krugman has so often and so eloquently pointed out, most discussions of trade policy even fail to acknowledge that the balance of payments has to balance (so that one country cannot be simultaneously swamped with cheap imports and exporting its jobs to sweatshops abroad)."



Well, yes, reducing tariffs can be a good policy. But Coyle's argument is, I think, fundamentally flawed for a common-sensical reason -- she assumes that the economic constitution of nations is scale invariant. In other words, what works for the United States should, pari passu, work for Argentina. This simply isn't true, as any objective survey of nations would show you. No other nation could maintain both a crushing trade deficit and a high currency as the U.S. does -- and the reason for that is that the US economy is of a much larger scale than the Argentine economy, for instance. General laws still apply -- eventually, the dollar will crash in value, all things being equal -- but because general laws apply more slowly in the case of the dollar, it is always possible that the US can leverage its scale to prevent an abrupt crash of the value of the dollar, or even pre-empt it. It is hard to see how any other country at the present time could do that.

These are the factors that make the unilateral decision to drop trade barriers at all times in all places (or, its equivalent, the decision to cancel governmental supports of national industries and agriculture) a bad policy. It can lead to a quick boom and a deep 'recession" -- as we now call what we used to call, with more sense, a depression. Argentina is a wonderful example of how liberalizing an economy can lead to disaster. You will notice that no economist is urging the Argentine government to run a deficit in order to get out of its current horrible situation. You will also notice that economists of both the left and right are urging the U.S. to run a deficit in order to get out of its current pretty bad situation. The reality is, IMF strictures on the American economy, if structured along the lines of Coyle�s scale invariant model, would lead to a global depression.

So, are there positive reason to have tariffs, or to have the government support industries and agriculture? Yes, there are. The reason is similar to the reason governments allow inventors to monopolize an idea for a certain period of time. Tariffs allow indigenous industries, and agriculture, a zone of inefficiency within which they can innovate, in the same way that monopoly allows inventors a zone of inefficiency in which they can get a fair return on their investment. One has to remember that all economic events happen along some time-line. Argentina, by liberalizing the economy in the way the hotshot, neo-liberal ministers did, ignored the patterns endemic to that time-line � that is, the unavailability of deficit spending in times of business retraction, which is, after all, inevitable. Economists from America, always on hand to advise governments to privatize, consistently ignore the time-line, and the conditions inhering on small scale national economies in times of recession. In fact, they are like gamblers who think they have devised a system that will guarantee a permanent lucky streak. Which is why a pattern has been established that seems to have escaped Ms. Coyle�s attention: advisor from Harvard or MIT or Chicago goes to Third World Country x; advisor gets president of x to liberalize the economy; a boom follows liberalization, greatly increasing spending power of the top ten percent of the population; a devaluation of the currency follows, as the boom proves to be shallow and unsustainable; advisor, from tenured position at Harvard, et. al., writes op ed in Business Week or Forbes listing reasons liberalization didn�t go far enough, and blames collapse on these reasons.

Differences in scale also lead to deviations between the measure of income inequality and the measure of inequality in real purchasing power. Tomorrow, LI is going to expand on this little thought with regards to Coyle�s remarks in the Guardian.