Category: Economics Education/Teaching

On Economics and Ethics

Ever since political economy became economics, the role of ethics has continually diminished in the learning of economics. This is because economists want(ed) their discipline to be scientific. To serve this purpose, economics has been divided into normative economic and positive economics. Normative economics deals with questions such as ‘what ought to be the price configuration’ whereas positive economics deals with questions such as ‘what is the configuration of process’. In other words, there is no room for debate in positive economics; at least, that is the impression one gets from reading the mainstream textbooks. Amartya Sen tried to remedy this situation by strengthening the area of welfare economics; however, methodologically, it still adopts a ‘positive economics’ framework. In any case, this development motivated economists to ask humane and ethical questions. This post raises some issues concerning the role of ethics in economics.

Adam Smith, the father of economics, did not only write Wealth of Nations; being a moral philosopher and an acute observer of society also published a book titled Theory of Moral Sentiments. This book talks of sympathy, passion, ambition, justice, duty, utility, custom, virtue, self-command, etc. Often, proponents who favour utility maximization cite Adam Smith as the first one to do so effectively. As much as one glance at the table of contents of Theory of Moral Sentiments will say otherwise.

This brings us to the following pertinent, yet very difficult questions. What is the objective of economic policies or economic engineering’ What role does economic theory play in policy making’ Does economic theory provide tools, methods and concepts that aid policy formulation’ The final objectives of economic policy invariably happen to be poverty elimination, reduction of unemployment, inflation control and provision of a good standard of living to all the inhabitants. Hence, various kinds of policies are undertaken to achieve these broad objectives. Very often, economic theory aids such policy making exercise in a significant manner. Now, we come to a very startling observation. Economic theory (which is positive in nature) has no room for conflicts, ethics or values. Instead, the major criterion which dominates most economic theorization is that of economic efficiency ‘ free markets achieve efficiency. So what’ The goals of economic policies are not to make markets efficient or free; instead, it is to provide the inhabitants with a good standard of living. In India, how can markets take care of the diversity in caste, language, region, income, etc’ Economists must do away with their arrogance and admit that policy making is a serious and complex matter, which cannot be solely guided by macroeconomic models of the general equilibrium variety!

For instance, the variables which the government tries to engineer affect people in different and often opposite ways. Alterations in interest rates affect lenders and borrowers differently. Also, movements in exchange rates affect exporters and importers in exactly opposite ways. More importantly, changes in prices of goods and services affect those who cannot afford it very adversely. Given such differential effects of policy variables, economics must incorporate ethical discussions into its fold. Perhaps, a reading of Theory of Moral Sentiments will be of great help!

 

For ‘Social’ Economists

Over the past years, I have come across many students of economics who complain about the irrelevance of economics to understand practical issues. Among them, some go on to choose sociology, which is considered to be more practical and realistic. This post is for those who think that the dominant practice of economics is not done the right way. It is certainly possible to be a ‘social’ economist. In fact, this post is about ‘social’ economists and not about social economics, a distinct field in economics, which comprises economists who think ethics, values, philosophy, culture, etc are important.

Social economics/socio-economics/new social economics are emerging fields within economics whose central premise is that one cannot study an economy meaningfully without paying attention to social institutions, culture, beliefs, etc. It is disturbing to know that the practitioners of social economics, socio-economics and new social economics distinguish their work among themselves. This trend is largely because of the urge to be ‘pioneers’ in ’emerging’ areas in economics. The following extracts from The Elgar Companion to Social Economics shows this clash of identity:

‘The association that promotes socio-economics, the Society for’ the Advancement of Socio-economics (SASE) advertises itself rightly as’ an interdisciplinary organization. In recent years, socio-economists have’ increasingly used insights from biology, in addition to psychology and sociology.’

‘The association that promotes social economics, the’ Association for Social Economics (ASE), presents itself as a pluralistic’ organization that emphasizes the role of social values and social relationships in economics. Social economists have a variety of additional orientations, including institutionalism, Marxism, feminism, post-Keynesian,’ Kantianism, solidarism, neo-Schumpeterian, environmentalism and’ cooperativism. ‘

‘There is also a quite recent literature termed the ‘new social economics‘,’ which begins with market relationships, and then seeks to add ‘non-economic’ social content to their analysis. That is, rather than embed the’ economy in social relationships, these more recent contributions seek to’ embed social relationships in the market. ‘

In any case, these emergent fields indicate a dissatisfaction with the dominant economics profession. However, in their haste to carve out a separate field, the essentials are often lost. The adjective social prefixed to economics indicates the existence of an economy which cannot be clearly demarcated from the society in any clear fashion. Moreover, this usage also emphasises the role of how society is organised. The following are some questions pertaining to the economic aspects: Are the people motivated by reason’ To what extent does profits motivate entrepreneurs’ On what basis are people employed ‘ caste, gender, religion, academic qualification, political connections, bribes, region’ Can we visualise distinct social classes in the economy based on their ownership of land’ What are the sort of interactions which take place between agricultural, manufacturing and service sectors’ How is finance organised in the country’ How important are informal sources of finance’ Does labour laws apply to all sorts of employment’ How does the government intervene in domestic production and consumption of commodities are services’ What sorts of price and quantity controls exist’ These are some of the questions which aid in understanding how the economic aspects of a society are organised.

Today, economists are asked for their opinion/advice on matters pertaining to financial crises, foreign exchange constraints, poverty, unemployment, inflation, rural development, etc. Only an economist who is reasonably aware of how the society is actually organised will be able to devise strategies and chart plans which can effectively tackle these economic issues. A ‘social’ economist is one who understands the complexity of social studies in general and of economics in particular. In addition, she will always resist the temptation to think in atomistic terms and will resist universal solutions. She will also be aware of the significance of non-market transactions.

Even if the dominant form of economics teaching and research is asocial, the academic enterprise of economics does give space to alternative approaches. However, one must be careful because some of these approaches appear ‘social’ but are in fact static and atomistic. A reading of Adam Smith, the father of economics, easily points to the role and significance of social values and institutions. It is for this reason that we need to return to classical economics, where, as one of the earlier posts argued, economics is’ the study of commodities; but their economic analysis can easily incorporate social values and institutions as well.

Paul Samuelson: The Father of 'Modern Economics' Dies

All those who have studied economics for the past 50 years or so have heard about Samuelson – Foundations of Economic Analysis, Samuelson-Stopler theorem, Factor-price equalisation theorem, revealed preference theory, Bergson-Samuelson social welfare functions, non-substitution theorem, linear programming in economics, etc. The first one is his 1947 book which dominates economics teaching even today, directly or indirectly. Samuelson transformed economics into some sort of science (pseudo-science, as some call it)-social physics. [For more on this, go here]

Robert Lucas on Samuelson:

‘Samuelson was the Julia Child of economics, somehow teaching you the basics and giving you the feeling of becoming an insider in a complex culture all at the same time. I loved the Foundations. Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk.’ [Marginal Revolution and here]

SCARY!

In his Foundations, he is supposed to have popularised the views of Keynes. In fact, what he popularised is the neo-classical synthesis (IS-LM curves, which were created by Hicks). Hence, what we learn in most macroeconomics texts is not what Keynes said. Post-Keynesian economics is more closer to what Keynes said.

Despite his ‘ideas of good economics’, one needs to appreciate the works he carried out in different areas in economics – macroeconomics, public finance, international trade, consumer theory, capital theory and general equilibrium, etc.

In his initial editions of the Foundations, one could find a few pages devoted to the 1960 capital theory debates. However, with passage of time, the debate was relegated to footnotes. Now, in mainstream textbooks, capital theory is entirely omitted. In fact, Samuelson admitted the problems neoclassical microeconomics and general equilibrium run into because of their notion of capital. [More here]

I end with two questions.
Is mathematics the only way of studying economics and analysing economies’ [We mostly use calculus and game theory. Should we employ other kinds of mathematics’]

How reliable are textbooks’ It makes learning easy, but probably, a bit too easy.

On Causality in Economics

This post tries to unsettle some of the methods used in economics today ‘ Regression analysis and Granger causality. Apart from this objective, the post also tries to understand the meaning (rather, meanings) of causality. Do we economists mistake correlation for causality’ Can we have a single method for capturing causality’

Causation is defined in the following ways:

-the action of causing or producing.

-the relation of cause to effect; causality

-anything that produces an effect; cause [Dictionary.com]

And the definition of Correlation is:

-mutual relation of two or more things, parts, etc. [Dictionary.com]

I once asked a professor who had offered to give a lecture for our Advanced Economic Theory class this: ‘Sir, is it possible to establish causation conclusively” He replied ‘That is simple. There are these tests- Granger test, Sims test, Sargent test, McClave-Hsiao test, Haugh-Pierce test, etc.’ And he wrote the names of these so-called ‘scientific’ tests on our black board.

What we often forget is that, there is no single and simple understanding of causation. There are various kinds of causality like epistemic, conceptual, factual, counterfactual etc. Causality in economics also are of different natures- poverty is causing unemployment, increased demand for oil has resulted in oil price rise, supply constraints are hiking up the price, etc. For instance, conceptually we know that poverty causes unemployment (vicious cycle of poverty) and that increased demand causes a concomitant price rise. In economics, it is important to have an account of both conceptual as well as factual causality.

For causality to be present between two variables A and B, it is necessary for them to be related in some way. This relationship among them can be of a linear nature or a non-linear one. If it is linear in nature, then it is called correlation. [Note that regression analysis (OLS) is based on correlation and is linear in nature.] But, correlation alone does not imply causation. Hence, all those who think that causation and correlation are the same make an inductive leap ‘ from correlation to that of causation.

As R G D Allen writes in his Statistics for Economics: ‘This statistical concept of correlation is quite neutral as regards causation. One of the variables may be ’caused’ by the other, but this can only be known from other than statistical considerations.’ Usually, causal hypotheses are derived from economic theory, because ‘data does not speak on its own’. We need to pass data through theory in order to make sense of it.

However, economic theory (like any other theory) contains a lot of assumptions, mostly unrealistic. What happens to causality then’ Causality, then is dependent on these assumptions. Hence, drawing inferences from such theoretical models for practical purposes should be undertaken with caution.

It is this caution that seems to be missing amongst econometricians. This will be evident after looking into the workings of Granger causality. Granger causality analyses probabilistic causality. However, this per se is not a limitation of the test. For, in social sciences, it is exceedingly difficult to talk about deterministic causes in real-world scenario- especially, in a macroeconomic environment.

Granger causality
If X and Y are probabilistically dependent and X precedes Y, then X causes Y.

And, in actual testing, Y is regressed on X (t) and also on X (t-1). If the latter regression is found to be more significant, then X is said to Granger-cause Y. In actual practice, there are economists who forget the prefix. That is, again, some sort of correlation analysis is carried out between Y and X (t-1). In any case, the concept of causation is a problem-ridden one. And as economists who contribute to policy-making, one ought to be on their toes all the time.