Risk, Choice, and Uncertainty

Here is a paragraph from my review of George Szpiro’s book:

While Szpiro tells a highly engaging and informative story about the discipline that mostly purged true uncertainty from its textbooks, he does so unreflectively. The lack of reflection is apparent from the illustration of Kahneman and Tversky’s concept of framing. Szpiro asks the reader to “imagine that the U.S. is preparing for the outbreak of an unusual Asian disease which is expected to kill 600 people” while presenting the reader with two programs one of which is “uncertain” in that if chosen, people would be “risk taking” (p. 198) by facing certain payoffs with certain probabilities. The problem is — as Michael J. Ryan, the Executive Director of the World Health Organization’s Health Emergencies Programme, recently pointed out — that we often find ourselves in situations where “there are no numbers that say if this number is this then you do that” (WHO 2020). After all, Frank Knight (1921) and John Maynard Keynes (1936, 1937) reminded us that not all decisions have the character of a lottery. The lack of reflection on when and how reducing true uncertainty to calculable risk took place in economics is, in my opinion, a serious omission of the otherwise excellent book.

Read the whole review at EH.net.

2019 Warren Samuels Prize

Lachmann and Shackle: On the Joint Production of Interpretation Instruments” (coauthored with Erwin Dekker) has recently been awarded the 2019 Warren Samuels Prize for Interdisciplinary Research in the History of Economic Thought and Methodology (ungated version here).

The prize winner is chosen each year by RHETM’s editorial board from among the papers accepted for publication in the journal throughout the year. Previous winners include the late Gabriel Oliva, Tom Stapleford, Wade Hands, and Isabella Weber and Gregor Semieniuk.

Here is me talking about the paper at THETS 2018 Conference at Balliol College, Oxford (slides here).

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My students on History of Economics

From this year’s student evaluations:

Economics teaching proceeds as follows: here is an extremely abstract and unlikely theory, go away and learn it, and don’t ask awkward questions about its veracity. But I want to know where these ideas come from, and whether they are true, not just whether they make neat mathematics.   In this course I was finally able to ask some of the questions that had been bothering me, for example: Is the idea of maximising utility really true, is it useful, where does it come from? Has economics always been about rational individuals, or should it consider societal influences and morality? Does it make sense to talk about general economic laws, or does human action actually depend on culture?

History of Economic Thought is an excellent course for students who want to think about big ideas; this year we had some very good discussions. More reactions here.

 

Do economists perform the economy?

Here is an excerpt from my review of Enacting Dismal Science (Palgrave, 2016), a new collection of essays on performativity edited by Igor Boldyrev and Ekaterina Svetlova.

Boldyrev and Svetlova have set out a challenging and important task to push forward the dispersed streams of thought on performativity of economics. While this volume offers a solid reconstruction of the historical origins of the concept, and while it addresses some of the main criticisms of performativity, the question remains whether we are converging to anything like a theory of performativity. If so, it seems we still have a long way ahead.

Read more.

Classification and exemplars

Earlier on this year, Howard Schultz stepped down as the CEO of Starbucks (NYT, Seattle Times, WSJ). In our paper, Erwin Dekker and I have looked into what can we learn from the ascent of Starbucks about the meaning of economic competition. Here is the abstract:

This paper offers an alternative to essentialist theories that conceptualize goods as bundles of objective characteristics. Extending the idea that economic competition is a discovery process beyond the discovery of costs and prices to the discovery of qualities, we argue that relevant qualities of goods emerge along with costs and prices from the process of economic competition. Such a discovery process revolves around exemplary goods—a novel theoretical concept we develop. Exemplary goods, as we argue, have a coordinative role within markets that is complementary to the coordinative role of prices. We illustrate our theory with a reinterpretation of a case study on the entry of Starbucks and conclude by challenging some of the normative implications derived from theories of salience.

Read More: http://ejournals.duncker-humblot.de/doi/abs/10.3790/schm.136.3.237

Change things, so that everything stays the same

This very decade Mexico rounds off two centuries taking on its independence. It seems, however, that although the independent Mexico has experienced a number of more or less radical transformations, these changes often did more to leave things as they were than to move the nation to anything resembling a liberal constitutional order. Classical liberal ideas have always been present in Mexico in one form or another but it is paternalism, patronage, and corporatism that have deep roots in the economic thinking, not liberalism.

Today the heritage of conservative colonial paternalism is a major contender for liberalism and a source of many contemporary Mexican problems. In the pre-independence Mexico, land, and labor never really got to become commodified. The colonial society never came to be constituted by competing individuals that would see themselves as self-interested and autonomous, market exchange was impeded by the aristocratic philosophy of noble idleness, through institutions of mayorazgo or ejido that would lead to the concentration of lands, and through encomiendas and repartimientos that would weaken the position of a typical laborer. The market mechanism was misunderstood and mistrust and by the time Mexico claimed its independence the notions of bargain, contract or competition were not too relevant. The Spanish paternalism which found a fertile soil in the subsistence economy of native Americans did not permit the rise of a merchant class in Mexico. Independence was not really a break with this tradition, rather, it was a return to traditional values in a changing world shaped by Bourbon reforms, Napoleonic invasion of Iberia and partial trade liberalization. Rather than a force of emancipation, Mexican independence was a kind of counter-revolution that reinforced corporatist interests and special privileges.

Mexico did not have a stable political system until the second half of the nineteenth century when Porfirio Díaz came to power. With Díaz the political system became stable and a national (as opposed to provincial) identity begun to shape up. Stable polity is key for a liberal order, but can we find some cultural allegiance to liberal principles during the Porfiriato era? Although it might seem so looking at the records of the time, the liberal program that the Reforma movement envisioned did not change the fact that by the time Díaz came to power, ownership of land continued to be concentrated in the hands of the hacendados and that labor – the only asset of the majority of the Mexican population – was not really a property of the individual. It was compulsion, not contract that controlled labor; the liberal program was in conflict with the reality of the landed power in Mexico and the costs of enforcing the liberal ideas of the 1857 constitution were too high.

Despite the irrelevance of the liberal order that was imposed on the Restored Republic, some Mexican historians of economic thought believe we can find an allegiance to liberal principles during Porfiriato. In fact, the argument goes, at the end of the nineteenth century – during the reign of Porfirio Díaz – liberalism prevailed and later on in the 20th century this political philosophy was renewed, updated and promoted by a group of intellectuals, businessmen and politicians establishing a continuity of the so-called “orthodox liberal thinking” or “neoliberalism” that can be traced to Porfiriato. The intellectual core of this kind of thinking counts with an elite that reforms the state with one principal objective: creating and strengthening the market; the government should bring about conditions under which the price mechanism functions correctly.

Granted, the 1883 commercial code defined the profession of a merchant, the civil code (1867-1884) exalted contractual arrangements for labor, all significant private law limitations on free commerce were abolished by legislature, in 1889 shareholder-owned corporations were permitted separating management from ownership, in 1896 alcabalas were mostly abolished and the value of Mexican industrial product doubled between 1878-1911. The fact remains, however, that bargaining for the purchase and sale of labor and goods did not prevail among large segments of Mexican population; the civil law did not provide a solid and inclusive framework for economic activity and the life outside of the cities was largely unaffected by the commercial and legal innovations of Porfiriato. Rather than private economic agents, it was the government that through institutions of fomento directed the country development. The development strategy of the Porfirian government was not liberal, rather, the strategy rehabilitated the Spanish mercantilist colonial tradition introducing a kind of economic nationalism spurring what could be called a closed door defensive modernization. Porfirio Díaz created a patronage pact that sustained the political establishment and protected powerful economic interests. This pact brought stable polity and modernization but not economic liberalism.

In many ways, the Mexican Revolution was a break with the Porfirian tradition but in many key aspects the movement brought about changes that made it possible to keep things as they were yet again. The Mexican Revolution was violent but most importantly it was conservative, it embodied the key ideas of Spanish economic paternalism: limiting the scope of avarice and bringing about social justice to protect the weak and poor from exploitation by private economic power. To achieve these goals, the constitution of 1917 (mainly through articles 27 and 28) rolled back traditional patterns of community ownership and weakened the development of market relations. With the formation of Partido Revolucionario Institucional (PRI) in 1946, the patronage pact introduced by Porfirio Díaz reemerged, the chief mechanism for allocating factors of production was still government coordination, not price mechanism.

The reforms of the 1980s – what some call the “second revolution” – did not modify the key institutions of Mexican Revolution either. The article 27 of Mexican Constitution stayed in place and the article 28 was amended to give the government power over key industries and the mandate to intervene so as to make sure markets are competitive. The “second revolution” of the 1980s and 1990s did remove some inefficiencies through privatization and partial liberalization of trade, it helped move the Mexican economy to the production possibility frontier. But the very frontier did not move outwards because the “second revolution” did not manage to strengthen the rule of law. The “second revolution” was again a predominantly conservative movement that firmly reified the rectorship (rectoría) of the Mexican government. Since the 1980s and despite the reforms the development has been lackluster, in large parts of the country poverty rates have not diminished and corruption, violence, and impunity are still major problems.

The argument about deep roots of liberal orthodoxy in Mexico is important, it tries to establish a link between the nineteenth century and the immediately present Mexican reality that is characterized by crony capitalism, patronage pacts, inequality and faltering social mobility. As I argue elsewhere, the thesis that links the Porfirian development strategy with the 20th-century Mexican liberal thinkers downplays the very prominence of economic nationalism during the Porfiriato era and the prominence of mercantilist arrangements that have survived and prevailed in Mexico since the 1980s. Liberalism has always been present in the history of Mexican thought. But it makes no sense to call the Mexican “orthodoxy” liberal, it is corporatist and contradictory to classical liberalism.

A Spanish version of this article was published in the Boletín de la Asociación Mexicana de la Historia Económica 11, 2. May-Aug, 2016

Entrepreneuship and legitimation of novelty

Sindakis and Walter present a book on entrepreneurship, innovation, management and policy making that should be of interest for anyone inhabiting the “start-up ecosystem, which is struggling to comprehend what it takes to build products for the [Southeast-Asia] region and how to enter emerging markets” (p. xv). I see the main shortcoming of this ambitious project in the omission of one of the most important but still generally understudied entrepreneurial tasks: convincing others to make use of artifacts (goods, services, processes) that work in other contexts and therefore legitimizing their use within local conditions. Unfortunately, the theoretical treatment of how the rules of the game interact with entrepreneurship remains weak throughout the book.

Read my review here.

Must we agree on more than just price?

Coordination through the price system has been well studied and the coordinating aspects of price signals are appreciated among economists and non-economists alike. This paper argues that the coordination processes which take place within markets are often shaped by other systems of non-price coordination. These non-price coordination systems, or orders of worth as we call them, can be thought of as emergent orders just like the price system is an emergent order; they are sources of justification that can be drawn upon to warrant the worth of diverse artifacts and the legitimacy of trading them. We show that Adam Smith’s theory of sympathy hints towards the need for such non-price coordination systems and offers conceptual means for analyzing the emergence of such orders. We link Smith with contemporary work in economic sociology and we distinguish, following a framework developed by Luc Boltanski and Laurent Thévenot, between different orders of worth, we explain how they can help us understand the justification of the exchange and value of contested goods and we apply this theoretical framework to cases of art, life and reproduction.

Read more