Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

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Monday, February 08, 2010

The Temptation of Magic

Posted by Simon Halliday | Monday, February 08, 2010 | Category: , , |

http://blogs.e-rockford.com/thepassengerseat/files/2009/10/aircraft_interior.pngA recent post by William Easterly at The Aid Watch blog, 'Who Gets the Last Seat on the Plane?' reminded me of an article by Deirdre McCloskey, 'Voodoo Economics' in which McCloskey relates the wishes of children (and, in the context of Easterly, development officials) to magic and magical thinking.  Many's the economist or statistician who wishes that there were endless resources, that there were always another seat on the plane, that there were water, food, bricks and mortar to slake the thirst, sate the hunger and house the bodies of the poor. But it cannot be.  Resources are scarce.  Economists do not habitually profit from their predictions, rather they gurgle about shocks, harp on about errors, and make no more money than the next man when a commodity price wanders around like a directionless drunk. 

To support her argument, McCloskey reminds us of several characteristics of Magic:
  1. Magic is often bussinesslike: magic expects to work, and work it shall (or else)
  2. Magic is often arrogant:magic summons and invokes, reality takes heed
  3. Magic is often secret: secrecy with public dissembling
  4. Magic is often exclusive: only performed and understood by a select few
  5. Magic is often nontransferable: only applicable and given to you and only you
  6. Magic is often particular and local: on this day, this week, the moon favours us
  7. Magic is often elaborate: procedures, rituals, sacrifice and execuation - all elaboration and often unnecessary
http://images.artwanted.com/large/50/1926_32550.jpgSubstitute 'economics' for 'magic' and you should laugh.  That said, some truth shivers through, especially when you consider some of the childish or magical economics that gets espoused in the media.  People forget that scarcity exists always and everywhere and that we must always make decisions about costs and benefits.  Right now I have weighed up the benefit of writing this post with the cost of the time of doing so, against the benefits and costs of other activities.  I don't claim that I've indexed every possible activity, but at least one or two have gone through my head: reading another few pages of that article sitting open on my desktop, or doing some writing and editing, or, more frivolously, watching a program or reading a novel. 

These are rather inconsequential costs and benefits, further up the ladder, and pertaining to development directly, the costs and benefits are measured more emotively and significantly: one more child fed, one more mother given anti-retrovirals, one more father employed.  Even so, in development and economics we must always keep ourselves away from magical thinking, from believing in the arcane, secret musings of 'consulting economists' when judging the costs and benefits, we should try to understand the intricacies, if there are any, ourselves. Similarly, in our daily lives if we consider the evidence deeply, if we steer away from magical thinking, remain sceptical, humble in the face of uncertainty and agnostic about whether something like price can be predicted, if we adhere to thinking that is often general rather than specific (i.e. someone claiming that in this place, at this time, and now, apart from all other moments, X must work), if we seek always to remain simple and avoid elaborateness, then hopefully we'll rid ourselves of the magical thinking that the Economic Magicians of policy, business, and development have all the answers, we'll expunge the thinking that scarcity does not apply to them, that all they need is a final utterance, a final spell, or a final conjuring before the problem is *poof!* solved. 

Now, I must say that I consider there to be some caveats to this reasoning lest people misconstrue my meaning.  I realise that there are situations in which people, governments, or firms must make large leaps in order for something, anything to happen, for a poor country to yank itself out of poverty, for example, might require massive and directed investment (throwing in jargon, think punctuated equilibrium, evolutionary game theory, and moving from on basin of attraction to another).  But, when we do this, we must admit that investing in something a) might not work, and b) has an opportunity cost.  Politicians and economists often seem scared to admit projects might fail or that there are opportunity costs, and well they should be scared because their jobs often depend on the the sops in governments and the public believing their magical reasoning that their project - and their project alone - will work.  Economists fail. Often.  We're much better at post hoc explanations and describing existing data than they are at predictions.  We economists know this.  We just seem, every so often, to suspend this knowledge in the belief that one more try might make us right.  I'm not saying economists won't get it right, or we don't get policies right, we do.  But many economists, probably most of the time, get things wrong.  The price goes up, not down.  Or it goes up or down more than we said it would.  Or something else equally scary and equally damaging because we misinformed people and they were led to believe the magic.  Beware magical thinking.  Remain sceptical.  Think of the last seat on the plane and whether you're sitting in it. 

Currently have 2 comments:

  1. If you are a student of this MMT blog, as I am, then most of mainstream macro-economics does indeed seem like voodoo, and worse.

    With appreciation- Burk

    One of his better posts.

  2. Burk, thanks for the link, I hadn't seen that blog before and I am always interested in different approaches, especially to things that seem so faulty like our Macro models. I hope that more economists take it upon themselves to improve Macro after the hellishness of the recession.