Category Archives: Economics

My unfounded theory on Martin Shkreli

Everyone’s favourite price-gouging, Wu Tang-baiting pharma bro is back in the news. Martin Shkreli is an odd figure. Brazen, but with a hint of desperation that suggests that his characteristic self-confidence might not be all there is to him. This week, he was called to testify before Congress, and remained uncharacteristically silent.

Why, though, was he called to testify before Congress? Hasn’t he just been plying the game, like all the rest of Wall Street? Well no, not really, he’s only been playing half the game. Shkreli is undoubtedly new money – the child of immigrants who worked as janitors. He is brazen, and doesn’t try to hide what he’s doing. That, really, is what he’s been called to testify for (he’s also under investigation for securities fraud, but that is a separate matter).

He’s been called to testify because if all of the wealthy were as brutally, publicly honest and unapologetic as him, people would fairly soon get pretty angry. He’s simply not doing it right. People as rich as Shkreli are supposed to gush about how much they contribute to society, to wear nice clothes and patronisingly explain that it simply has to be this way. They aren’t meant to openly admit that they are getting filthy rich off the backs of others.

What Shkreli did – buy up a life-saving drug and raise its price – is not exactly uncommon. He works in a multi-billion pound pharmaceutical industry devoted to doing pretty much exactly the same thing as he’s done – acquire some monopoly power and sell it for as much as you can. In reality, this quest for monopoly power underpins much of capitalism.

The intersection of the pharmaceutical and finance industries just happens to be about as blatant, direct and transparent as this process gets. Patents – the granting of a temporary legal monopoly – can be resold and then exploited as by Shkreli. This is pretty offensive, yes, but functionally very similar to practices in many, many industries, from fashion, to food, to carmaking. Every company wants monopoly power, and many spend a great deal trying to get it.

What are the chances that the most motor-mouthed of hedge fund CEOs happened to also be the worst, and most deserving of a congressional investigation? Fairly low, especially when you consider that basically nothing happened over the financial crisis. His brashness threatens to undermine the legitimacy of the system. Shkreli isn’t being investigated for his crimes against the American people, he’s being investigated for crimes against his fellow financiers – many of whom will have donated generously to those investigating him.



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Silly cartoon on government economic policy

Asset bubble

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January 20, 2016 · 1:23 am

Are we headed for another subprime crisis?

Before we started pretending that government deficit caused the global financial crisis, it was widely recognised that it was caused by irresponsible bank lending. Rocketing house prices fuelled a lending bubble that was, in effect, little more than a legitimised Ponzi scheme. Banks could afford to lend to people who couldn’t really afford mortgages, because the rapidly increasing price of the house was enough to cover their losses in the event that the borrower couldn’t repay. Everyone needs shelter, and so for as long as prices went up, and banks could attract new customers, the gravy train could go on.

Like any Ponzi scheme, however, it all came down eventually. While economists and traders had been egging each other on, convincing themselves that sub-prime mortgages were safe as (excuse the pun) houses, the system quietly mounted in size. Banks plunged themselves further into debt to be able to lend even more money for buying houses, blind to the possibility of failure. A little wobble in the US housing market suddenly turned everything sour, as the entire financial sector suddenly remembered that prices could go down as well as up.

The rest is history, though that history has since been revised. As house prices plunged, and the government felt compelled to rescue the financial sector, economic uncertainty (as well as a healthy dose of reality) depressed demand, shrinking the economy. Since then, we’ve gone through some largely unnecessary cuts to a depressingly partisan range of government services. The economy has “rebounded” largely on the back of free-flowing credit from the once-again-booming London housing market.

There have been several recent changes to housing in the UK. Two in particular almost seem designed to repeat the mistakes of 2007-08. The first is the extension of right-to-buy, the second is the ending of secure tenancies. Together, these funnel people into home ownership, whether they can afford it or not. As secure tenancies end and the private housing market continues to hurtle away from reality at startling pace, council tenants are confronted with a choice: scrape together the cash to buy the place, or submit to the insecure, overpriced world of private renting.

This is incredibly expensive, given that public money is subsidising each purchase, and doesn’t benefit those most in need of support with housing. Tellingly, however, it does benefit mortgage lenders. Lots of nice, insecure borrowers who can be charged high rates of interest and then have their more-valuable home sold on in the case that they do default. Lots of low-income borrowers funnelled towards home ownership during a period of booming house prices; something sounds familiar.

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Market failure? More like economists’ failure.

In economics, we are often taught that market failures justify government intervention, though this is a strange way of looking at things. A market failure is, broadly speaking, any situation in which a market has failed to “efficiently” allocate resources; what “efficiency” means is all too often left unsaid. Some might see climate change as a market failure – the social cost of pollution is not properly represented by the private cost of it. If one person doubles their polluting, the impact is spread over everyone, so they are only negligibly worse off. If everyone were to do the same, however, that would obviously be bad.

Why should situations in which a market is unable to properly operate be called a “market failure”? Why not blame those who insist blindly that markets should solve everything? It seems ludicrous to blame the market for being applied to areas it simply doesn’t belong to. Nobody would call the collapse of a wooden skyscraper a “timber failure”. We would blame the architects and engineers who told us it would work to begin with, we would ask why they blindly insisted that timber was the best option and we would hold them accountable for the harm they did to others when they approved the construction of that wooden skyscraper.

We, as economists, need to stop using the term “market failure”. It is not the fault of the market for not allocating things perfectly efficiently all the time, it is the fault of economists for insisting it would. Here I am being slightly unfair – of course economists do not insist that everything is best solved by the market. However, we still take this as our starting point with worrying regularity. In order to prove to economists that a market isn’t applicable to a situation, it sometimes has to fail first. We should have seen the harm that structural adjustment programs would cause, yet we did not. We should see the harm that healthcare privatisation will cause in the UK, yet market fundamentalism has blinded us to it.

This is not to say that the market isn’t efficient some of the time – perhaps even for most of its current uses. However, those who promote its use everywhere need to take a step back. Firstly, the use of Pareto efficiency is extremely problematic. While Pareto efficiency is a politically neutral concept, the choice of it as something to pursue is not. Something is Pareto efficient if nobody can be made any better off without making someone else worse off. This is a good starting point for talking about efficiency, that much is clear. However, it really is something of a bare minimum.

Aiming for Pareto efficiency alone is extremely conservative. When our discussion about efficient use of resources stops as soon as we talk about transferring them from one person to another, we need to accept that this is a discussion in which change of the status quo is not even considered. The distribution is irrelevant – if only one person becomes even a little worse off, no matter if many people become much better off because of it, then it is less efficient. This is a perverse definition of efficiency, and should be avoided.

Suppose a desert island has 5,000kcal of food per day on it, and that a person needs 1,500kcal/day to scrape by, 2,000kcal/day to live fairly well, and is fully fed with 2,500kcal/day; beyond that, they enjoy eating the extra food, but gain little nourishment from it. If there are two people on this desert island, one with 3,500kcal/day and one just fending off starvation on 1,500kcal, this is Pareto efficient. All the food is used up – the person near starvation cannot get any more food without denying the greedy one the small pleasure of eating. If both of them had 2250kcal/day, this would not be Pareto efficient. However, it intuitively seems like a much fairer allocation of resources.

This example is, of course, an oversimplification. However, the tragedy is that it is an oversimplification of how our food markets currently run. Billions fend off starvation, while others eat simply for the pleasure of it. This is what happens when we use markets – excellent at getting Pareto efficient outcomes – to make our decisions for us. The failure is not with markets themselves – they simply operate and produce allocations – the failure is with those who assume that there is no other conceivable allocation. Pareto efficiency is all too easily conflated with actual efficiency, and both are too easily conflated with just outcomes. The fault for these failures resides with those who insist on using markets to allocate resources, such as food, where lack of that resource is a grave injustice.

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A response to Krugman’s ‘Frustrations of the Heterodox’.

In a recent article in the New York Times, Paul Krugman criticised the heterodox economics movement for going too far. His patronising article is both self-contradictory and self-serving. In his article he repeatedly accepts the need to learn from mistakes and incorporate new ideas into economics while simultaneously attempting to silence those with different ideas. Silencing those who challenge the mainstream has obvious benefits to a man who has made his career out of being a critic embedded within the establishment. I have no doubt that Krugman is sincere in his writings, yet it does not change the fact that much of his prominence arguably comes from being a consistent yet not too radical critic of establishment economics.

By opening the piece with a line like the heterodox need to realize that they have, to an important extent, been working with the wrong story line”, Krugman reveals his intentions. He seeks not to listen or engage, but merely to dismiss out of hand, by patting us on the head and telling us we’ve gotten ourselves muddled. His mocking tone is that of someone who seeks to protect themselves, not to actually debate anything. In fact, it is arguable that in this piece Krugman has misinterpreted some of the facts; more on that later.

Krugman accepts that economists failed to predict the 2008 crisis, while also pointing out that nobody else did either. This is somewhat strange, given that studying the economy is, well, the job of economists. If a security guard doesn’t spot an intruder, they have failed to do their job. Pointing out that several passers by also didn’t spot that intruder doesn’t change that fact; none of those passers by were responsible for identifying and dealing with intruders.

This aside, Krugman argues that the failure to predict the recession is as simple as a failure to properly identify the rise of shadow banking. This seems a little too simple, and misses out many important facts. First of all, when an entire profession completely misses such an important fact, one has to question whether that profession was functioning properly. Even if we accept this explanation, it is still very possible that the uncritical nature of the current state of economics and its failure to adapt to new phenomena are linked.

Krugman also skates over recent developments within heterodox economics – such as the Bank of England’s admission of failure over the role of money. By ignoring the contributions of Steve Keen – as so many within the mainstream have been so keen to do – Krugman distorts the debate to make it seem like there is nothing out there that could aid our understanding that isn’t currently being discussed.

He then goes on to insist that the response to the crisis – austerity – is based on a rejection of textbook macroeconomics. This, of course, depends on the textbook. Many undergraduate economics textbooks are full of material that supports austerity, highlighting the efficiency of markets versus the inefficiency of governments. Can Krugman really not see the connection between a reductionist economics curriculum in which we are taught to accept principles with relatively little questioning and the disastrous application of those principles into public policy?

Furthermore, the culture of avoiding questions of politics and claiming political neutrality must also be linked to austerity. The language that supported austerity policies is tied closely to mainstream macroeconomics. The policy was presented as the only valid option, political and social externalities were ignored and GDP growth was viewed as the only thing worth valuing. If we had an economics that was able to challenge these ideas, to accept that economics has a political aspect and to look beyond GDP growth, then we might not have seen austerity policies brush aside criticism like they did. Many mainstream economists did object to them, this is true, but those economists came from the same culture that prevents economic policies from being criticised on social grounds.

At this point, one possible motivation for writing the article shines through when Krugman says that heterodox economists “want to drive people like me out of the temple, too”. Oh, the horror. Frankly, I don’t particularly want to drive Krugman out. He is clearly a very intelligent person who has a lot to contribute to economics, despite my disagreeing with him on this article. However, I think it is possible that Krugman – who has made a career out of being consistently slightly critical – would see his importance to the discipline of economics decline if we allowed more genuine dissenting voices. No longer would he be the left-most superstar economist, he would have to share that territory with others. Given Krugman’s possible self-interest in the failure of the heterodox movement, it is worth taking his article with a pinch of salt.

Krugman finishes the article by building a rather strange heterodox economist strawperson and knocking it down, before noting that the crisis and the resurgence of high inequality mean that we need to ask questions about how we teach economics. But how are we to ask questions if the people we ask them of are so eager to dismiss concerns out of hand? In the very next breath, Krugman again attacks heterodox economists for having the temerity to question his interpretations of events. This kind of piece serves nobody but Krugman and the mainstream. It gives the illusion of caring about diverse opinions while in practice stifling debate and protecting those who currently rule the temple.


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Intellectual Darwinism and the fallacy of the marketplace of ideas

I recently attended panel discussion, organised by the University of Manchester’s Post-Crash Economics Society as a counterweight to the Royal Economic Society’s conference, between Victoria Chick and Diane Coyle on economic pluralism. The Q&A session became somewhat heated after one audience member suggested that the reason modern economics is dominated by one school of thought is that this particular school of thought has beaten out the others. He referred to the numerous paradigm shifts we have seen in economics – from the classics to Keynesianism and from Keynesianism to the monetarists – as evidence that the best theory prevails.

This, however, is a view which neglects the long history of paradigm shifts, both inside and outside economics. Wherever ideas and viewpoints are challenged, those who hold them are often quite naturally defensive. This is normal, and a perfectly human reaction. I am certainly not accusing anyone of wilfully suppressing debate and critical engagement – I think it happens accidentally because we are all, alas, human. However, just because it happens by accident does not mean it is a phenomenon we should close our eyes to.

Throughout the history of the sciences – natural and social – challenging viewpoints have been met with hostility. Within our own discipline, John Atkinson Hobson’s initial theories on underconsumption were to influence the thoughts of John Maynard Keynes over 50 years later in his magnum opus, The General Theory. However, in his own time, Hobson was not so highly regarded. Having found himself unable to counter the arguments of a friend using orthodox theory, he turned away from it, in what was to be a damaging career move. In his own words (cited in Keynes’ The General Theory, 1936: 365-6)

The Physiology of Industry [was] published in 1889.This was the first open step in my heretical career, and I did not realise in the least its momentous consequences. For just at that time I had given up my scholastic post and was opening up a new line of work as a University Extension Lecturer in Economics and Literature. The first shock came in a refusal of the London Extension Board to allow me to offer courses in Political Economy. This was due, I learned, to the intervention of an Economic Professor who had read my book and considered it equivalent in rationality to an attempt to prove the flatness of the earth”

This situation – a promising theory which challenged the deficiencies of the orthodoxy of the time – bears a somewhat worrying resemblance to the present situation, particularly the recent cancellation of Manchester’s Bubbles, Panics and Crashes module. Differing points of view are blocked from academic positions, denied funding and effectively silenced. Of course, those doing the silencing do it in good faith, but that does not change the reality of the situation – dissent is possible, but exceedingly difficult. As a social science, we should be fostering dissent, debate and critical thinking, rather than impeding it. As pointed out in the Association of Heterodox Economists’ response to the last QAA review of the economics curriculum, almost all other social sciences view debate between different and legitimate viewpoints as central to their discipline itself.

If, like many in economics, we prefer to view our discipline as closer to the natural sciences than social sciences, there are still powerful lessons to be learned. Many of the natural sciences have a shameful history of suppressing what would later turn out to be revolutionary ideas. Alfred Wegener’s theories about plate tectonics were met with scathing criticism and hostility during his lifetime. Crick and Watson were instructed to drop their research on DNA, yet continued it on their own time – again, much like the recent Bubbles, Panics and Crashes module.  Even within the “purest” of fields, mathematics, Gauss was unwilling to publish his work on non-Euclidean geometry for fear of ridicule. This fear proved well-founded, as Lobachevsky was, indeed, to face ridicule for daring to publish work on non-Euclidean geometry.

This pattern of hostility to new thought proves that we cannot simply assume that the prevailing ideas of the time are the best. Much like advocates of Social Darwinism, advocates of Intellectual Darwinism fail to comprehend the structural constraints in a system they perceive to be perfectly competitive. The situation is more akin to a sapling trying to grow under a large tree; even if the sapling could potentially grow to be taller than the tree, it will not do so while the larger tree shades it and stunts its growth. It might, perhaps, be suitable to prune back some of the branches of the larger tree in order to see which sapling might grow tallest.

Building on this, it is difficult to see why a talented young economist who could potentially revolutionise the discipline would stay within it. Expensive degrees, vanishingly low wages for PhD tutors and few opportunities to meaningfully challenge the existing paradigm make the life of the next potential Smith, Marx, Keynes or Friedman a somewhat unappealing one, should they choose economic academia. Suffice to say, it is difficult to see why a rational utility-maximising individual would bother with trying the change economics.

Economics needs to change, and it cannot wait until the next great idea in order to do so. Without changing the discipline, we reduce the likelihood of that idea every coming into existence by driving its potential originators out of the discipline. Only by actively fostering debate and critical thinking, and going out of our way to ensure that orthodoxies can be challenged, do we ensure the survival and relevance of economics.

Whether we view economics as closer to a natural or social science, it is clear that we must learn from other disciplines. If it is to be viewed as akin to a social science, we must be mindful of the fact that paradigms in social sciences are allowed to compete and coexist, and that this complex interaction is a key part of the discipline itself. If, on the other hand, it is to be viewed as closer to a natural science, we must be mindful of the long and shameful history of silencing dissent within the natural sciences, and ensure that our paradigms can be effectively challenged.

This post also appears on the Rethinking Economics blog.


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It’s not taxpayers’ money, it’s public money.

This article was written for Rethinking Economics

The slogan which famously accompanied the American Revolution, “no taxation without representation”, is at risk of being turned into “no representation without taxation” by the language we use to discuss public economics. It is easy to assume that the language used to discuss economics is neutral, and does not have an effect on the debate itself, but I believe this is not the case. Language is not neutral and contains – whether intentionally or not – inherent biases. We all convey hidden meanings and messages simply by the words we choose in a given situation.

One particularly prominent situation in which this happens, and is potentially harmful, is the use of the term “taxpayers’ money” when referring to government spending. The simple fact is that the money is not taxpayers’ money. It is money that the government holds and uses on behalf of society. It comes from taxpayers, true, but by the time it is being spent by the government it no longer belongs to taxpayers.

The term is now in extremely widespread use. A simple Google search reveals that in the last few days The TimesThe SunThe GuardianThe Daily Mailthe BBCand Sky all used the phrase. It is a rhetorical device generally to make alleged waste of money more personal and offensive. However, I believe that the term implies that those who are not taxpayer’s do not deserve a say in how it is spend. Continually saying “waste of taxpayer’s money” or “value for taxpayers” implies that this is who the money should be spent on behalf of.

When we say we are “wasting taxpayers’ money”, this implies that the act of paying tax ­­­– contributing financially to the state – gives one a greater say in how that money is spent. As soon as the money is handed over to the government, it no longer belongs to the person who paid it. If a supermarket spent a large sum on rebranding, they would not be criticised for “wasting customers’ money”. The shareholders might well criticise them for wasting shareholders’ money, and citizens can (and should, where appropriate) criticise governments for wasting public money. When money is wasted, it seems odd to bemoan the fact that people paying taxes aren’t getting good value – we should instead be worried that the people supposed to be benefitting from the spending are not benefitting as much as they could be.

This might seem like a trivial complaint, yet I believe this trend is part of a wider trend within economics to overvalue financial contributions to society and undervalue non-financial ones. Housewives, househusbands, full-time carers, the disabled, those under the income tax threshold, children, students, the unemployed and many other groups all make significant (if hard to measure) contributions to society, yet by overusing the term “taxpayer” when we really mean “state” we risk excluding them from the discourse on how money is spent. These groups of people all deserve a say in how public money is spent, and all have a right to be annoyed when it is spent badly.

Using “taxpayer’s money” inappropriately is just one example of where language threatens to genuinely affect the issues being discussed. Another recent trend, in the UK at least, is the increasing usage a “strivers” and “skivers” in the debate over levels of benefits. Society is divided into two groups – the “strivers” who strive for a better life, work hard and pay their taxes and the “skivers” a group of lazy benefit dependent slobs sitting around all day leeching off the “strivers”. This is false on many levels. Firstly, most of those on unemployment benefits are there because they can’t find work, not as a conscious lifestyle choice. Secondly, many benefit recipients are those who are poor and in work. Thirdly, more than a few people in work are not the hard-working tax-paying angels the language suggests they are, but are more than willing to avoid both work and taxes wherever possible. The result is that benefit receipt is turned into a more humiliating experience. Those who receive benefits are told that they should feel guilty for being a leech on society, and people paying taxes feel vindicated in setting benefits at cruelly low levels.

These are just two examples of the language being used in economic debates containing biases that begin to shape the debates. I am not suggesting that everyone using these terms is putting forward this message deliberately – quite the opposite. However, we should all be more conscious of how the language used in both the media and general conversation affects subconscious perceptions of the issues at hand. Since almost everyone using the phrase “taxpayer’s money” is not intending to say that someone not paying tax does not deserve a say in how public money is spent, so I would encourage people to gently point out that it’s “public money” where this does crop up.

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