Wednesday, April 3, 2013

Are economists really uneasy about studying inequality?

Economists are often misunderstood. People do not understand what we do. They think we spend all our time forecasting the stock market. And the whole profession has been accused of not foreseeing the recent recession. Some economists have redirected this criticism and made a name for themselves by complaining that economic models do not take this or that into account. That is true, but this is often irrelevant, as models are abstractions and they cannot take everything into account. You want to build the right model for the particular question at hand. I have mentioned a few of those essays on this blog, in part because they frustrate me as they are ignoring the very literature they are calling for. There is a lot more to Economics than the principles with perfect markets we tend to teach as an introduction to the field.

The latest paper to frustrate me is by Brendan Markey‐Towler and John Foster. They claim the Economics profession is uncomfortable with issues about inequality to the point of ignoring them. To support this, they quote extensively from the introduction of the Handbook of Economic Inequality, which of course is going to try to make the case that inequality is underrepresented in the literature. Why so? Markey-Towler and Foster claim this has to do with the profession's adherence to Arrow-Debreu markets, welfare theorems, the Hicks-Kaldor efficiency-equity trade-off, and Arrow's impossibility theorem. Because the profession is so enamored in these theorems, it views the impact of inequality to be political only, but of no economic consequence. Never mind that you can still have inequality in such economies. Never mind that every issue of the top journals has papers with such properties and inequality. Never mind that many papers go through great lengths in trying to model observed inequality while studying many issues. I agree not every paper does this, far from this, but then not every answer hinges on inequality. Again, models are an abstraction, and one cannot include everything. One keeps what is most likely to matter. Occam's razor is still valid today.

Markey-Towler and Foster have this distorted and unfortunately common view that economists believe markets are always complete and perfect, and thus inequality cannot happen. This sounds a lot like those who criticize Economics after taking one class, where they learned that free markets and free trade are good. But economists have long realized that things are much more complicated than that, and the study of the departures from this perfect world dominates current research in Economics. In fact, read this blog and you should see that I hardly mention such perfect markets. The authors' solution? Complex systems theory, which I liken to modeling the actors of an economy being linked by a giant plumbing system with leaks, plugs and bottlenecks. That sounds much like the frictions, information asymmetries and imperfect competition we put in our models, except that complex systems theory is much more detailed, requires gigantic amounts of data to calibrate or estimate, and has gone nowhere so far. So researchers had to resort to heroic assumptions to show something could happen, without any ability to validate it empirically.

I do not think this is the way to go, and we can agree to disagree on that. But I take offense at the idea that economists are somehow uncomfortable, even scared of dealing with inequality. That is just not true.


Anonymous said...

I have seen this paper embraced on other blogs and I have read through it. Like you, I have been taken aback by its biased premise, that economists are allergic to inequality. I made my whole career working on this, and a successful career I would claim. It really hurts when you are being told you and all your co-authors do not exist because economists do not like working on your topic or even include it in their considerations.

Some of my macro colleagues have been virulent about Krugman or Colander ignoring the last 30 years of research in macro when he criticizes that field. I understand them now.

Anonymous said...

Just a bunch of heterodox economists living in their bubble. They are best left ignored.

Anonymous said...

That paper is intellectually dishonest and self-serving to the point of being outright unethical. The authors ignore literally thousands of theoretical papers concerning income distribution, studiously overlook the fact that the even larger empirical literature on income distribution is hardly atheoretical, and, naturally, heavily promote the senior author's crap research as a solution to this fabricated problem. Self-cites:

Foster, J. (2005). From simplistic to complex systems in economics. Cambridge Journal of Economics, 29(6), 873‐892.

Foster, J. (2006). Why Is Economics Not a Complex Systems Science? Journal of Economic Issues, 40(4), 1069‐1091.

Foster, J. (2011). Energy, aesthetics and knowledge in complex economic systems. Journal of Economic Behavior and Organization, 80(1), 88‐100.

Foster, J., & Metcalfe, J. (2012). Economic emergence: An evolutionary economic perspective. Journal of Economic Behavior and Organization, 82, 420‐432.

Cameron Murray said...

Wasn't the point of that paper that inequality usually requires some kind of ad hoc assumptions in economic models. Which doesn't really help explain what causes it in the first place.

Yet if you took a complex systems approach (didn't get a great idea of what that really means and whether is also requires different ad hoc assumptions) that inequality might arise due to some other factors.

They also seem to spend the whole time discussing the way economics do treat inequality. So it seems a bit rough to say 'Never mind that many papers go through great lengths in trying to model observed inequality while studying many issues'. That was their point wasn't it? That this group is using a tool that doesn't really work well for this type of analysis.

I'm not expert on these things. I thought the paper was a bit light on explaining better alternatives. It may very well be that studying inequality is difficult.

For me that would be my main problem.

Tomlines said...

'Markey-Towler and Foster have this distorted and unfortunately common view that economists believe markets are always complete and perfect, and thus inequality cannot happen.'

This implies that inequality indeed cannot happen wherever markets are 'complete and perfect'. Whatever makes you think that?

Economic Logician said...

You can have inequality with complete and perfect markets. The obvious is that people can start with unequal endowments, and this inequality remains unchanged thereafter. Even with uniform endowments, heterogeneity in preferences generates inequality.