Tuesday, 12 January 2010

Left, right and wrong economists

A comment from Joshua Corning on this Environmental Economics post says:
Also it should be noted that many economists are politically neutral and are simply painted by the left. The idea that there are libertarian, conservative and leftist economists is false dichotomy (trichotomy?). The reality is that there are economists and there are left wing economists, with the left wing economists trying to paint everyone who produces work that conflicts with their ideology as being right wing.
This comment is hilarious on its merits - just replace "left" with "right" and vice versa to see an equivalently absurd statement that would be equally happily accepted by a different group of people.

But it raises a sort-of valid question: what does it mean to be a left-wing or a right-wing economist? In two conversations recently I've felt the need to make excuses-in-advance for an economist whose work I was recommending, but who is well to the right (in the libertarian sense) of the British mainstream. I thought the reader might think of them as a bit of a free-market extremist, so I decided to defuse this reaction by warning of it in advance.

Now this could mean - as Corning implies - that the British mainstream is economically illiterate, which expresses itself in left-wing views, and any real economist would agree with the people I'm describing as right-wing.

But that's not a fair representation of economic theory, or of "left-wing" economists such as - say - Paul Krugman, Brad DeLong or Mark Thoma. All three are fairly strong defenders of mainstream economics and will argue for broadly unregulated markets, free trade and a general economic understanding of people's response to incentives. Just as "right-wing" economists mostly accept the concept of public goods and that there are occasional market failures which can justify a role for government. In fact, for all that economic debate really does have a socially determined component, the discipline is quite united; and few British or European economists would disagree on basic theory with the majority of Americans.

The differences between left and right within the economics profession are rarely about theory - they are about the weights that people put on known parameters in the theories.

Left-wing economists tend to assume that:
  • transaction costs are often high
  • marginal utility of wealth is strongly diminishing
  • many goods are public or have public aspects
  • markets are often inefficient (e.g. due to sticky prices or asymmetric information) and the well-known government solutions to those inefficiencies are welfare-enhancing
  • labour supply and demand are inelastic
  • poverty has externalities

Right-wing economists tend to assume that:
  • labour supply and demand are elastic - at least in the long run if not so much in the short
  • knowledge and agency problems mean that government solutions are usually worse than imperfectly efficient markets
  • the incentives provided by strong property rights lead to efficient allocation of resources even in the presence of transaction costs
  • social safety nets have important moral-hazard externalities
None of these points contradict standard economic theory: the only question is the strength of each effect. If you think the problem of government knowledge is less important than the problem of sticky prices, you're more likely to tend leftwards. If you think transaction costs are less important than labour incentives, you may tend right. At our current level of understanding of economic theory, I'd argue that these are basically empirical questions.

There are certainly disciplines within economics which are more likely to be pursued by those on one or other side of these questions, simply because they find the questions more important. Labour economics, environmental economics and Keynesianism would mostly be associated with the left; while monetary economics and the economics of crime and the law are more typical on the right.

And there are heterodox theoretical approaches which are strongly associated with the left or right wing. For example the Marxist dialectic approach is linked to the left, and there are more of the Nudge-type subset of behavioural economists on the left than the right. And the free banking and real business cycle theories are associated with the right. But none of these are mainstream viewpoints.

But overall, mainstream theory really does provide a strong common base for nearly all practising economists, and only the parameters of the theory determine their political position. Only someone with their own heavy ideological blinkers could suggest that putting different values on those parameters disqualifies you from being an economist.

1 comment:

Lord said...

It also raises the question the extent of preference for ideology over fact that biases the extreme from the center and demotes them from being scientists if not economists.