Michael Hersh describes a new $50 million George Soros initative to try and remake the economics profession so to reclaim it from “free market fundamentalists.” The fund will be run by Robert Johnson, formerly a managing director of Soros Fund Management; it hopes to raise $200 million in matching funds. (H/T Instapundit; also Mark N is right in the first comment to raise Cato as a better point of comparison in the (lengthy) discussion below the fold.)
Large swaths of economics are going to have to be rethought on the basis of what’s happened.” So said Larry Summers, President Obama’s chief economic adviser, in an interview in the weeks after the markets crashed a year ago. Yet to a remarkable degree, economic thinking hasn’t changed very much at all.
Now financier George Soros is announcing a $50 million effort to speed things along. This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of “free-market fundamentalism,” among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He’s also creating an “Institute for New Economic Thinking” to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades, and to correct the failures of decades of market deregulation. Soros hopes matching funds will bring the total endowment up to $200 million. “Economics has failed not only to predict and explain what happened but has also failed to protect society,” says Robert Johnson, a former managing director at Soros Fund Management, who will direct the new institute. “That’s what the crisis revealed. The paradigm has failed. There is no guidance.”
I am curious what professional and academic economists make of this kind of initiative. (Update: Here’s a much better article from the FT. And I’ve added … still more to the post below.)
George Soros, the fund manager, has pledged $50m to back a new think-tank with the mission of reconceiving the field of economics, which he describes as “a dogma whose time has passed” … The group’s advisory board will be studded with economists such as Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay, a Financial Times columnist. Mr Soros is pledging $5m a year for 10 years.
II
As the FT notes, one way to see this is that Soros is simply funding a stellar academic cast in order to push his own philosophical theory of “reflexivity” – will the Nobelists go along with that? Or simply do what they were going to do anyway?:
Mr Soros, who has long been a critic of economic “fundamentalism”, blames the unwavering belief in unchecked free markets, which remains pervasive in universities, for allowing financial markets and asset prices to melt down. Through INET, he will be indirectly funding his philosophy of “reflexivity” – that markets tend to influence perceptions of reality, which in turn feed back into markets.
This new institute will based in Hungary, at the Central European University, by the way, which Soros created back in the 1990s, and it should certainly give some oopmh to the CEU. Overall, you can think of many ways to conceive of this kind of institute, including (thanks to commenter below) this observation from Peter Boettke:
So to challenge the economic establishment which doesn’t permit creative thought outside of free market fundamentalism, we are going to enlist 2 professors from Columbia (1 a Nobel Prize winner, and the other the closest thing the profession has to a rock star), 1 from Harvard, and another from UC-Berkeley (who also won the Nobel Prize). Because I guess the profession has been dogmatic in the treatment of their ideas, or that the US government hasn’t been influenced for the past 20 years by their ideas on regulation of markets, managament of the macroeconomy, and foreign aid goals.
I think I am highly committed to free markets without thinking of myself as a dogmatist; the EMH is an empirical hypothesis that bears only as much weight as the evidence shows. I have no view that markets tend always to efficiency let alone perfection, and I am quite sympathetic to the idea that economics is entirely too much in love with elegant mathematical modeling and has turned itself into the Glass Bead Game. I am second to none in my admiration for Professor Mankiw, but I must admit that one part of his famous blog post on why study math as an economist gives me pause, even if it was no doubt tongue in cheek:
4. Your math courses are one long IQ test. We use math courses to figure out who is really smart.
I don’t doubt for a moment the utility of much advanced math that I don’t understand, particularly, as Professor Mankiw says, because there are many genuinely counterintuitive economic conclusions. The problem is, using advanced math skills as a professional filter is also a remarkably good way for ensuring that the connection between the real world and the academic world lessens. Paul Krugman took abuse from the professionals for his recent NYT Magazine essay on the state of economics. No one should be surprised to learn that I am no fan of Krugman the pundit – but much of the criticism seemed to me curiously misplaced. It was narrowly focused on talking about how little he knew about macro, and curiously unfocused, seemingly unaware, that there is a perfectly important conversation to be had about conceptions of elegance in the Glass Bead Game taking over from reality that apply, as he was speaking, to the discipline of economics as a whole. Aesthetics, in the sense Krugman meant it, is a relevant observation about the nature of the discipline, and not addressed by sniping about specialized details.
That’s a point about sensibility that is external, as it were, to the sense of economics. I was both surprised that Krugman made it and admiring that he made it so well. I don’t doubt – see the discussion below – that there is a role for the humanities, philosophy, and the philosophy of value – in the re-widening, as it were, of the discipline of economics. It will be incongruous with purely mathematical modeling, because it will be forms of explanation at least partly exogenous to the pure discipline. But, to be clear, I do not mean by this the conversation I had with an anthropologist a year ago who, sensing academic blood in the water in the economics profession, sagely nodded and told me that none of the current market meltdown surprised him, because he had carefully studied … exchange rituals in hunter-gatherer tribal society and it wasn’t that different from macro. (I exaggerate but frankly only barely.) Not that exogenous; the Ache can teach us many things, I suppose, monetary policy not being among them, however.
Tyler Cowen, by the way, remarks that as the formal discipline of economics includes fewer native English-speakers and fewer Americans:
In percentage terms, fewer and fewer economists are Americans by birth and upbringing. Non-Americans are less likely to be fully fluent in English, which encourages mathematics. Non-Americans also tend to be less market-oriented in their thought. In any case they are less likely to stand along traditional U.S. ideological fault lines or even share ideological fault lines with each other.
If that is so, then what I am suggesting – a resurgence of humanities into economics, via such topics as the ‘moral sentiments’ or the deep conceptual philosophy of value (see the discussion below) – is unlikely to go anywhere. But in that case, I think much of Soros’s project does not go anywhere, either, because it, too, is founded on a move away from Glass Bead Game economics as well as a move away from EMH.
III
One way to model this new institute – if, as I think many on the left do including perhaps Soros himself, you think that “conservatives” have done this kind of think tank thing better in recent decades – is on the model of Cato. As Mark N points out in the comments, it’s probably the most accurate to Soros’s intentions, and those of his board. If not that, then perhaps the Olin fellowship program.
Another way to see it, though, is as a sort of Hoover Institution of the left. It would be a good model for such an institute, if it had the patience to persevere after Soros has left the scene. Hoover’s slogan is “ideas defining a free society.” But Hoover is nowhere near as monolithic as outsiders sometimes imagine – I often have the impression that many casual observers confuse Hoover and Heritage and Hudson. Niall Ferguson is a Hoover senior fellow; so also, outside of economics, is Timothy Garton Ash or Michael McFaul, now a senior Obama official. Hoover has far more diversity of thought as an academic institution than – well, to be perfectly frank, than many of the academic institutions I’ve ever been associated with. It is a big tent on the idea of “defining a free society.” Ironically it is not necessarily that far from Soros’s own ideas about the ‘open society’.
If it were modeled on Hoover, it could be a very good thing, precisely because while Hoover has a squishy tilt, it is a not a political task-master in any sense and it understands far better than most traditional academic institutions the role of free thought, particularly in academia. One virtue of a free society/free market tilt is that it leads the institution genuinely to believe in a market place of ideas. Whereas my (long and deep) experience in the nonprofit and foundation world is that, no matter what the spin, the advocacy community regards academic research and endeavors as “bought and paid for.” (Which is a reason, by the way, not to bother to commission research, because – if you are looking for pre-set outcomes – it’s both cheaper and more reliable to buy off the shelf.)
But if this new Soros institute actually takes seriously the Hoover model of gently mission-driven but also capacious and not partisan, a research institution in the fundamentals of ideas rather than a day-to-day policy shop cranking out stuff for Capital Hill, a believer in the market for ideas, then it could be an excellent enterprise. But also not particularly clear how this new Soros initiative is different in that respect from … Brookings or, come to that, most universities, including their economics departments in the United States. Indeed, if I were a senior vice president at Brookings, I would be wondering why Soros isn’t simply cutting Brookings a check right now.
IV
In any case, I’m not at all persuaded that the economics profession, in academia or out, has been captured by some “free market fundamentalism.” It somewhat seems that the goal is much narrower than the economics profession and “market fundamentalism” – it might better be called, perhaps, the Anti-EMH Institute. But I have serious doubts that the economics profession or academy has been taken over by that, or that to the extent it has, that it will not on its own momentum shift other directions in response to … “events, dear boy, events.” The real, and real world abuse, of EMH, one might have thought, lies in the financial world itself, among people who did not sufficiently understand the models to challenge them; or who lived in a Dilbert’s world of “It must be right, it has math!!”; or who might have been skeptical about the risk models, but couldn’t be bothered to follow up because the monitoring incentives were wrong.
In any of those real world cases, it is easy to absolve oneself by saying, ‘But Dr. Pangloss at Chicago said we lived in the best of all possible worlds’ – but it is doubtful that is where the problem lies, not really. It’s a convenient excuse and scapegoat. In that case, the true mission of a Soros initiative on this would be aimed not at the academy and its supposed fundamentalism, but at the really hard, grindingly hard work of the ground level structure of regulations. Policy not at the level of high, high abstraction economic theory, but the policy that deals at the ground floor of regulations and regulatory approaches to concrete problems of complexity, complacency, and conflicts of interest. Felicitously, one might think that a Soros institute run by the eminent Robert Johnson is exactly positioned to connect new intellectual movements on such things as efficient markets to the real people of Wall Street and London. But then there’s a catch:
A lot of that work is regulatory law informed by economics, not economics as such. I’ve come to believe that the lawyers have far more to contribute to fixing financial regulation than many people – read economists – understand. Or that we lawyers understand. It is principally because lawyers seem to grasp better the sticky grit of institutions and their internal workings. As a caricature, economists seem better to understand markest; lawyers seem better to understand institutions.
Why is that, if so? I think it has something to do with the fact that economists think so much of the time in models of abstract contract and freely contracting parties. I’m always surprised by what economists often think the actual rules of contract law are; they in turn are often surprised when I point how many contingencies lie within contract interpretation, default, remedies. Mitigation, for example, or oppression or adhesion. I don’t mean this in any radical or skeptical sense, I just mean that contract rules and legal outcomes, as understood by lawyers and judges, are not quite as fixed as economic modeling sometimes seem to assume.
For that matter, I am often struck by the financial instruments that financial economics seems to treat as economically equivalent – various synthetic derivatives for example or, even easier, certain varieties of preferred stock and corporate debt. When I actually look at the law underlying the instruments -the corporate law as well as contract, the contingencies of bankruptcy, etc., I think … these instruments are equivalent in the middle of the bell curve, in ordinary conditions trading in the market, but precisely when trouble strikes, the contingent risks that different instruments with different-reading contracts defining them will be read differently increase drastically. And I can’t say I have any good reason to think that the markets have a mechanism other than fiat assumption that these contingent differences are captured in market valuations. But hey, it’s tail risk, right?
V
In particular, when economists think about agency, they seem to think mostly in terms of failures of agency with respect to essentially contract relations. Lawyers have shifted in that direction over time, but they are still far more imbued with concepts embedded in the law about agency as a genuine form of social life itself – apart from and beyond simple bargaining between free actors. Fiduciary duty might not mean very much to an economist used to thinking solely in terms of what actors think they can get away with, but it still means something (less than it used to, granted) to lawyers.
Agency, in other words, as an affirmative body of social behavior, motivating and motivated on its own terms. That, for me, was the most important signal from this year’s economics Nobels – indirectly, they signaled an acknowledgment of the importance of agency for its own sake, and as its own form of social life, with an independent impact on economic relationships. The life of a fiduciary, the social ideal of the steward, the idea of a ‘shepherd’. I have written about this in passing at VC – a return to the idea of the moral psychology of finance; ‘virtue economics’ not in the sense of welfare and distributional justice, but instead in the idea of economics informed by the ‘moral sentiments’.
This is not behavioral economics. Behavioral economics is important as an empirical correction to rationalist models – but they both suffer from the incompleteness of not taking into account the depth of human psychology, at the conceptual level. Behavioral economics is admirably superficial; in order to defend its empirical claims, it makes as few claims as possible about the deep psychology of social life. But there is a deeper, if admittedly more contestable, aspect to humans and markets: concepts such as trust, honor, fidelity, fiduciary, agent, principal, steward, are not fully captured either by rational market models or by deliberately under-theorized behavioral finance. And yet they do indeed inform human behavior and, for that matter, as Alan Greenspan noted to his sorrow, markets and even the favorite playground of the most abstract thinkers in economics, finance.
Sorry for the digression; I’d like to write a very short book-essay on the moral psychology (or the moral sentiments if you prefer) of finance. It is on my mind everytime I think of these topics; perhaps the new Soros institute would like to underwrite my work and free me from teaching for a year (well, let’s say two … or maybe a year on Soros’s dime and a year out at Hoover? Wow!) In any event, if anyone related to this new institute happens on this – I hope you will consider carefully that
- an important aspect of the work worth funding is, in the intellectual foundations of finance theory, less about rationalist theory or behavioral finance than about the philosophy and intellectual history of the social virtues, the social sentiments, the socializing sentiments, the other half of Adam Smith’s endeavors; and
- the biggest task of intellectual reconstruction lies, perhaps surprisingly, and in the gritty work of policy involving law informed by regulatory policy, and so you need to fund more academic and regulatory lawyer policy work than you might have thought.
VI
The other possibility for the Soros institute, however, is that the effort is seen, either as perception or reality, as being an explicit effort to politicize the economics profession. Since in one way of course economics is “politicized” in much of its work nearly by definition, in the broad sense of policy, that might be brushed off. But within the professional community, there are policy and political preferences that can be explicitly put on the table and understood as such, either as assumptions or qualifiers – and there are bridges too far, as well.
It’s different if it appears that by taking funding from this think tank or that, you’re bought; and it’s not always easy to draw the lines, even though they are often understood informally. It’s easy enough for Soros to fund the kind of research he wants to fund, and to do it in a way that absolves it of political controversy. The aim here. however, seems to be to try and create a movement. It might turn out very well, like the Olin fellows. But it might turn out that taking those funds and sticking them into an organization with an explicit mission to “re-educate” the economics profession permanently taints those funds. Is there a difference between that and Hoover or Brookings or other existing think tanks? Depends on your view of things but, yeah, I think there is.
I am not a professional or academic economist, however. I am curious to see what the professionals think and how they perceive it, now and as it plays out. The Olin fellowships, after all, were a remarkably effective catalyst for change in the academy, in economics and law. Or else they simply funded where people were headed anyway, though they were happy to take the money. Or a little bit of both.