Opinion: Paul Romer on the State of Economics

I want to continue discuss EconReporter’s interview with Paul Romer, which can be found here: https://en.econreporter.com/2020/06/interview-with-paul-romer-on-large-scale-covid-testing-the-transcript/

Since the Great Recession, I have been following discussion on macroeconomic methods, especially the DSGE models. Romer’s interview touched on the state of economics/macroeconomics. Economists have certain mindset that are different; a friend even once joked that we are all sociopaths.

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A excerpt of the interview:

Q: In the light of the recent experiences in both the Covid-crisis and the ongoing social unrest, do you think that macroeconomics, or economics as a whole, put too much emphasis on the economy, rather than the people inside it?

P: Let me try and say it in a way that is more helpful. Macroeconomists, or economists more generally, try to help people. They understand that this is about helping people, but their notion of what would be helpful for a person is very narrow, focusing on things like income, material consumption. They don’t think about a broader set of issues.

Frankly, they haven’t paid very much attention to inequality in the past; not as much as they should have. People care about how much inequality there is in the society they live in. People also care about notions of being right and wrong, they have feelings about what is morally right or wrong.

Economists have paid far too little attention to the questions about values, like trust or commitment to integrity, like how much value we should put on the acceptance of diversity, or the feeling of true inclusion, where a large group of people think of themselves as an “us” and try to help other people in this group of “us”. Many successful nations managed to sustain a notion that the citizens are all in this together. They share a common faith and they support each other.

Economists have not thought about these kinds of issues. They talked about material gains and emphasize the value of selfishness; the notion that people being selfish will, by the invisible hand, lead to good outcomes in terms of material gain. I think that model of what leads to a good society is too narrow. This is where the critical voices of economics play a helpful role.

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Milton Friedman, I think, was the one who popularized the distinction between normative and positive economics. Normative economics is about what should be done. Positive economics is about what is. The issue was raised possibly as a response to the marginalism debate in the 30s and in the 40s. Friedman seems to prefer Karl Popper’s falsification, but “falsifies economics” just doesn’t sound right.

Romer’s comments point out a few things, very politely.

1. Economics is about materialistic gain.
2. Economic models do not deal with values, and thus things like inequality, trust, and togetherness have been largely ignored until recently.

Actions, or lack thereof, reflects the value of the agent. Choosing to focus on materialistic gain while dismissing elements other people care is by itself a value judgment. I can think of two reasons for the choice. One is economists’ fascination of hard science and facts. Another, as some may claim, is the alleged capitalist ideology. Sometimes, it is hard to distinguish one from the other.

I recall Friedman’s pencil example in which he eloquently explained how amazing and complex the market is in serving people. What is amiss in the narrative are the human beings and the natural resources who have contributed to the supply chain that create that little pencil. We live in the 1950s no more; nowadays we know how destructive a certain supply chain could be. I have often heard of the deforestation and the displacement of indigenous people of the Amazon. The market is “amazing” if we treat everything in it a physical particle. It is less so if one has to live in it.