Clawbacks from economists?
Source Michael Perelman
Date 10/08/15/10:32

Better Living through Economics
Author: Siegfried, John J.
Reviewer: Vedder, Richard

John J. Siegfried, editor, Better Living through Economics. Cambridge,
MA: Harvard University Press, 2010. viii + 315 pp. $45 (hardcover),
ISBN: 978-0-674-03618-5.

Reviewed for EH.Net by Richard Vedder, Department of Economics, Ohio

THIS VOLUME OF essays advances the proposition that economic theory and
economic research can and has been harnessed to promote human welfare in
many different ways, materially improving the quality of our lives and
arguably our incomes. Not unusual for compilations of essays, this book
contains the good, the bad, and, unfortunately, the ugly. Fortunately,
“the good” dominates, and I would say two-thirds of the volume
successfully achieves its mission.

John Siegfried, Vanderbilt professor and Secretary-Treasurer of the
American Economic Association, seems to be the prime mover on getting
this volume published. As Richard Caves states in a cover blurb, many
of the “essays are concise, clear and consistently written at a level
within the reach of undergraduate economics students.” Good examples
include Thomas Tietenberg’s excellent treatment of the evolution of
emissions trading to more efficiently deal with restricting
environmentally undesirable practices, Elizabeth Bailey’s nice narrative
about the benefits of transportation deregulation beginning in the late
1970s, Robert Moffitt’s clear and well balanced discussion of the
evolution of the Earned Income Tax Credit, Michael Boskin’s discussion
of improvements in measuring inflation, Lawrence White’s analysis of
changing views on anti-trust regulation over time, and the Asch, Miller
and Warner’s discussion of how the military draft was ended and
subsequent issues arising from that. Each of these authors shows that
basic propositions taught in any good principles of economics course can
be harnessed to make the world work better and more efficiently.
Generally speaking, the discipline and self-correcting properties of
markets are stronger and more effective in allocating resources than
rules-based command decisions made through the political process. Also,
aligning incentives with socially desirable objectives pays.

Anne Krueger’s essay stands out in several respects. First, she very
convincingly demonstrates that the move away from protectionist/import
substitution policies in the 1950s and 1960s harnessed the spirit of
enterprise and brought about enormous improvements in the standard of
living for literally billions of people. And she appropriately notes
that the underlying theory was not discovered by an National Science
Foundation grant revealing huge insights, but essentially by the work of
Adam Smith and David Ricardo a couple of centuries ago.

This gets to a problem. Economists sometimes get overwhelmed with their
own self importance and claim more than they should. John Taylor writes
a generally solid essay arguing that reductions in macroeconomic
stability in modern times reflects in large part a move to a more
intelligent understanding on the role of monetary variables in the
economy. Taylor believes the evolution of new economic modeling in
recent decades that combine rational expectations with some allowance
for price stickiness has brought about enormous policy improvements.
Maybe, but I side with commenter Laurence H. Meyer (himself a former
Federal Reserve Governor) whose views are “the shifts in monetary policy
... are due more to the rediscovery of classical monetary theory than to
advances of modern macroeconomic theory. ... classical monetary
theorists had the story basically right” (p. 165). The work of Milton
Friedman outlined a half century ago -- itself informed by still earlier
work of quantity theorists and neglected practitioners like Clark
Warburton -- was far more important than modern-day theoretical refinements.

The less good essays stray a good deal from the stated mission of
offering clear, concise explanations of using economics to deal with
problems in a language an undergraduate student can understand. Alvin
Roth’s paper on deferred-acceptance algorithms is filled with jargon, is
exceedingly hard to follow, and deals, frankly, with a far less dramatic
advancement in modern economics than improving price indices, promoting
the power of comparative advantage, or the gains from transport
deregulation. Modest Roth is not -- he cites nearly thirty papers he
authored or coauthored in the bibliography. The McAfee, McMillan and
Wilkie piece on auctioning spectrum licenses deals with a moderately
more important topic, but again gets into too many details of
alternative bidding possibilities to be of interest to all but the most
gung ho specialists.

Alas, I must come to the “ugly” part of this book. This appears to be
not simply a volume of essays to promote the practical dimensions of
modern advances in economics, but more an effort to increase the income
and prestige of economists relative to other scholars. On page one John
Siegfried assets, without a scintilla of supporting evidence, that “the
value of the improved policies documented in this volume is likely
hundreds of billions of dollars.” His agenda becomes clearer very
shortly: “Interestingly ... only a few of the contributions outlined
here have been financed or promoted through the private sector” (p. 3).
In other words, NSF economics grants have a huge payoff. Charles
Plott even goes further: “the social value of the contributions of
economics compares well with the contributions of basic research in any
field of science.” (p. 6). This, of course, is a normative judgment
without a scintilla of rigorous proof, measuring, for example, the rate
of return on research in physics or biological sciences with that in
economics or psychology (a point that even the NSF’s Daniel Newlon
gently takes him to task on).

All and all, this reinforces my own feelings about our profession. For
many, Physics Envy is a big cross to bear -- the unwillingness to accept
that economics is not considered as respectable as many of the so-called
hard sciences. This volume promotes the good economists have done,
ignoring the policy disasters that economists have contributed to, for
example, the stagflation of the 1970s, or, arguably, even the financial
crisis of 2008 -- where were economists in warning about subprime
lending, excessive use of untried to financial instruments, etc? Where
are we today in opposing stimulus packages that historical experience
and economic theory alike say do not work?

But above all, the volume is all about rent-seeking -- a plea to get
more economics funding for the NSF and related agencies. It is amazing
how much Adam Smith, David Ricardo, A.C. Pigou, Irving Fisher and Milton
Friedman contributed to the advancement of human welfare without NSF
funds. As Austen Goolsbee notes in a recent NBER working paper, more
government grant funding inevitably increases economic rents because of
the inherent short-term limits on the supply of good talent. If the
authors had stuck to presenting the evidence without its obvious and
overplayed commercial message, this would have been a far better volume.

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