Posts Tagged ‘McCloskey’

mathematics and economics

Wednesday, October 12th, 2016

Korean-American economist Yeomin Yoon calls on his colleagues to create, as Newton did, mathematical models to reflect observations of the real world. Instead, they frequently assume that the real world fits their theoretical models. An old joke is, if economists’ observations of the real world are inconsistent with their models, there must be something wrong with the real world!

[M]ainstream economists should learn from Isaac Newton, who developed his own calculus when he needed to solve a physical problem. Newton developed his mathematics as a tool to accommodate the observed facts so as to simplify his work. Mainstream economists frequently do the exact opposite: they create models of world and humans that fit their mathematics.

Deirdre McCloskey is right on the mark when she points out in The Secret Sins of Economics [Prickly Paradigm Press, 2002] that a large part of today’s theoretical economics is nothing more than a mathematical game with assumptions.

Yeomin Yoon, “Newton developed his own calculus as a tool to accommodate the facts“, letter to the editor, Financial Times, 12 October 2016 (metered paywall).

Yeomin Yoon (born 1942) is Professor of Finance and International Business at Seton Hall University, South Orange, NJ. There is much more in the full letter.
The link to McCloskey’s 58-page book is not gated.

capitalism and trust

Tuesday, August 16th, 2016

For millennia, the trust required for exchange of goods and services was based on personal relationships: family, friends, friends of friends or friends of the family. All this changed with the rise of modern capitalism. Markets (in finance, goods and services) began to operate based on trust in strangers, eliminating the need for personal relationships.

Deirdre McCloskey, in the first volume of her series on The Bourgeois Era, explains the importance of “trust in strangers” for the smooth functioning of capitalism.

Modern capitalism … was supported by, and supported in turn, a trust in *strangers* that still distinguishes prosperous from poor economies. ….

Trust and friendship, further, make possible speculative bubbles, from the tulip mania of the 1630s to the dot-com boom of the 1990s. The very fact of capitalism’s speculative instability, therefore, argues for an entirely new prevalence of belief in strangers. “Credit” is from *creditus*, “believed”. A business cycle based on pyramids of credit was impossible in the distrustful sixteenth century. The macroeconomy could in earlier times rise and fall, of course, but from harvest booms and busts, not from credit booms and busts. ….

On this theory the episodes of disorder and unemployment in capitalism from the 1630s in Holland and from 1720 in northern Europe arose from the virtues of capitalism, not from its vices, from its trustworthiness, not from its greed. To be more exact: the business cycle arose from trustworthiness breaking down suddenly in an environment of quite normal human greed for abnormal gain ….

Deirdre McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press, 2006), pp 158-159.

With the rise of the internet, personal reputations are once again important for commercial transactions, but trust – though personalised – continues to be trust in strangers. Tim Harford, the FT’s ‘undercover economist’, has written a column on this development, which he refers to as a ‘hybrid model’.

One of the underrated achievements of the modern world has been to develop ways to extend the circle of trust by depersonalising it. Trust used to be a very personal thing: you would trust your friends or friends of friends. But when I withdrew €400 from a cash machine [while on holiday in Bavaria], it was not because the bank trusted me but because it could verify that my bank would repay the money. This is [modern capitalism] a cold corporate miracle.

Over the past few years, people have been falling in love with a hybrid model that allows a personal reputation to work even between strangers. One example is Airbnb, which lets people stay in the homes of complete strangers, a considerable exercise of trust on both sides. We successfully used it on another stop in our Bavarian holiday. Airbnb makes personal connections but uses online reviews to keep people honest: after our stay, we reviewed our host and he reviewed us. ….

Personalised trust has never been fairly distributed. When Harvard Business School researchers … conducted field experiments on Airbnb, they found that both hosts and guests were discriminating against racial minorities. Other researchers have found evidence of discrimination in places from Craigslist to carpools. New online tools are giving us the ability to treat faraway strangers as though they were neighbours — and we do, in good ways and in bad.

Tim Harford, “The meaning of trust in the age of Airbnb“, Financial Times Magazine, 10 August 2016 (metered paywall).

Bourgeois Dignity

Sunday, July 31st, 2016

An unusual feature of Deirdre McCloskey’s book, Bourgeois Dignity, is the chapter headings which provide a concise summary of the argument of the book. Few books have impressed me so much.

The volume contains 450 pages of text, so each chapter is roughly 10 pages long. In addition there are 42 pages of endnotes, 41 pages of references and a useful 37-page index.

You can read the entire first chapter (pp. 1-9) here. Below is the complete table of contents.

1   The Modern World Was an Economic Tide, But Did Not Have Economic Causes.
2   Liberal Ideas Caused the Innovation
3   And a New Rhetoric Protected the Ideas.   
4   Many Other Plausible Stories Don’t Work Very Well.   
5   The Correct Story Praises “Capitalism.”   
6   Modern Growth Was a Factor of at Least Sixteen.    
7   Increasing Scope, Not Pot-of-Pleasure “Happiness,” Is What Mattered,   
8   And the Poor Won.    
9   Creative Destruction Can Be Justified Therefore on Utilitarian Grounds.   
10   British Economists Did Not Recognize the Tide,   
11   But the Figures Tell.   
12   Britain’s (and Europe’s) Lead Was an Episode,    
13   And Followers Could Leap over Stages.    
14   The Tide Didn’t Happen because of Thrift;    
15   Capital Fundamentalism Is Wrong.    
16   A Rise of Greed or of a Protestant Ethic Didn’t Happen;
17   “Endless” Accumulation Does Not Typify the Modern World.   
18   Nor Was the Cause Original Accumulation or a Sin of Expropriation.   
19   Nor Was It Accumulation of Human Capital, Until Lately.    
20   Transport or Other Domestic Reshufflings Didn’t Cause It,   
21   Nor Geography, nor Natural Resources;   
22   Not Even Coal.    
23   Foreign Trade Was Not the Cause, Though World Prices Were a Context,   
24   And the Logic of Trade-as-an-Engine Is Dubious,   
25   And Even the Dynamic Effects of Trade Were Small.    
26   The Effects on Europe of the Slave Trade and British Imperialism Were Smaller Still,
27   And Other Exploitations, External or Internal, Were Equally Profitless to Ordinary Europeans.   
28   It Was Not the Sheer Quickening of Commerce    
29   Nor the Struggle over the Spoils.   
30   Eugenic Materialism Doesn’t Work;
31   Neo-Darwinism Doesn’t Compute;    
32   And Inheritance Fades.
33   Institutions Cannot Be Viewed Merely as Incentive-Providing Constraints,   
34   And So the Better Institutions, Such as Those Alleged for 1689, Don’t Explain,
35   And Anyway the Entire Absence of Property Is Not Relevant to the Place or Period   
36   And the Chronology of Property and Incentives Has Been Mismeasured,    
37   And So the Routine of Max U Doesn’t Work.
38   The Cause Was Not Science,   
39   But Bourgeois Dignity and Liberty Entwined with the Enlightenment.   
40   It Was Not Allocation:   
41   It Was Words.   
42   Dignity and Liberty for Ordinary People, in Short, Were the Greatest Externalities,
43   And the Model Can Be Formalized.   
44   Opposing the Bourgeoisie Hurts the Poor,    
45   And the Bourgeois Era Warrants Therefore Not Political or Environmental Pessimism   
46   But an Amiable, if Guarded, Optimism.   

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. vii-ix.


perverse effects of education

Sunday, July 31st, 2016

I have completed McCloskey’s remarkable book, and will continue to post short excerpts that caught my attention. Here is the first of several to follow.

Each of the book’s short chapters made me think, and some made me wish that I had written the words, or at least something similar. This excerpt is from chapter 43, the only chapter of the book that contains a formal model of economic growth. As McCloskey explains, on p. 411, “The ‘mathematics’ is merely a metaphorical language that economists understand, and which allows me to chat with them … without excessive confusion.”

[The effect of education] can be and often has been perverse, corrupting good bourgeois boys by educating them to believe that the bourgeoisie have no dignity at all, or corrupting good bourgeois girls to become state bureaucrats devoted to believing that bourgeois liberty is to be stamped out. Marx took a PhD degree in philosophy at Jena in 1841. The leader of the Shining Path Marxists in Peru was a professor of philosophy. A high percentage of the officers in Hitler’s SS had advanced degrees in the humanities. German engineers built the gas chambers. Excellent computer engineers enforce the Chinese censorship of the Internet.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), p. 417.

I encourage you to visit Professor McCloskey’s web page, where you can download many of her diverse writings (though not this book!).

liberal policies and economic growth

Friday, July 29th, 2016

For your enjoyment, here are more excerpts from Bourgeois Dignity.

Dignity and liberty still work. …. Shenzhen in mainland China, a suburb of Hong Kong, went from being a small fishing village to an eight-million-soul metropolis in two decades. it didn’t happen without some nasty rent-seeking by party officials and their friends, true. But out of such creative destruction are average incomes raised, to the benefit eventually of the poorest. Such a shift required a shift in rhetoric: stop jailing millionaires and start admiring them; stop overregulating markets and start letting people make deals, corrupt or not.

…. You can still hear people … [declare] confidently that the market of course needs to be closely regulated, or that trade needs to be fair, or that immigration must be restricted, or that jobs are to be created by governmental programs, or that businesspeople routinely cheat, or that markets are chaotic, or that the more complex an economy is, the more it needs government regulation, or that banking or financial speculation is robbery, or that governmental bureaucracies are always fair and efficient.  …. Such antibourgeois people … do not believe the bourgeois axiom that a deal between two free adults has a strong presumption in its favor ….

This seems to be extremely libertarian, but five pages later, McCloskey explains that she is very much a classical liberal (a follower of Adam Smith, John Stuart Mill and others):

Liberty, I say again for the enlightenment of my libertarian colleagues, does not by itself suffice. The political scientist James Otteson asserts … “Those countries that respect private property and efficiently administer justice prosper, and those that do not do not. It is as simple as that.” Not quite, I would argue …. Prudence is not enough. We need to assent to bourgeois virtues.

Two chapters later McCloskey affirms this even more clearly:

[We should not celebrate] “greed is good,” which I argued at length in [my book] The Bourgeois Virtues is a childish and unethical rhetoric, however popular it has been on Wall Street and in the Department of Economics.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 397, 402, 446.

science and economic growth

Thursday, July 28th, 2016

Like imperialism and trade, science was more a result of economic growth than a cause.

All this remains to be shown …. But understand the main point here: even today … a great deal of economic growth in a country has little or nothing to do with science. The spread of economic growth to places like Brazil or Russia or India or China uses some science-based technologies, such as cell phones, but uses also a great many merely technology-based technologies free of much input from science …. And the international spread of growth has intensively used the social “technology” of bourgeois dignity and liberty.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 360-361.

Surprised? (I was.) Not convinced? Before rejecting McCloskey’s thesis read all ten pages of chapter 38 (“The cause was not science”), pp.355-365 or, better yet, read the entire book.

foreign finance for foreign wars

Wednesday, July 20th, 2016

I am continuing to read Deirdre McCloskey’s delightful book. It is a slow slog, because sentences often contain an impressive amount of material on which to reflect. Here is a typical example, from chapter 36 “The chronology of incentives has been mismeasured”.

The incentives in the sentence below refer to the availability of foreign loans, which were accessed by the English (after 1689), and then by the Japanese (in the late 19th century) primarily to finance wars rather than fund domestic investment.

The Russian state after 1917, by contrast, was at least for a while confined by its inability to borrow abroad to merely domestic violence–until Hitler’s imprudent invasion brought American credits for the Soviets, and the West’s salvation, and Eastern Europe’s woe.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 341-342.

imperialism and growth

Saturday, July 9th, 2016

I am continuing to read Deirdre McCloskey’s delightful book. Each page contains material to think about. Professor McCloskey is not kind to anyone she feels has misinterpreted economic history. Here is a brief example.

True, people thought that mercantilist aggression was good for them. …. It is the rhetoric of business-school deans and big-thinking journalists. But it is not sound, then or now, whatever people believe.

An instructive example of the unsound connection of aggression to economic success is the military historian Correlli Barnett’ brilliant old book of 1972, The Collapse of British Power, an influence for example on the Thatcher administration in Britain. …. [Barnett] mixes rank in the league table of power with economic success, and assumes … that what people thought at the time was an important connection among trade, empire, military might, and domestic prosperity was in fact the case. Thus Barnett:

in the eighteenth century the English ruling classes … saw foreign policy in terms of concrete interest: markets, national resources, colonial real estate, naval bases, profits. …. They saw national power as the essential foundation of national independence; commercial wealth as a means to power; and war as among the means to all three. They accepted it as natural and inevitable that nations should be engaged in a ceaseless struggle for survival, prosperity and predominance.

That’s right. That’s what they thought. But they were wrong–even in the dismal year for the British economy of 1972–to lament British economic “decline.” He attributed the “decline” to softness of mind and softness of will, arising especially from a new evangelical Christianity:

The abolition of the slave trade in 1807 as a result of a campaign led by William Wilberforce and of slavery itself in the British Empire in 1833 were the earliest of the great social achievements of British evangelicalism. …. As a consequence of this spiritual revolution English policy ceased to be founded solely on the expedient and opportunistic pursuit of English interests. ….

Barnett’s analysis sounds quite plausible, and it sounded even more so in the realpolitik days of 1972. Certainly British politics, at home and abroad, became in the nineteenth century more ethically driven, right down to coming to the aid of the French in 1914, against expediency, and then making a welfare state …. /but Britain, despite its lamentable descent into namby-pamby soft-heartedness, to be cured in the glorious war of conquest against the Argentinians, has remained one of the richest economies on earth, and has shared in the modern engine of innovation, which it started.


Britain’s overseas trade [and colonies], in short, can’t explain Britain’s peculiarity. Lining up national conquest with national trade is an old claim, though Adam Smith and many economists since him have wisely contradicted it (without persuading many politicians or journalists.) National conquest, though, doesn’t explain early British industrialization, and certainly not the continuation on the way to the [growth] factor of sixteen.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 215-216, 225.

More snippets from McCloskey will follow. I have added a “McCloskey” tag so that you can easily find them.

economic “multiplier effects”

Wednesday, July 6th, 2016

[T]he primitive conviction most noneconomists have … that money must somehow come from outside to puff up the economy and make us rich, is mistaken. You see the mistake in the claim [for example] that subsidizing a new sports stadium will “bring dollars into the community.” …. Public opinion gets fooled into voting for the stadium, because it hears of “multiplier effects.” The phrase sounds like technical economics, but only a deeply misled economist thinks that multiplier effects work in anything but conditions of mass unemployment.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), p. 209.

I am continuing to read this delightful book. My pace is slow, not because the book is dull, but precisely because it fascinates me. Every page causes me to think and rethink what I have learned (and forgotten) about economic history and economic thought. This is just one small example.  Another is here. Purchase or borrow this book, and read it. You will enjoy it, even if you have never studied economics.

McCloskey on Cuba and education

Friday, June 24th, 2016

I am reading a fascinating book that covers a wealth of economic history. It is a delightful book, very much in the tradition of Adam Smith. I want to share with you two paragraphs on Cuba, because of my interest in education in general, and that country in particular.

[E]ducation by itself does not yield much. Cubans nowadays go to school, as they did before the Revolution, if now strictly limited in what they are permitted to read …. Yet the Cubans at some points (Fidel repeatedly changed the laws) could not start a restaurant or take their farm produce to markets (Raul has somewhat relented), and so they remain to this day cripplingly poor, disabled from exercising bourgeois virtues–in sharp contrast to their cousins in Miami. Cuba’s income per head in 2001, despite all its alleged investment in human capital, was still about what it had been in 1958, while all around it since the Cuban Revolution income per head had almost doubled. In 2009 the country was malnourished. The cousins in Miami, by contrast, whether much educated or not, were doing a lot better, because they lived in a bourgeois society. And they could read what they wanted.

You will say if you are on the left, “But Cubans as you admit are educated and well cared for in their hospitals,” …. Yet so were they before 1958 well educated and well cared for, by the standards of the day. That’s why Cuba in 1958 was such a promising country, though ruled by a different gang of thugs from the present one. Yet after 1959 the Cubans fled from the workers’ paradise, just as the skilled are fleeing from Venezuela, Bolivia, Ecuador and Nicaragua, to places where economic opportunities are better than at home. A democratic social scientist should be inclined to put weight on how people vote, with their feet, or their boats.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 164-165.

This is the second volume of six that economic historian Deirdre McCloskey (born Donald McCloskey in 1942) is writing on The Bourgeois Era. The first volume was The Bourgeois Virtues (University of Chicago Press, 2007). The third is Bourgeois Equality (University of Chicago Press, 2016).

When I finish this volume, I will read volume 1, then volume 3.