I always think of this angry crank who was notoriously near-sighted when it came to politics and economics whenever I find myself tempted to say anything substantive about economic theory. It’s too easy, in a way, to say things about a subject one has never studied.
When curious types, literary nerds, and anti-Semites went to visit Ezra Pound at St. Elizabeth’s Hospital from 1945-1958, they were often treated to rants on economics inspired by the theories of Clifford Douglas, whose work Pound had read thirty years before. These ramblings were merely extensions of Pound’s war-time Rome Radio program, titled American Hour, where he would rail against the Bank of England and try to discourage Americans from invading Italy. As Hugh Kenner describes it in The Pound Era, an unparalleled assessment of Pound’s life and work, in Pound’s radio program:
The details [were] violent, the rhetoric disordered, the phraseology intemperate. The war was outrageous; in particular. “For the United States to be making war on Italy and on Europe is just plain damn nonsense,” and session after session he attempted in a few minutes to explain from halfway round the world to his countrymen how this nonsense had come about. Unlike the propagandist who says what he is told to, he was offering his own highly specialized account, so crammed with apparently unrelated allegations that some Italian officials are said to have wondered if he were transmitting code under their noses. (466)
Kenner is not alone in characterizing Pound’s diatribes here as less than lucid. In fact, Pound was a huge supporter of Mussolini because he thought the fascist leader would be a kindred spirit on the same economic theories that inspired Pound to write, “[World War II] is a chapter in the long and bloody tragedy which began with the foundation of the Bank of England in far-away 1694″ (463).
In a couple of years, Pound was indicted for treason for his radio broadcasts and by the war’s end after spending some time in a temporary war-time prison cell that stood entirely out of doors, he narrowly avoided prison in the United States by being judged unfit to stand trial, after which he was “confined to St. Elizabeth’s Hospital until such time as his condition should improve, which, the doctors told his attorney, ‘would never happen’” (494).
Whatever his personal and political failings may have been, Ezra Pound continues to command a great deal of respect in the world of literary theory. Nevertheless I always think of this angry crank who was notoriously near-sighted when it came to politics and economics whenever I find myself tempted to say anything substantive about economic theory. It’s too easy, in a way, to say things about a subject one has never studied.
Even so, I found it difficult not to chime in a piece I read recently by Linton Weeks on NPR, titled “Under the Spell of Voodoo Economics.” Weeks writes,
It’s premature to conduct a postmortem of the economic crisis of 2009 — which some people in the finance world are calling the Second Great Depression, or at least, the Great Recession — but it’s not too early to point out that many economic experts have been wrong, wrong, wrong.
This is a dramatic way to begin a piece of reporting, but it links nicely with the kind of Schadenfreude that has been hanging around since Alan Greenspan’s so-called “mea culpa.” What have the economic experts been wrong on? According to Weeks, it’s the enduring belief that individuals engage in rational behavior. This idea is central to “Mainstream” or “Neoclassical” Economics, which dictates that individuals choose from a set of options whichever is in their own best interests. Thus, for example, when consumers make purchases, they’re supposed to be rationally selecting the item with the most benefits in return for the lowest cost.
Economists often try to make allowances for the fact that this is ideal-world stuff, but they continue to build models on this rationality belief and it’s the predictive power of these models that can lead us into trouble, at least when we turn to economists to predict the future. All this is something that economics professor Michael Goldberg rails against, and he’s quoted in the Weeks article saying:
[Economists] have even convinced themselves that rational behavior on the part of individuals boils down to following a set of mechanical instructions that can be specified in advance. Remarkably, the vast majority of economists attempt to understand real-world markets as though they are based on the ‘behavior’ of interacting robots.
At the risk of becoming a poor version of sad, old Ezra Pound (a Poundian!) here, I want to say that this criticism seems appropriate. Now, Economics is a weird field. It creates unexpected controversy out of seemingly boring stuff, numbers data and graphs and lots and lots of intangible information about people, consumers, workers, but it’s probably this intangibility that is the most glaring problem, especially when policymakers treat the predictions of economists with a special gravity. Further, the basic tenet that individuals will weigh their economic options and make rational choices sounds like the most grandly constructed metaphysical principle, like the belief that people are inherently good (or the opposite). It does not, by contrast, sound like the foundation for a science considered vital to managing our government and everyday lives.
Actually, it’s hard to understand how anyone who’s ever seen It’s a Wonderful Life or Pimp My Ride can carry on with the belief that individuals make rational economic choices. It seems more likely that the economic choices of individuals are inspired by a clash of competing rationalities, themselves inspired by personal narratives. Another way of saying this is that human rationality itself is not very, well, rational. Take the borrowers in the mortgage crisis, for instance, where the housing market heated up and suddenly everyone was rushing out to get a mortgage whether they could afford one or not. Weekly stories appeared in the newspaper about homeowners selling their houses for prices that would have been considered well above market value just a few months previous, and still the prices kept inching upward. It wasn’t until troubling stories started to appear about foreclosures and tricky adjustable-rate-mortgages that doubts began to appear.
Now, it surely wasn’t tricky lending in every case that landed people in problem mortgages. It was more likely the difficulty of weighing the risk between a confusing mortgage and the attractive option of having a nice large house with a two-car garage that would surely maintain a continuously soaring fair market value in perpetuity. Surely, many of those who were foreclosed on were somewhat complicit in wanting to believe the dream they were sold, that they could afford a house and they didn’t need any equity and that interest rates would stay low forever. It’s hard not to ask: what kind of rationality allows someone to suspend this much disbelief?
Gambling is another good example. Faced with the evidence that gambling is a great boon to casinos and that the chances of winning are very low (are there any successful professional gamblers?), millions continue to gamble up their cash. Even while casinos are giving away hotel rooms, shows, and food, gamblers still see the long shot as a viable option.
Going for the long-shot is a good example of a common type of human rationality. The long-shot, for instance, is tied up in the American Dream and the mythology of the rich and lucky entrepreneur. Anyone can get rich, the story goes, and many do so in creative ways entirely through fortitude and a dash of luck. Because the potential reward is so high many individuals are willing to take on disproportionate (irrational) risks to go after that huge reward (sometimes with terrible results).
Therefore, it seems crazy to assume that individuals, even on a large scale, act in these perfectly rational, self-interested ways, and Weeks’ piece on the failure of traditional economic theorists to predict our actual economics strikes a chord. Of course, I would never let any economists tell me how to read and write poetry, so maybe I should keep these criticisms to myself.
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2 Comments
The rationality assumption has been called into question many times over the years–that’s why you have the “neo” in neoclassical or neoliberalism. Recently, we’ve seen the rise of behavioral economics, which attempts to fuse economics with biology and psychology.
In the end, most economists tend to assume that people are self-interested utility-maximizers. We do our best to get more of what we think will make us happy. Clearly, this assumption is not going to always be 100% correct. But the divide isn’t between the economists that realize this and the ones that do not (as the quote from Michael Goldberg would lead you to believe). The divide is between those that argue that the flaws in the assumptions (and the classically liberal model that follows) require government intervention and those that argue that the costs of government intervention out-weigh the benefits.
I guess I have trouble with the idea that people can be expected to routinely pursue their own economic self-interest. It’s the kind of belief that might be possible were it easier to see and pursue a particular self-interest.
Instead, the options people are regularly presented with are likely overwhelming to compare: should I quit my job and go to school to increase my wage-earning capacity? Should I take an initially low-paying job with high-upside or a moderately okay-paying job with no room for advancement?
Can you imagine what kinds of models we could build if we had the same kinds of assumptions built into our political predictions? In that case it would seem outright absurd to assume people act in their own self-interest when, in reality, we’re constantly struggling to define what that self-interest is.