12 July
Dear Eleanor,
I’m not Paul Krugman. But I enjoyed the letter that you wrote to him on ‘thinking about economics’. Perhaps I can share a few thoughts with you because I am curious as to what you might make of them. (For context, my background is in economics and finance. And I’ve spent far too many years of my life as a soulless quant for big business and big government.)
Firstly, to your question: Have we learned anything since the financial crisis? As you know, scores of books and papers have been written about the subject. But in my opinion, the answer is both yes and no. Yes, in the sense that the crisis reaffirms many things that we already know. Robert Shiller, Andrei Shleifer and others, for example, have written much about the anatomy of price bubbles, financial contagion, and the double-edged swords of credit and confidence. While I am not privy to the post-crisis changes to Dodd-Frank, Basel III, and other accords, many experts say that the political-regulatory response does resolve the moral hazards, arms-races, snake-oil, and quality controls that plague our financial institutions. Hence, my hesitant no.
So perhaps we haven't learned anything at all. Financial amnesia, memory fade, and intellectual hubris are recurring themes in financial history. Part of the problem stems in the negative externalities that markets generate. Risk tends to migrate to regions in which oversight is poor (so problems, by definition, are difficult to spot before the fact). What’s desirable for the individual risk-taker is not necessarily healthy for the entire system. The crisis showed, for instance, how excessive leverage, risk-taking, and shoddy products in a tiny corner (i.e., subprime products) can then spread like wildfire to everywhere. This is also why I watch the market for cryptocurrencies and banking in China today with some concern.
You add that there is “a lack of economic education and therefore economic understanding in [your] country.” I agree with you that basic financial literacy is essential, especially for marginalized communities. But as an economist, I must admit that I worry a bit about a world in which everyone thinks like an economist. Such a sad world that must be, don’t you agree? The problem, as I see it, is twofold. Firstly, economics is inherently political and values driven. In her book Doughnut Economics, Kate Raworth explains, for example, how students tend to become more selfish after taking courses in microeconomics and game theory. The problem is worsened in part by the profit-seeking machines of capitalism; and the fact that mainstream economics continues to teach narrowly under its neoclassical paradigm. I should also add that not once in my undergraduate studies, in between all the theorems and models, was financial history or ethics mentioned.
Social discourse is healthiest when there is a diversity of opinion. So if we’re to broaden our economic education, we have to be careful in how we discuss the role of the market and the state. We otherwise risk leaning further into the ideological positions that you’ve talked about. Better and safer, I think, is to have more scientists, ethicists, engineers, designers, artists, community leaders, and so on, in our leadership circles to cultivate the ‘wisdom of crowds’. In my opinion, the world does not need more economic thinking or lawyering. We need more people to ask the right questions. And we need of more diversity in academia, government, and business. Social and economic policy is complex, yes. But it is not string theory. We know roughly the steps we need to take to address poverty, disease, climate change, and other pressing issues. The main challenge is execution, organization, coordination, and representation.
Finally, the communication problem you cite is an immense challenge. And here I have little to offer, for many things in economics are nebulous. Even simple models of wage dynamics and minimum wage policies are fraught with unintended consequences. Rarely does the real world conform to our toy models. Even the most well-meaning policies can backfire in counterintuitive ways. Clearly, academia has to get better at communicating complexity and uncertainty outside their ivory tower. And the news media and public must accept that many ideas cannot be reduced into a single headline or directive. We also need to foster greater tolerance for mistakes and experimentation because so many things in economics are unclear until we pilot them. But much of this is unlikely to change until our incentives and attitudes change too. And change of this sort is difficult because everyday folk have so much on their plate already. It's almost unfair to expect more from them.
Perhaps something like Collate is a nice place to start—an opportunity for people from different backgrounds to exchange perspectives and viewpoints. I hope some of my comments will resonate with you. But thank you for getting me to think!
Warm regards,
Tobias
P.S. Paul Krugman is a great lecturer, isn’t he? I remember attending a similar talk at my own campus. I hope he’ll respond to your questions. But if not, he has plenty of books and essays for you to follow up on.
Tobias Lim
Tobias Lim