December 28, 2009

life in financial markets: review of 'the dismal science' book

A couple of weeks back I reviewed, for the magazine I presently write for, a book on economics. I present it below. Economics is understood differently by different people. Economists, like every other professional in his or her respective field, try to lobby and influence governments, companies and finance professionals with their theories.

The ideal situation is one where such heavy lobbying, as economists and others do presently, fails and instead quiet and straight-forward research and theories are picked up directly by governments, companies and finance professionals. The latter should do their own hard work to surf the world of economists and their economic theories and pick the right ones for implementation in their policies and businesses.

Anyway, here is the review of that book:

Title: THE DISMAL SCIENCE - How Thinking Like An Economist Undermines Community

Author: Stephen Marglin

Publisher: Oxford University Press

First published in India 2009

ISBN-13: 978-0-19-806335

ISBN-10: 0-19-806335-0

Number of pages: 307

Price in India: Around Rs 800

Good criticism, poor alternatives

A critic from inside provides his expose to problems in economic theory and practice but only in order to bat, without success, for community-based thinking

Stephen Marglin, the author of this book, is a trained economist from a few decades back. Presently, he is a member of the Department of Economics at Harvard University. It has taken courage on the part of Marglin to defy conventional economics wisdom among his colleagues and students to write this book.

This is because his book 'Dismal Science' works on a comprehensive and intense critique of the mainstream consensus, among economists, that a system of unfettered markets is good for the people. This, Marglin does, in order to put forth his theory that community-based economics would serve humanity better.

His training as an economist gives Marglin some credibility when he elaborates on why he rejects many of foundational assumptions of economics calling them "cultural myths" as against what conventional economists would term as "universal truths".

One of them is the idea of individualism that, Marglin writes, is be understood as "a collection of autonomous individuals, that groups—with the exception of the nation—have no normative significance as groups, that all behavior, policy, and even ethical judgment should be reduced to their effects on individuals."

Marglin continues articulating, "A second founding myth is the modern ideology of knowledge, an ideology that privileges the algorithmic over the experiential, an ideology that elevates the knowledge that can be logically deduced from what are regarded as self-evident first principles over what is learned from intuition and authority, from touch and feel."

The third assumption, and myth, according to Marglin, is that "the nation... is the only legitimate social grouping," where "it is legitimate to ask whether the nation will be better off by free trade, but it is parochial to ask whether workers, old folks, or farmers will fare better or worse."

The fourth myth is of unlimited human wants that can never be fulfilled and so economics tries to allocate scarce resources towards it. Marglin states that the western economy allows free play to unlimited desires and allows "rivalry—keeping up with the Joneses and the like—to be expressed in the acquisition of display and wealth."

These four foundational assumptions of economics, and other theories associated with any of these, are very craftily argued against in 'The Dismal Science'. One thoroughly enjoys reading the well-articulated and sharp points and elaborations made by Marglin, particularly in the middle half of the book in chapters titled 'From Vice to Virtue in a Century', 'How Do We Know When We Do Not Know?', 'Taking Experience Seriously', 'Why is Enough Never Enough?' and 'The Economics of Tragic Choices'.

The book provides very well-presented thoughts of the author although at times the frequent references to people, events and places from the history of economics get boring and pointless. There have been other critiques of economic theory in the past but Marglin's book is nevertheless a fresh and interesting addition to the list of critiques.

Marglin, however, fails to give justice to the second part of the book title 'How Thinking Like An Economist Undermines Community'. Even though he has one full chapter on 'What is Community? And Is It Worth the Cost?' it does not present a convincing case as to why community-based economics is necessarily free of the myriad problems that bog down market-oriented economics.

It is, however, to Marglin's credit that he stays fair to the mainstream economists in the sense that when he is stating their positions on economic theories and free markets there is no distortion of any kind. This, then, gives him enough credibility to launch his criticisms.

The second big failing in the book is that Marglin could have hit harder on the problems with foundational assumptions of economics. He could have, if he had put in just a bit more effort, to expose, through real-life examples, of the continuous failure of the fulfilment of the assumptions of economics. The fact that, more often that not, cronyism, unfair tax favours and corruption of government, and not free and fair markets, is how capitalists operate is ignored by Marglin.

The fact that some markets work, and work wonderfully, is despite the capitalists' cronyism and partly because of human nature to adapt as best they can to circumstances forced upon by the policy-makers and industrialists who resort to conventional economics' flawed theories.

Are there alternatives to conventional economic wisdom then? Marglin thinks going back to communities would help. But, in my view, any system that is run by humans will not be free of the negatives of human nature such as manipulativeness, greed, deception and violent, or subtle, exploitation of other living beings and the ecology.

At any rate, 'Dismal Science' is a book worth reading, and I can safely recommend you to go buy a copy.

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