November 10, 2017 at 3:37 PM
"Value investing" has lately become a whipping boy. Based on a formulaic way (low price to earnings) of classifying "value" stocks, pundits have decided the strategy is wanting. What I find wanting is the robotic, one-
dimensional definition. Done properly, value investing is not a prescription but an approach. Its methods can be studied and applied, but they do not lead to precise agreement on all stocks all the time.
That same sort of nuance is missing from economics generally. It should be a softer science, not even a science, with less precision but more wisdom. Even with more insight.
This is the thesis of the cleverly titled "Cents and Sensibility," by Gary Saul Morson and Morton Schapiro. Morson and Schapiro do not exactly say that mathematics ruined economics, but they think it. They want economists to talk to people in the humanities. They think public policy could he improved by Tolstoy, infused with an ethical sensibility.
This sounds mushy, the sort of the thing your relative who doesn't get markets is apt to say over dinner. But Morson and Schapiro get markets.
So did Larry Summers. Long ago, as chief economist at the World Bank, Summers endorsed the idea that polluting industries should be relocated to poorer countries, where the value of lost lives, measured in unrealized future earnings, would be less. A Brazilian minister rejoined that such reasoning was "logical but totally insane." (Summers apologized).
The same brutal logic led a World Bank team to question whether a program with spectacular success at curing blindness in West Africa was worth it.
Economists can tell you that sanctioning a market for kidneys would raise the supply — maybe save lives — but someone else has to weigh the moral implications of auctioning body parts to the highest bidder.
And why practice economics if not to try to improve people's lives? Morson and Schapiro's point is that the standard tools of economics, while powerful, are not necessarily sufficient.
This may sound self-evident — aren't university catalogues stuffed with courses in every subject from anthropology to zoology? — but economists regard other disciplines with scorn. They are intellectual imperialists. They read "The Road Not Taken" and smirk that Robert Frost was discovering opportunity cost. But they scarcely ask what they might learn from poets.
Like old-style imperialists, economists assume that other people resemble themselves, regardless of their culture, class or background. Thus, they assume that other people will respond in ways that economists consider rational. They subscribe to the fallacy of an abstract "economic man" — "precultural" person. But, the authors write, people are not organisms first created "and then dipped in some culture, like Achilles in the River Styx. They are cultural from the outset."
Many of the questions that economists study, such as why birthrates are higher in some places, or why some countries developed earlier, or why some high school students do not apply to the best college they could get into, could be better understood through a cultural lens.
What the authors are targeting is the arrogance of economics monotheists. They skewer Gary Becker, a Nobel Prize winner, for postulating that all human behavior is "maximizing" — that is, the product of a rational, self-interested calculation. And that, therefore, economics is "a valuable unified framework for understanding all human behavior," including whom to marry and divorce, whether to have kids, whom to befriend.
Rubbish. In the first place, as Adam Smith, who wrote "The Theory of Moral Sentiments" prior to "The Wealth of Nations," recognized, people are far from exclusively selfish; indeed, they feel for others. It's worth listening to Smith's memorable description of the process of feeling for another: "We enter as it were into his body, and become in some measure the same person." This is, the authors note, what happens when you read a good novel. You develop empathy.
Literature develops a feeling for how people will behave in ways that economic models cannot. Becker's rational man has stable preferences. If he bought chicken yesterday and fish today, it must tell us something about the relative price of chicken and fish. Whereas, from literature, we learn that, over time, people change. (Correction: from good literature. James Bond never changes.)
It is surely happy news that while Morson teaches language and literature at Northwestern, Schapiro, who is the president of Northwestern, is an economist. Better still, the authors subject the humanities to the same savage scalpel as they do economics.
Economics, they note, is afflicted with physics envy. For all its pretensions, the proof that it is not a hard science is its need for narrative. You don't need a narrative to explain the orbit of Mars (Newton's laws will do just fine), whereas to assert that a shortage of bread caused the French Revolution, you do.
But if economics suffers physics envy, literature and history suffer "humanities embarrassment." At Stanford, about 45 percent of the main undergraduate faculty are in humanities, but only 15 percent of the students.
Borrowing a leaf from economists — yes, the authors salute economics for wonderful achievements — Morson and Schapiro surmise that the humanities' product is faulty. It is largely a case of self-depreciation. Today university faculties preach that the great novels are merely "words on a page" — cultural artifacts akin to the writing on cereal boxes. To quote the influential "Norton Anthology of Theory and Criticism," "Literary texts, like other artworks, are neither more nor less important than any other cultural artifacts or practice."
Then why read Shakespeare? If the reason (as the academy espouses) is simply to deconstruct the authorial "message," why not just teach the message? Thus, "Les Miserables" could be reduced to "Help the Unfortunate." And "Hamlet": Stop moping and do something! No, the reason we read novels is for the experience that the words inspire.
History sadly mimics economics in an attempt to systemize, to discover immutable laws. Explanations must be scientific and universal. Contingency or chance — a famine, the timely arrival of a genius or madman, a scientific discovery — are presumed irrelevant. Humanities, ideally, should wrestle with uncertainty. It is a discipline of contingent truths, of "on the whole." No one ever said the Pythagorean theorem was correct "on the whole." The authors prepare some very hot coals for Jared Diamond, author of the best-selling "Guns, Germs, and Steel," for presuming to explain human history according to the single factor of geography — neither culture, nor chance, nor great individuals entering into it. Indeed, they assert that Diamond "accounts for history by removing everything historical."
The authors target absolutists (Marx, for the single explanation of the class struggle, and many others) in the hope that economists may recognize the dubious wisdom of absolutism in their own discipline. Economics is also a field of "on the whole."
I have one gripe, and it concerns the authors' sullen takedown of behavioral economics as being all impression, no substance — poorly timed, given the Nobel recognition of Richard Thaler — and wrong on the merits. Behavioral economics didn't enrich the field in the way the authors propose; no matter, it did enrich it.
"Cents and Sensibility" is less a critique of economics than a critique of using "only" economics. It is especially relevant in the presence of ethical doubt. Should there be a limit to prescription drug prices? Is it right for universities to mislead the public about SAT scores, or about why they give financial aid? Such questions indeed require sensibility as well as cents. This is a bracing, original work, reminding us that economics was never supposed to be about the math but rather about the stories it tells about our lives.