A lucky boy from a golden age of economics

When the financial crisis struck, it was back to the economics Max Corden learned in the 40s and 50s — a golden age of economics in which conceptual simplicity was a feature not a bug and the central criterion of good work was its generality and usefulness — rather than the conspicuous cleverness that defined later economics.

(Cross posted from The Mandarin) This has been adapted from Nicholas Gruen’s address at the launch of Max Corden’s memoirs Lucky boy in the lucky country at Queens College, University of Melbourne on May 29.

The German philosopher Hegel said “the Owl of Minerva spreads its wings at dusk”. It’s an oracular way of putting an arresting and, if the truth be told, deeply melancholy thought.

In our fallen world, so much of life is revealed to us in retrospect. Reflection and wisdom come too late to be useful. In some ways, Max’s penchant for economic theory is an assertion of optimism against that melancholy. For by the fragile and imperfect construction of theory we try to build bridges between the events of the past and those of the future. We want to be ready next time. But therein lies a challenge. We want our theory to be useful, a point to which I’ll return.

The owl has been visiting Max lately. In an earlier discussion with Ross Garnaut to try to coordinate what we’d each speak about, I mentioned to him that my father was less conscious of his Jewish roots and less reflective of his past than Max. “Exactly like Max” said Ross. My father died twenty years ago and Ross says that Max’s deeper interest in his past has grown considerably since then.

Still that owl has a habit of creeping up on one. It was only towards the end of my father’s life that I gained any real interest in his history. It was much later again when I realised that all those things that migrants’ kids said – for instance about the strange food they ate at home – were also true for me, at least in small ways. A couple of decades ago I wouldn’t have noticed Max’s Europeanness. I barely noticed my father’s. But I do now.

I was invited to speak at this launch because of my father’s friendship with Max and the similarity between Dad’s and Max’s stories. I don’t know if Max knows some of the eerie similarities. I’ll tell you one. As Max tells us, in May 1938 he started two terms at the Streete Court School in Westgate-on-Sea in Kent.

He would meet Dad in Australia twenty years later at Monash University and write a paper together. They’d become closer friends another twenty years after that as respective heads of their centres at the ANU. Indeed Max writes in his memoirs “I don’t think I have met anybody in my life whom I have admired so much for his personality and balanced judgement”. But all those years back at Streete Court School, Max was just six miles or so up the road from Herne Bay College where my father had been boarding since 1936.

As Ross was speaking of the clarity of Max’s work, the simplicity that came from thinking things through before one opened one’s mouth or put pen to paper, it put me in mind of Steve Jobs who spoke of the simplicity on the other side of complexity – the simplicity that comes from all that work trying to find the most compelling way into and through some difficult problem.

It’s a clue to Max’s success as an economist – a discipline which, as Keynes remarked, is intellectually “a very easy subject compared with the higher branches of philosophy and pure science?” Keynes’ sting in the tail was that “good, or even competent, economists are the rarest of birds.”

You see economics itself is built on very simple foundations. In fact, I was once at a lunch following the launch of Nugget Coombs’ last book at which a ditzy blonde acolyte was on my left and Nugget was on my right. She trilled that economics was far too complex for her to understand. I responded that economics might look complex, “but it’s really all built on a single idea”. Nugget, who like surprisingly many economists towards the end of their days despair of their profession, leant across to her and said: “Yes and it’s wrong!”

Max and my father made their careers during a golden age of economics in which conceptual simplicity was a feature not a bug and the central criterion of good work was its generality and usefulness. Gradually academia somehow came to reward conspicuous cleverness as its apex value and quite quickly its usefulness of economics receded – a Tower of Babel rising in its stead. It’s telling that, when the financial crisis struck, it was back to the economics Max learned in the 40s and 50s. Paul Krugman, of whom I’m a huge fan is the impresario of this new age, a strident but pathologically clear headed critic of the way in which the macroeconomics of the business cycle actually retrogressed after the 1980s. Ironically, as I’ll argue shortly, he was an architect of a similar retrogression in trade theory from about the same time.

I recall one of the first conversations I had with Dad at around the age of thirty when I’d finally relinquished one of my life-long goals to not become an economist. He read me a marvellous passage from the great British economist and friend of Max, John Hicks. In Value and Capital published in 1939 Hicks spoke of how little progress could be made in economic theory if one incorporated scale economies which are logically incompatible with perfect competition. Here’s the money quote from Hicks:

“It is, I believe, only possible to salvage anything from this wreck – and it must be remembered that the threatened wreckage is that of the greater part of economic theory – if we can assume that the markets confronting most . . . firms . . . do not differ very greatly from perfectly competitive markets. . . . At least this get-away seems well worth trying. We must be aware, however, that we are taking a dangerous step, and probably limiting to a serious extent the problems with which our subsequent analysis will be fitted to deal. Personally, however, I doubt if most of the problems we shall have to exclude for this reason are capable of much useful analysis by the methods of economic theory.”

Note that last sentence. Hicks didn’t say “I doubt you can get a paper published assuming imperfect competition”. Indeed, people had done it throughout the 1930s though with disappointing results. His claim was that, in the light of his carefully considered and formulated arguments, formally modelling scale economies would not be useful.

Of course, he never advocated ignoring scale economies. Indeed he wrote about scale economies often. He understood that in a formal model the realism of one’s assumptions came at the price of the tractability of the model and the generality of its results. Therefore perfect competition would generally be assumed in his formal modelling, particularly in general equilibrium, and scale economies would be taken into account formally in simplified partial equilibrium models and diagrams and/or in discussion of limitations to the generality of one’s formal modelling or how some theoretical conclusion might be applied in a specific context.

For Hicks, as for Keynes and for Max and my father, economics was commonsense, worked over, clarified and applied.

However, at about the time Max moved on from the microeconomics of trade, these sensibilities changed. Paul Krugman and a cadre of others set about ignoring Hick’s warning. Here’s a challenge I’ve put for a couple of decades now without anyone rising to it. Show me any paper from the ‘new trade theory’ that mentioned Hicks’ warning or one like it (Milton Friedman had the same advice) and carefully considered why this time it was different. I think of Krugman as about the most brilliant and useful economist we have. But his most brilliant work wasn’t useful, and his most useful work isn’t brilliant.

And what’s that they say about people forgetting the lessons of history being condemned to repeat it? Krugman later lamented that such a “fundamental rethinking” of trade theory “can have such modest implications for policy”:

“The models ¹ used were, in a way, typical of economics: clearly untrue assumptions (symmetric constant elasticity of substitution preferences; symmetric costs across products!), and involved a fair bit of work to arrive at what sounds in retrospect like a fairly obvious point: even similar countries will end up specializing in different products …. But this point was only obvious in retrospect. People in trade were not saying anything like this until the New Trade Theory models came along and clarified our thinking and language. Trust me, I was there ….”

I was there too. So let me decode Krugman’s statement that “people in trade” weren’t saying that “even similar countries will end up specializing in different products”. He’s saying first that economists can’t see what isn’t in their models – whereas Hicks and pretty much every economist until the late twentieth century would have understood the need for careful and ongoing reconciliation of formal modelling and other sources of knowledge. More shockingly he’s saying that those who smell a rat at the dysfunctionality of all this should just get over themselves. To quote Krugman:

“You may not like this tendency; certainly economists tend to be too quick to dismiss what has not been formalized (although I believe that the focus on models is basically right).”

It’s ironic given how compellingly Krugman has documented the regression of macroeconomics in the same period that saw his own rise via new trade theory. I think both retrogressions were driven by formalisation at all costs, though, in the case of new classical macro, this mindset gave additional licence to the motivated reasoning of the libertarian right. In each case, economics regresses into scholastic abstractions, and obviously important parts of the story slide pristine invisibility to the elect.

For the record when Krugman says “people in trade” weren’t thinking of scale economies driving trade patterns he really means academics at the commanding heights of formal neoclassical trade theory. The rest of us were shouting ourselves hoarse. Take Linder’s early 60s model of mass marketing at home and luxury marketing abroad, Raymond Vernon’s ‘product cycle’ model of trade a decade later,  or Peter Gray’s late 1980s heuristic model of trade and imperfect competition. Two distinguished antipodean economists Peter Drysdale and Peter Elkan (from New Zealand) not to mention another Kiwi by birth Peter Lloyd who is with us tonight elaborated the significance of scale economies for trade. They proposed ad hoc partial equilibrium toy models and diagrams to illustrate various ideas and proposed policies based around them. Then there was the empirical work of people like Bela Belassa, Anne Krueger, Jagdish Bhagwati and others who, from the early seventies on, explored the implications of scale economies, regional trade agreements and intra-industry trade. This is not to mention Max himself, who has a whole chapter on scale economies in Trade and Welfare.

Before I wind up. One more coincidence – this time in the form of a riddle. What do I and Max’s student, Sir Nicholas Stern have in common? I don’t know if Max knows this but we’re both second generation Dunera Boys. My father came out on the Dunera and stayed. His father came out and went back, surviving the journey unlike a few unlucky souls who set sail to return during the war but perished at sea.

And finally to kindness. Max concludes his book Lucky boy in the lucky country with a typically straightforward accounting of all the lucky breaks he had in his life. His humble gratitude for the kindness of others is palpable. As it was with my father who often made a point of thanking those who had gone out of their way to help him and to protect him. Like a woman who’d looked after him in Austria, Frau Heller and Miss Margaret Holmes of the Student Christian Movement in Australia who helped the Dunera Boys get access to books and other things necessary for their education in their new homeland.

I thought I would end with a quote from one of the Dunera Boys about one of the people who was kind to Dad and other Dunera Boys. For me it has the quality of a kind of incantation. I read it every now and again and also read it to other people. Let me read it to you now. It’s a description of Captain Edward Broughton who was the Sergeant of the 8th Employment Company in which my father and many Dunera Boys worked towards the end of the war. The first Australian to write a book on the Dunera, Cyril Pearl describes him thus:

“He was a half-caste tattooed Maori. At the age of 16, by falsifying his age, he . . . served in the South African war. Fourteen years later he fought with the Maori Battalion on Gallipoli, was mentioned in dispatches, and commissioned. After the evacuation of Gallipoli, he served in France, and with a Russian regiment. Having overstated his age for the Boer War, he understated it by 16 years to fight in World War Two.”

This is what one Dunera boy said about him on his death in 1955:

“Keenly intelligent, well-read, endowed with a superb sense of humour, completely untainted by any racial prejudice… deeply interested in human beings, he did not only gain immediate respect and obedience, but also the love and affection of the unit. He enjoyed hugely being at its head, learned and meticulously respected Jewish customs, and was immensely proud of the unit because of the splendid work it did, humbly unaware of the fact that it was only he who could have turned these people into willing manual labourers. … He engaged in incessant publicity war on our behalf and fought hard to have our status changed, only to be booted out by the Army eventually. After being shoved around as flotsam and jetsam for many years he managed… to make us feel like human beings again. He restored our faith in man, as something more than 92 percent water and a few chemicals. He was a scholar and a gentleman.”

As Broughton said to one of his refugee charges from across the world “You and me, we’re the same”.

Both were lucky. And luckier still adding to each others’ luck.

Those who’ve been paying attention to the multi-dimensional scandal of academic publishing may not be surprised to learn that Max’s publisher Palgrave have done Max the great disservice of gouging those who might want to read his book. Their price is $125 for Max’s slim, elegant volume. At the launch Max was subsidising this for readers and is pitching in his own money on top of the publishers discount to him to bring the price down to $50. In any event, if people wish to borrow my copy they should email or tweet me – and I’ll be happy to arrange to lend it to them.

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