Summary: The Tragic Science: How Economists Cause Harm by George F. DeMartino

Recommendation

Professor George F. DeMartino notes that economists often reach conclusions about how to handle thorny and all-encompassing problems, like climate change, despite the many uncertainties and unknowns that the issues present. That leads to advice and actions that can cause real harm to societies and individuals. This academic study draws attention to the damage that economic policy can do, and it provides some wise pointers for practitioners of the dismal science.

Take-Aways

• The “moral geometry” approach favored by economists allows all harms to be measured against each other and all benefits.
• Economists justify harms by pointing to the long-term benefits of systematic efficiency and asserting that winners could compensate losers.
• Some economic policies and decisions tend to hurt those already disadvantaged, causing a pattern of “cascading harms.”
• The 1990s restructuring of the Russian economy was a high point of economic hubris.
• Using the counterfactual to support arguments is rarely conclusive in economics.
• “Decision making under deep uncertainty” is an approach to economic policy making that is less likely to inflict permanent harm.

Summary

The “moral geometry” approach favored by economists allows all harms to be measured against each other and all benefits.

A central role of the economics profession includes analyzing the many trade-offs that occur among groups of individuals in an economy, trade-offs that can benefit or hurt those groups. But while economists undoubtedly contribute much good to society, the flaws in their approaches and techniques are easy to see. One characterization of mainstream economists’ methods consists of a “moral geometry,” in which benefits and harms are all converted into monetary values and fed into complex equations. Foregone potential opportunities and actual economic harms are equally weighted. In other areas of life, however, values like liberty and rights provide constraints on how people treat each other that are independent of any calculus involving monetary value.

“With the moral geometers, we can choose to insist that it is appropriate to reduce all forms of harm in the taxonomy to one simple metric, the loss of welfare typically defined in terms of preference satisfaction.”

This type of thinking also assumes that harmed individuals can always be compensated and made whole again. For example, if you like apples but can’t get any, you can always buy more oranges. This preference-satisfaction rationale is fine when applied to simple things such as going without a fruit, but it seems trivializing and one-dimensional when considering more complex economic harms, like unemployment. Native Americans refusing to accept large compensation payments for the breaking of land treaties more than a century ago don’t think their loss is equivalent to any monetary gain. Decision making during the coronavirus pandemic – for instance, determining whether social distancing would save enough lives to be worth the potential cost – showed how problematic it can be for policy makers to try to impose monetary values on issues like health outcomes.

Economists justify harms by pointing to the long-term benefits of systematic efficiency and asserting that winners could compensate losers.

Economists condone the moral geometry approach by insisting that the ebb and flow of a dynamic economy hurts individuals all the time. A more general defense of economists justifying harms in the name of economic efficiency is philosophical in nature: If over the long term a country always pursues economic efficiency, then every generation will benefit from a higher standard of living, or what economist Friedrich Hayek called “social betterment.” Halting all efficiency or labor-saving changes because someone will be economically damaged would freeze an economy at a certain standard of living forever.

“If, instead, efficiency-promoting policies that generate uncompensated harms are not permitted, economic progress will stagnate, leaving everyone worse off.”

The way economists justify their economically efficient policies is to assert that the winners from a policy or proposal should be able to compensate the losers. For example, in theory, American consumers who gained from cheaper manufactured goods from China could all give some portion of the dollars they saved to now jobless or less well-paid factory workers. But that will never happen. Sometimes the economists’ cop-out is that politicians are responsible for the mechanisms that could compensate the losers; the economists’ role is only to maximize the pie while leaders should apportion it equitably.

“Recent research indicates that the harmful effects of trade are much deeper, more concentrated and longer lasting than economists had assumed. The impact in the US trade with China…is now understood to have been particularly damaging while providing little net benefit to the US economy.”

Income inequality has grown sharply in the United States, driven partly by globalization’s winners and losers as well as by policies like financial liberalization, tax cuts on capital gains and unions’ decline. Economists used to dismiss the negative effects of inequality as the price a society pays for a dynamic, innovative economy, but more are now recognizing the harm caused. Being poor in a wealthy economy raises feelings of shame, stress, humiliation and degradation. The impact of an individual’s shift from being a reasonably paid manufacturing worker to searching for minimum wage jobs can be an assault on cherished identities such as that of a provider and a respected person in an organization. Appreciating that individuals value being “a maker” is a theme philosopher Karl Marx emphasized, in contrast to the neoclassical economist’s concept of work being just a means by which people earn money to spend.

Some economic policies and decisions tend to hurt those already disadvantaged, causing a pattern of “cascading harms.”

The economists’ moral geometry becomes a more pernicious device if those who lose tend to be from groups that start out with disadvantages and have been the uncompensated losers from previous policies. The economist’s analysis can fail to recognize “thresholds” of harm, in which individuals experience a catastrophic or life-shattering decline in their quality of life that creates negative spirals. For example, unemployment in middle age affects mental and physical health, and poor health then worsens already limited employment prospects. Similarly, a bankruptcy can take away a small-business person’s capacity to recover. Using techniques like “harm profile analysis” can distinguish between compensable and noncompensable harms.

“An economic system in which being harmed today predisposes individuals to being harmed in the future is morally indictable. Serial correlation of harms implies that those who are worst-off suffer compounding harms.”

Another problematic aspect of some economists’ attitude to harm is the way they assume that degrading labor or dangerous working conditions can be addressed through higher wages. Their view is that, as long as all individuals have the free choice to enter into and exit contracts, all market outcomes must be “unimpeachable” or ethically benign. But this claim of freedom doesn’t consider whether the workers involved have real alternatives and opportunities. The coronavirus revealed some of these tragic dynamics: During the pandemic, minorities and the less well-off were far more likely to be in jobs that required face-to-face interaction, which meant either increased exposure to the virus or lay-offs, while the well-off more likely worked from home. In another type of dire choice, a city that wants an incinerator will probably end up placing it in a poor neighborhood, as residents have less money and influence to fight back. Once the utility goes online, the lower property prices around the incinerator would indicate that the residents “choose” to live there while also suffering more uncertain health care options.

“Ascertaining the presence of genuine consent can be difficult, even in the presence of apparent exit options…The analysis must probe the background conditions against which people appear to be making self-defeating choices to ascertain whether coercion lurks there in some form or other.”

A more enlightened way to think about economic harm is to look at the degree to which someone’s capabilities or functioning are stunted, preventing them from flourishing or causing them a setback. The complex markets and power structures that trap people in harm can be labeled as “structural violence.” No one may have done anything illegal or pernicious specifically directed at an individual, but the structures of an economy are benefiting the powerful and harming the already disadvantaged. These structures are awful but not illicit, as the mechanisms are silent and obscured. Those who benefit from the present system are prepared to use the means at their disposal to stabilize and maintain the status quo. Economic ecosystems with more autonomy and less coercion include setups like worker cooperatives.

The 1990s restructuring of the Russian economy was a high point of economic hubris.

When the communist system imploded in Russia in the early 1990s, free market economists were brought in to advise on the transition to a market economy. But rather than taking it slow – as the example of Poland showed would be less harmful – the heroic-minded Western economists recommended a super-quick shock-therapy transition, partly to prevent any opposition from having the time to organize. Their policies exposed thousands of previously sheltered enterprises to competitive international markets and prices, causing mass unemployment. Later, population and death data revealed that 10 million Russian men, some 6.7% of the population, disappeared from the statistics; by contrast, just 2.1% of the population was killed in America’s deadly Civil War. In Russia, cheap alcohol was popular, with suicides, homicides, injuries and heart attacks also contributing to the figures. For millions of men, mass unemployment created stress, hopelessness and the loss of their identities as productive providers for their families. The reforms led to 40% poverty rates while a scramble arose among the sharpest, most politically connected strongmen, who became oligarchs.

“The most notable instance of economic adventurism concerned the effort of the world’s most influential economists and economic institutions to promote abrupt, complete market transition in the Global South in the 1980s and then in post-Soviet economies during the 1990s.”

That same period in the late 20th century was the heyday of economists advising and pushing their free market policies onto developing countries and other post-communist states. Since then, thanks partly to failures revealing their hubris, more economists have acknowledged what they didn’t know. Many of them are now less likely to treat economies as simple systems and more likely to back up their opinions with empirical research.

“In place of paternalism, responsible economists must recognize the integrity and autonomy of laypersons – the right of those who will live with the beneficial and damaging consequences of policy interventions to participate, meaningfully, in the assessment of available strategies, risks and trade-offs.”

For example, in the past, medical doctors were more paternalistic in their dealings with patients. Physicians assumed that they knew best, and they saw excessive communication with patients as a distraction. But through the decades, a greater emphasis on patients’ self-determination and their rights regarding what they are told has motivated doctors to become far more consultative. In contrast, economists have arguably maintained a paternalistic mind-set.

Using the counterfactual to support arguments is rarely conclusive in economics.

The sciences that produce the most robust theories and conclusions are those in which repeatable experiments can prove them decisively, such as the trials in physics and chemistry. The trouble with economics is that the specific time and place of a policy can’t be rerun as a counterfactual to prove impacts and causation conclusively. This lack of conclusiveness leaves room for interpretation. The past is sometimes as unknowable as the future, and it is inevitably influenced by an economist’s ideological framework and biases.

“A consequence of the fervent secular religiosity underlying economic debates is that economist-induced harm has been weaponized rather than acknowledged as a fundamental problem for which all economists share responsibility.”

Rather than recognizing the damage that economic policies can cause, endless debates ensue in which each side attributes certain harms only to the ideologically opposing school of thought. Economists can fall under the comforting illusion that future outcomes can be nailed down in a probabilistic way. But the reality is that there is deep uncertainty, irreparable ignorance and irreducible complexity in some areas of the economic future, as financial crises have always illustrated. Some of the most important and knotty issues facing this era are “wicked problems,” which have nonlinear qualities and feedback factors: Climate change and its related issues of water resource security and urban planning are just a few examples.

“Decision making under deep uncertainty” is an approach to economic policy making that is less likely to inflict permanent harm.

Because economics involves some areas of great ambiguity, using the approach of decision making under deep uncertainty (DMDU) is beneficial. DMDU starts by choosing options and policies that don’t necessarily seek to maximize welfare through the moral geometry of cost-benefit analysis calculations, calculations that may rely on tenuous assumptions, estimates and theories.

“The risk is magnified by the proclivity of economists to pursue optimal outcomes that are extremely vulnerable to forecasting errors, rather than robust strategies that are apt to perform well enough under a wide range of unknown futures.”

When the RAND Corporation studied the complex, interrelated issues involved in the water management of the Colorado River basin, it used a DMDU model. DMDU acknowledges ignorance and uncertainty upfront, and it prioritizes robust and adaptable strategies that can do well or “well enough” under a wide range of unpredictable circumstances. The emphasis is on keeping options open and preserving exits, thereby avoiding irreversible and inflexible commitments that lock in strategies that only work under certain conditions. DMDU allows for more stakeholder consultation, with data visualization diagrams like heat maps indicating safe and perilous ranges of major variables, helping decision makers better understand the trade-offs, thresholds and options.

“Neither the experts nor the stakeholders are pressed into impossible activities, such as divining the future or deriving the optimal policy. Instead, they are invited to apply their expertise to the challenge of identifying strategies that will perform adequately under diverse possible futures.”

In the Colorado River project, diverse stakeholders with divergent interests yielded many useful proposals. Typical of wicked problems, the Colorado River project presented multiple overlapping objectives and risks to consider, with exploratory modeling employing simulations and stress-testing to clarify more of the possible futures and potentially unwelcome surprises. Economists are not expected to predict the future in an uncertain world. Instead, they can devise policies that minimize stakeholder regret. That would surely be an example of a step toward a less “tragic science.”

About the Author

George F. Demartino is a professor of international economics at the Josef Korbel School of International Studies at the University of Denver. He has written books and published widely on the ethics and normative aspects of economics.

Review

Here is my summary and review of the book [The Tragic Science: How Economists Cause Harm] by [George F. DeMartino]:

The book is a critical examination of how the practice of economics can cause harm to individuals, groups, and societies, even when economists intend to do good. The book argues that economists often fail to recognize, acknowledge, or prevent the negative consequences of their theories, policies, and interventions, due to their irreparable ignorance, paternalism, and hubris. The book proposes a new ethical framework for economists that emphasizes the complexity of harm, the uncertainty of knowledge, and the responsibility of care.

The book consists of three parts:

• Part I: The Tragic Science. This part introduces the main thesis of the book: that economics is a tragic science, in the sense that it involves unavoidable trade-offs, dilemmas, and conflicts between competing values and interests. The author defines harm as any adverse impact on human well-being or dignity, and distinguishes between different types of harm, such as direct, indirect, intended, unintended, reversible, irreversible, distributive, aggregative, and systemic. The author also criticizes the moral geometry used by economists to evaluate harm, arguing for a more multifaceted understanding of harm that considers epistemic uncertainty, moral pluralism, and contextual factors.
• Part II: The Origins of Econogenic Harm. This part explores the sources and causes of econogenic harm, or harm caused by economists. The author identifies four main drivers of econogenic harm: irreparable ignorance, or the inability of economists to know all the relevant facts and consequences of their actions; economic paternalism, or the tendency of economists to impose their preferences and judgments on others; heroic economics, or the aspiration of economists to solve complex social problems with simple economic solutions; and disciplinary malformation, or the flaws and biases in the training and culture of economics that foster harmful practices.
• Part III: Adapting to Econogenic Harm. This part offers some suggestions and recommendations on how to cope with econogenic harm, both at the individual and collective level. The author advocates for a new ethical approach for economists that is based on three principles: professional humility, or the recognition of the limits and fallibility of economic knowledge; professional integrity, or the commitment to honesty and transparency in economic research and communication; and professional care, or the concern for the well-being and dignity of those affected by economic actions. The author also calls for a reform of the economics profession that would foster a more diverse, pluralistic, and democratic culture.

The book is a compelling and provocative read that challenges the conventional wisdom and self-image of economics as a positive and progressive social science. The book is based on the author’s extensive research and expertise as a professor of international economics and a leading authority on economic ethics. The book is written in a clear and accessible style, with plenty of examples, anecdotes, data, charts, and diagrams that illustrate the main points. The book is also well-structured and easy to follow, with summaries, key takeaways, questions, and exercises at the end of each chapter.

The book’s main strength is its originality and relevance. The book introduces a new concept of econogenic harm that captures the essence of the ethical challenges facing economics in the 21st century. The book also provides a rich historical context that helps to understand the origins and evolution of econogenic harm in different periods and regions. The book also offers a realistic and nuanced assessment of the benefits and costs of economics as a social science and practice.

The book’s main weakness is its lack of depth and detail on some topics. For example, the book does not cover some aspects of econogenic harm that are relevant for developing countries, such as the impact on local cultures, environments, and institutions. The book also does not provide much guidance on how to implement some of the suggested ethical principles or practices in different contexts or situations. The book could benefit from more references to external resources or further readings for those who want to learn more about specific topics.

Overall, I would recommend this book to anyone who is interested in learning more about how economics can cause harm even as it aspires to do good. The book is a stimulating and informative read that will make you think about your own role and responsibility as an economist or as a citizen in a globalized world. The book is also a valuable resource for anyone who wants to improve their ethical awareness and competence as an economist or as a user of economic knowledge.