What does economics do? Part 1 of N

One of the hot topics inside economic sociology (or, where economic sociology meets the sociology of knowledge/science/expertise) is the idea of performativity, and in particular, the performativity of economics. In simplest (and not uncontroversial) terms, performativity refers to the way in which a piece of knowledge affects the world, and in particular, the part of the world it claims to ‘know’. Donald MacKenzie, a sociologist of science and financial economics in particular, distinguishes three types of performativity. Here’s orgtheory superstar and economic sociologist Kieran Healy’s description of the three types, from a lengthy piece on MacKenzie’s new book:

MacKenzie distinguishes three kinds of performativity: “generic,” “effective” and “Barnesian” (together with the latter’s negative complement, “counterperformativity”). Generic performativity means the active use of some bit of theory not just by economists but also by economic agents, policy makers and the like. Effective performativity requires that the use of theory not just be window-dressing: it must “make a difference” (18 ) in practice. Finally “Barnesian” performativity (named for Barry Barnes) requires that the use of economics actively alter processes “in ways that bear on their conformity to the aspect of economics in question” (19). That is, the model or theory must bring participants into line with its picture of the world. In that case the model helps make itself true, in the sense that before the its public appearance the system did not behave in accordance with the model’s predictions, whereas subsequently it does.

The classic example of performativity comes from work by MacKenzie on the Black-Scholes Options Pricing Model. The details are not immensely important here, but the basic story goes like this. Someone invents a model for what the price of options should be (notice the ambiguity in that ‘should’) based on a number of factors. This model is published in a journal and made freely available to all. Traders start using the formula as a guidepost – they can quickly receive calculations as to what the B-S model predicts the price should be. And then the prices of options begin converging towards the predictions. Thus, the model’s predictions for what the price should be become the prices of the options.

Obviously, there’s a lot more history to this case (which I do not pretend to fully grasp). It’s a complicated situation involving a great many actors, many of them experts of a kind. It’s also quite rarefied – very few of us ever trade in options. But I think the performativity of economics (in the third, Barnesian sense of making the world like the model) goes much deeper, and affects us in ways that are a bit more profound. And the example I’m thinking of comes from Egypt at the turn of the century 20th century. It’s provided by Timothy Mitchell, whose book Rule of Experts: Egypt, Techno-Politics, Modernity is probably the best book I’ve read this year. His first 3 and last 3 chapters are of particular interest, as he connects the dots between colonialism, the development of modern economics, map-making, mosquitoes, the Aswan dam, Malaria, wheat and sugar cane, to name just a few of the major players. I would describe the 1st chapter, “Can the Mosquito Speak?”, as a poststructuralist Connections. It’s very good, and I’m sure I’ll be writing more about it soon. Mitchell’s argument is stronger, I think, than MacKenzie’s, because Mitchell argues that the economy itself was made and made recently (82). He dates the construction of the modern concept of the economy to the work JM Keynes and his contemporaries in the 1930s and 40s (including founding father of economic sociology Karl Polanyi), although they obviously drew on earlier innovations in political economy, statistics, colonial management, technology, etc.

For the moment though, I want to discuss a very simple example. From Adam Smith on, economics has treated nations as things that exist. The benefits of free trade, for example, were benefits that accrued to nations because of differences between nations. For example, if the price of cars is low in one country, but the price of bananas high, and the reverse is true in another country, both countries stand to gain an awful lot if they can swap some bananas for some cars. Early economics (Ricardo, principally, I believe) showed that this logic of trade held even when prices for both goods were cheaper in one country, hence the idea of comparative advantage (we do better making bananas than cars, even though both are more expensive here, because comparatively we are more efficient at bananas than cars). All of these arguments relied on the idea of nations, and national level prices. But where (and when) did national level prices come from?

From economists, in Egypt’s case at least. In 1910, economists Levi and Martin noted price variation for staple commodities between villages located within just a few kilometers of each other. The variation was much more than would be implied by simple differences in the cost of transportation, for example. These differences were impossible if there was anything like a national price to a good, or even a regional price. So what did the economists do? “To remedy the anomaly, they proposed the publication of price barometers in all the villages of Egypt, listing the current prices of commodities in nearby towns… Their answer was not to alter the theory, to take more accurate account of what happens, but to propose an alteration to what happens, to bring it closer to the simple practice of theory.” (Mitchell 117-118 ) So now Egypt has national prices, with regional variation given the costs of transportation and marketing, like most everywhere in the world. But these prices are the outcome of the production and application of knowledge – the performance of economics.

I think the case itself is very neat, and conveys what I think of as the most important part of economic performativity better than the more complicated Black-Scholes example. The larger methodological point is also interesting: instead of looking for where economics is wrong, the performativity perspective leads us to look at what economics does. And that’s a much more interesting and useful research program, I think, than simply one-up’ing economics over and over for forgetting this or that nuance of humanity. That economics is wrong is a little interesting, what it does is quite interesting.

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  1. I think I make a claim that is too strong – we certainly think of Egypt and other countries as having national prices, but Mitchell does not go so far as to assert that the creation of the regional barometers actually brought the village prices into some sort of equilibrium. I would imagine that it did, at least somewhat, but I should not assert that so strongly. Hm.

  2. @Dan Regardless of how strongly or weakly you assert this causality, the main thrust of your post should serve as the basis for thoughtful discussion about preconceived notions in social sciences.
    As you say, what the economics framework does is quite interesting. And it’s embedded in a specific context culturally, socially, and historically. We can deconstruct the context as we wish but maybe we should work with some insight into the effects of this framework.
    So thanks for an insightful post (linked by Carl Dyke).

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