Elizabeth Warren Freak Out, 1: So-called “Ideologue”

Joe Weisenthal asks the question: “What Is It About Elizabeth Warren That Makes People Freak Out?”

We made sure to get Elizabeth Warren to write and present the chapter on consumer finance for our Make Markets Be Markets conference we held at the Roosevelt Institute, and spending the year doing follow up on that report got me to see some of the reasons why there are freak outs. Luckily they are all selling points to me, and should be to you as well. Two posts on this, first is about her being an “ideologue”:

“Ideologue”

If you are a political scientist, sociologist, or study a social science that isn’t economics you’ll get this point easily: Warren is considered an “ideologue” because she doesn’t assume neoclassical economic ideology is right about everything all the time. She thinks that there are great points in economic theory and does economic analysis but doesn’t follow it off the cliff.

Consider this blog post Warren did for Credit Slips in 2006:

I was teaching Carnival Cruise Lines to my first-year contract students. This is the Supreme Court opinion holding that a forum selection clause in the fine print on the back of a cruise line ticket binds a customer who bought the ticket near her home in Washington state and was injured on the cruise to travel to Flordia to sue. As we discussed the opinion, a student explained that the clause is good for everyone (except the woman who was injured) because, quoting the Court, “passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys.”

Is this a question of fact or of law? “Fact, of course,” said the students. So I asked how this fact could be proven. What followed was a wonderful, multi-student discussion of maginal pricing, elasticity of demand, etc. Even as I pressed on the presumptions underlying the deductive model–fully informed parties, competitive markets, low transactions costs, etc–the students hung on to their model. They were smart and sophisticated in their arguments, but the bottom line was that they “proved” the fact of lower costs deductively by appling what they saw as immutable economic principles.

When I pointed out that this lovely conversation was all about theory and not fact, they were resistant. So I reversed and asked what the plaintiff might offer as proof to show that the justice was wrong. Much silence followed.

I finally filled in the blanks, suggesting some empirical tests–ticket prices for companies that do/don’t use such clauses, changes in pricing before/after such clauses are used, evaulation of whether cost is large enough to be reflected in price, etc. They got the idea and had some good suggestions

What struck me, and the reason I bring it to this group, is how these very bright students seemed to believe that deductive logic produced a “fact” that they could not or would not challenge. Perhaps my class was abberational, but it made me wonder about how we are educating our students, both before and during law school. Is it all about deduction, with nothing left over for reality?

I see that resistance a lot among certain types of elites. Modern economics “proves” that whatever exists must be the best. If you ask questions, or ask how do you really know outside of some math derived from 1870s physics or 1950s electrical engineering, everyone just blinks.

Bob Lawless wrote up Warren’s approach here:

For those who want to understand Warren’s approach to regulatory issues, one article in particular stands out for me: “Bankruptcy Policy,” University of Chicago Law Review, vol. 54, pp. 775-814 (1987). The article is illustrative of a pragmatic approach to very difficult policy issues. In the article, Warren embraces economic analysis–what might be called a “market-based” approach by some commentators today–but as a tool to broaden inquiry, not to close it off. She writes that she offers “a dirty, complex, elastic, interconnected view of bankruptcy from which I cannot predict outcomes nor even necessarily fully articulate all the factors relevant to a policy decision.” Warren contrasts her approach to the clean and rational conclusions offered by her opponent in the scholarly exchange, but defends her approach as “more realistic and more likely to yield useful analysis.”

Although this article is written in the context of a specific debate about bankruptcy law, it is illustrative of a pragmatic approach to policy questions that is skeptical of claims about foundational truths and generally anti-dogmatic. If you want a head of the CFPB who will hew to a particular ideology–on either side of the issues–then Warren is not your person. She is a person who goes where the facts lead her and will change her mind based on new evidence. Indeed, I sometimes wonder whether her popularity stems from an electorate who is looking for less ideology and more leadership from their public officials.

I like this because it is also my approach. Some have pointed out that her work on bankruptcy couldn’t be published in an economic journal, and that’s because she doesn’t start off with the “assume you approach life like a sociopathic bellman equation traveling backwards through infinite time.” And that’s supposed to be a bad thing! What we are seeing right now is proof that ideological assumptions about how applicable gaussian copulas are under efficient markets or how ruthlessly consumers behave in housing are completely off the mark. Using these models to close off critical thinking is exactly the kind of thing that allowed economists and financial engineers to implode the financial sector, and as such I am very sensitive to this.

But it is not everyone’s approach. This is what people like Karl Smith means when they say she has strong priors, or when e21 calls her an ideologue. She doesn’t assume that economic models have all the answers; she embraces them, but treats them as the start of a conversation instead of the pre-conceived conclusion. To someone who likes to use economics as a way to close off debate or prove-by-reassuming economic 101 stories this pragmatism looks dangerously ideological.

Those who use economic analysis as a tool for greater discovery instead of a circular exercises in proving the ideology of economic theory are the dangerous ideologues. How cool is that?

Matt Stoller, discussing Summers and job growth, put it perfectly: “Ideologies are like accents. Other people have them, you just talk normal.”

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3 Responses to Elizabeth Warren Freak Out, 1: So-called “Ideologue”

  1. noompa says:

    Reminds me of the old joke about economists: “Assume a can opener…”

  2. One of the fundamental characteristics that sets America apart from all other countries is our ability to think for ourselves, employ reasoning, and consistently derive and employ ingenious, innovative solutions to difficult problems. This characteristic begins to develop in early childhood, when our children are taught to reason through problems, rather than memorize rote lessons, and continues (hopefully) through higher education.

    The ability to cite relevant facts about a particular topic (economic theory, for example) is nice, but does not demonstrate understanding. It’s only the critical thinkers who can take yesterday’s theories and move them forward for the general good of our society. … and the positive progress of the society as a whole is the prime goal of, and justification for higher education in this country.

    The goal is NOT to create a class of ‘know it all’, self-satisfied individuals who feel entitled to set themselves apart from the general society, and game our political system/economy to their personal advantage – those who are more inclined to manipulate the numbers to achieve a goal because they’re incapable of generating organic, grass-roots progress via understanding – despite all the facts they can spout at will. Those characters are the cheaters, the transcript padders, the Cliff-Noters, the short-cutters. In our zeal to demonstrate our American ‘exceptionalism’ by hiring people who ‘look good on paper’, unfortunately we’ve let that category of character into our leadership positions.

    In doing so, we have debased our egalitarian, democratic, AMERICAN values to permit the creation of a ‘ruling class’ in our society that’s completely disconnected from the reality experienced by 98% of the country – in a complete, and not so surprising, reversal of our Founding Principles. Why are we so eager to run backward toward the feudalism that our Fathers rejected so completely? … or did we just spend so much time manipulating our transcripts that we never actually learned the meaning of the lessons we were being taught all along?

    As Americans, our primary global value is in our ability to lead the world forward – not just regurgitate ancient, memorized, ideas. Since The Pangloss League (Summers, Geithner, Greenspan, Rubin, et. al.) took control of our decisionmaking capabilities, the country has suffered greatly. The evidence of this is manifest, but has not been experienced directly by our Panglossian leaders – so they remain in their sheltered bubble, insisting that ‘all’s well in the best of all possible worlds’, namely the world they live in. Unfortunately, this is not the world most American’s live in.

    Just how Ms. Warren was able to break-out of our sheltered academic bubble, and join the real world is unknown, and would make a great book. Suffice it to say that she has. … and we need to support those courageous Candides out there of her ilk if we wish to retain America’s privileged position as a global leader. The tales are manifest of ‘empires’ that have fallen into the Panglossian trap – and subsequently failed. Rome and the British Empire to name two of the many.

    When the workings of our government begin to resemble an episode of ‘Yes, Minister’, we should recognize that we’re on the precipice of failure.

    To avoid this trap, we need to ensure that we encourage and develop our unique core competencies as a society. Those differentiating factors that justify the American exceptionalism that we have taken for granted for so long that it’s fading.

    Elizabeth ‘Candide’ Warren is a living, breathing example of this exceptionalism. Accordingly, it’s no surprise that she sends The Pangloss League into apoplectic fits, but after all, it’s all for the best in the best of all possible worlds, right?

  3. prt says:

    Agreed mostly, but I think you’re being a little unfair to the followers of neoclassical econ. If someone has a theory that contradicts what econ would probably tell us, they should be able to explain why. If a company has a money saving contract clause and operates in a competitive market, isn’t it common sense and not just neoclassical math that tells us this is likely to lead to lower prices? There may of course be reasons why not but I think the person making the argument should explain why that is the case.

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