INTERVIEW WITH ARNOLD C. HARBERGER
By Catherine Mansell-Carstens*
Catherine Mansell-Carstens holds a BA and MA in economics from the University of Chicago. For many years a professor of economics at the Instituto Tecnológico Autónomo de México, she is the author of Las finanzas internacionales en México and Las finanzas populares en México. Since 1995 she has been an independent consultant. [Note: Mainly what I've really been up to is writing books and this blog as C.M. Mayo.]
One of the world’s authorities on public finance, project evaluation, international economics, and economic development, Arnold C. Harberger is the Gustavus F. and Ann M. Swift Distinguished Service Professor Emeritus of Economics at University of Chicago and currently serves on the faculty of the UCLA Department of Economics. He has also consulted for corporations, international organizations, and governments as varied as Bolivia, Chile, China, Indian, and Mexico. Among the many now classic works he has published are: “On the Use of Distributional Weights in Social Cost-Benefit Analysis” Journal of Political Economy, 86, no. 2 (April 1978); “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay” Journal of Economic Literature, 9, no. 3 (September 1971); “The Measurement of Waste (in Principles of Efficiency) American Economic Review, 54, no. 3 (May 1964); and “Using the Resources at Hand More Effectively” American Economic Review 49, no. 2, (May 1959).
On February 14 and 15, 2003, UCLA’s Department of Economics held a special conference, “Fifty Years of Teaching Economics: A Celebration of Arnold Harberger.” It was a celebration indeed, but not for a career entirely past: Professor Harberger — fondly known as “Alito” to his Latin American students— is still going strong.
This interview was originally intended to form part of a collection focusing on the education and role of the economist. Alas, the project was not realized, and this fascinating interview, in which Harberger touches on the “Chicago School”; the role of the economist as diagnostician, as policy practitioner, and forecaster; Harberger’s own education; and his views on the controversial Chilean crisis, has never before been published.
Saturday afternoon, February 19th, 1994 by the swimming pool at the Hotel de los Tesoros, Alamos, Sonora, after speaking at the "Alamos Alliance" conference that morning.
Catherine Mansell-Carstens: I was going over the speech you gave at the American Economic Association last January, "The Search for Relevance," where you talked about what is it that economists as "policy practitioners" do. Applied welfare economics, projections, diagnostics...
Arnold Harberger: I think that the big problem in the world is diagnosing. That's what we economists know least about, and it's an area where humility more than anything else is called for. It seems to me that we have too many people in the profession who give patent medicine-style solutions. They are very quick to diagnose and then the remedies they have... a few bottles are always just exactly right in their own minds. These people don't really advance the cause of anything very much. And when I see them getting into positions of power and responsibility I shudder. And most of the time it turns out to be correct that I did shudder.
CM: A lot of people who are not familiar, intimately, with the University of Chicago often think of us that way.
AH: Oh, I agree that many people think that way, but on the whole they are wrong. I think there are three main points that define the “Chicago School.” The first is the idea that you cannot approach a super complex reality without a structure with which to think about it. The difference between good theory and bad theory is that with the good theory you can really do things that are helpful, while with bad theory it's like burning witches. It doesn't get at the heart of a problem. You're not really capturing, you're not correctly synthesizing a complex reality.
The second point that defines Chicago people is a great respect for empirical evidence. They prefer theories that are simple and robust— theories that can be juxtaposed to the evidence, and they learn from the interplay between the evidence and the theory.
The third point is a deep and fundamental respect for the workings of markets. Chicago people are not like the Hayekians, for whom market solutions are always best, always beneficent. In contrast, I like to say that markets are tough and cruel, like the winds and the tides. He who tries to fight them has himself one hell of a battle. Our big challenge is to understand market forces, so that we can take advantage of them, rather than find ourselves standing in front of the tidal wave when it appears.
I think, too, that diagnosing is something that many Chicago economists do better than people of any other stripe. There are other good diagnosticians who didn't come from Chicago, but who has produced a greater mass of diagnosticians than Chicago?
I would give a lot of credit to the Ag Workshop [the workshop in Agricultural Economics] at Chicago. T.W. Schultz was a profound diagnostician for his entire career. From the very beginning, he emphasized that we shouldn’t try to preserve the family farm at whatever cost. Schultz saw that it was inevitable that economic development would take people off the farm and he felt that policy should try to help and lubricate this process, so as to make that transition less painful and more positive.
In Spain in the sixties the government actually paid whole families to move to Barcelona from backward areas like Extremadura. They paid their rent for about three or four or five months; they gave them subsistence payments; they helped them find a job. By doing this they speeded up a process which the economy was naturally calling for. They were alleviating poverty in Extremadura, and at the same time they were satisfying a need for increased labor in the Barcelona area. This is the kind of thing that if you are alert you will see. Observation plus a correct understanding of the problem will help you to find a sensible solution. Observational diagnostics is one of the big pillars of good policy economics.
CM: Another thing economists do is projections. There's this sort of shamanistic aspect to making projections, and yet it seems not to be a very big part of what many economists actually do.
AH: Very good discipline. Tremendous discipline to work at that.
CM: To do projections.
AH: Yes! Because, you know, if you take them seriously, you look back to see how well you have done and you ask where you made mistakes. You look at what people are actually doing, you get a sense of what an economy is. The basic theorems of economics are purely qualitative and not terribly relevant. You know, demand increases, price goes up, supply increases, price goes down. That kind of thing. To make projections, you need to assess the orders of magnitude of different forces. How important is NAFTA vis-a-vis all the other swirling events that are happening? I say it's going to be a huge event, it is a huge event right now in terms of capital flows. But it's a tiny event in movement of people from Mexico to the United States. Now, I'm sticking my neck out there. At least I think I'm sticking my neck out. I'm not waffling around. No, I really will turn out to be wrong if the flow of people to the United States is cut to a third, just in the natural course of events involved in NAFTA. I say it just can't be. But the way a lot of people talk, they act as if it's the most natural thing.
So projections involve a sense of proportion which has to do with parameters in a way, but you don't have a complete model. One thinks in terms of reduced forms. This disturbance applied to this system will produce things of roughly this shape and magnitude. And that's where the art of the economist lies. Some of this simply uses common sense, some of it comes from a lot of observational experience, some of it comes from practice. I'm sure there's ability involved. Some people are better filters, and just like the economy is it's own computer, so is the human brain. And some people's brains work right for certain kinds of things and not for others.
Getting a quantitative sense of how an economy is going to react to something has all of these elements in it. But it's certainly something that we ought to pay more attention to in the way we train people. I think it's a shame that the art of making projections is so in the background. Part of the reason, of course, is that not many of us had it in our training.