Economics does it have any use?
October 25, 2012
As I bought the book What’s the Use of Economics? Teaching the Dismal Science after the Crisis. I sent the editor Diane Coyle a note to say it was now in my rucksack.
“I will be interested to know what you think” came the reply. Having now found my way through this book I understand why.
Edited by Diane Coyle, the book is written by an array of esteemed and respected economists. It makes the point in no uncertain terms that economics currently taught and practised is out of step and out of time with the world we live in today — a non-linear world. As David Colander wrote, To understand the economy, an economist must understand how complex nonlinear systems of heterogeneous agents operate so that he is not overly impressed by simple linear dynamic models.
The need for master economists: Keynes pointed out, A master economist must possess a rare combination of gifts. He must be mathematician, historian, statesman and philosopher. Reading this book it seems we have been in short supply of master economists for some time – or that they have been too widely dispersed like a diaspora flung across the world.
The need for context: Stephen King called for the teaching of a much broader historical narrative and context because Economic history can enlighten emphasizing the social and the political forces that lead to economic boom and bust, and I would completely agree, he goes on, There is no reason why, however, to limit economic understanding to what can be readily downloaded in a spreadsheet with n degrees of freedom. A more imaginative approach is required. Indeed we need to get beyond slicing and dicing statistics and that economists should not be slaves to economic data. The assumption that Financial systems are a black box that simply work is he points out a fatal assumption.
Theory vs. people: Andrew W. Lo makes the point, which causes me great anxiety that there is an overt emphasis on theoretical models and maths. This to me defies common sense simply because economics is ultimately about people, society, the messiness of our lives. We do not exist ‘in theory’ and in perfect equilibrium – my question is HOW could the teaching of economics arrive in such a place?
As Lo makes plain, This cyclical nature of the history of economic thought suggests that cultural, political and historical circumstances may play a more influential role in economics than in hard sciences, an inevitable consequence of the fact that human behaviour is at the centre of our discipline. How could it be any other way?
And to that end Lo makes the points that  Technique should be the servant, not the master of a greater purpose.  Economics may benefit from examples of anthropology, psychology, the cognitive sciences and medicine.
The modern economist, is the clinician with no patients: writes John Kay, who goes on to describe some of the worst type of economists that do great damage as a curious combination of ideology and mathematics the hallmark of what is often called ‘freshwater economics’–the name reflecting the proximity of Chicago, and other centres such as Minneapolis and Rochester, to the Great Lakes. Home to Milton Friedman and the Chicago School of economic ideological thought. To make the point he states that Modern economics at its worst is ideologically driven by people who pursue false premises to absurd conclusions, and like their religious and political predecessors come to believe that those who disagree are driven by ‘woeful ignorance or intentional disregard’.
Such a statement could be summed up in two words — worrying and frightening.
The spreadsheet rules, no longer: Much modern macroeconomics tortures data to demonstrate consistency.
Again one must ask näively why? And finally Kay makes the point The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation.
homo economicus does not exist: Alan Kirman makes the point that by creating economic theory and practice on the notion of equilibria, that man, nature, the world exists in this state — is essentially a false assumption. I feel a Bart Simpson DooH moment coming on – only because it must be obvious that this is true. As he points out, Deep introspection by economists and not willing to accommodate the nature of humanity and careful observation of individual behaviour. Results in restrictive assumptions of how a whole economy works.
Which planet?: As Bob Solow observed in 2007, Maybe there is in human nature a deep-seated perverse pleasure in adopting and defending a wholly counter-intuitive doctrine that leaves the uninitiated peasant wondering which planet he is on.
Consequently we must consider networks as an integral feature of the economy, viewed as a complex adaptive system. And to that end the world is messy, noisy, and economists need to understand contagion, panic, optimism and pessimism as key features and not annoying imperfections.
Scarce resources: Benjamin M. Friedman makes the point that the economics profession, especially including macroeconomists has been highly reluctant to abandon the rational expectations assumption. First, doing so would be deeply subversive of the all-important role of markets in allocating the economy’s scarce resources…
This is a critical point and one that increasingly will impact on our daily lives and how we operate our societies.
The power of dynamic networks social and otherwise: Andrew Haldane writes The social dynamics during the Arab Spring in many ways closely resembled financial system dynamics following the failure of Lehman Brothers in 2008: sharp discontinuities, driven by fear and uncertainty. This was no coincidence. Both are complex adaptive systems. When stressed these systems are know to behave in a non-linear, unpredictable fashion due to cascading actions and reactions among agents. These systems exhibit a robust-yet-fragile property: swan-like serenity one minute riot-like calamity the next.
He goes on, Conventional models, based on the representative agent and with expectations mimicking fundamentals, have no hope of capturing these system dynamics. They are fundamentally ill suited to capturing today’s networked world in which socially orientated networked communications media shape expectations, shape behaviour, shape outcomes. This is true irrespective of the socioeconomic system under study.
So we need investment in new models in which complexity and higher order agent interactions are taken seriously. But the construction and simulation of highly non-linear dynamics in systems of multiple equilibria represent unfamiliar territory for most in the economics profession.
Conclusion: this is an important book, low key in many ways, I wonder how the authors managed to contain their frustration about the teaching of a profession that is so out of step with the world we live in today. My wish would be to go to a school where all these economists would teach their new curriculum.
Their collective point is that we no longer live in a linear, simple world, we live in a highly complex networked world – and not that they say it explicitly, so I will — economics and economists play a hugely important role but we need them able to interpret and make sense of this world so we can all make wise decisions about the macro and the micro economic decisions that shape all our lives.
This is not a book about ideology other than it rejects the ‘freshwater’ kind that has done so much damage to us globally and collectively — it is instead a story about us as a humanity, and what can make this humanity thrive. Dismal it is not.