from Peter Radford
I shouldn’t. But I will
Well, well. Is there life in economics yet?
Not so fast.
My own journey into the swamp of economics began in the late 1980s when, out of the blue, my boss at the bank decided that because I had attended LSE I ought to be conversant with the subject. That I had studied history and politics seemed to carry no weight. So there I was a little later standing in front of large audiences trying to look and sound authoritative on a topic that I was simultaneously trying to catch up on in real time.
A few years later, and now known as the Chief Economist — something I never aspired to be — I turned my thoughts elsewhere.
Well sort of.
By then I had become intrigued by this new thing called the Internet. I was already tinkering with what was then called informations systems — how antique it all seems now. The question I kept returning to was simple: what was the likely impact on business of all this newly assembled and released flood of information? For some reason I could never let that question go. After all it was apparent to me the entire function of banking is to handle information and make decisions based upon it. I began to generalize that thought. If banks are information processors what about other businesses? What about the economy as a whole?
About this time I found myself with a lot of spare time. I had been fired! So I persisted.
And this is when I stepped further into the mire known as economics.
What more natural place to go look for answers about the construction of business, its relationship to the economy, and so on?
Wrong answer.
The haughty silence was deafening. What a trivial question! When someone as famous as Coase asked the question “Why do firms exist?”, the profession immediately rallied to protect the sanctity of “the market” in which is has invested most of its intellectual capital. So firms were reduced to some sort of kludge because, occasionally, there are costs associated with transactions and that muddies things somewhat. With that fixed, economists could go back to the safety markets without having to confront Coase’s question more definitively.
The answer is, of course, rather obvious. Markets are hopeless at coordination of actual production. They don’t design, innovate, construct, market, advertise, or perform any of the other tasks that need to happen in order for stuff to cohere into what we call products. Markets are only where stuff changes hands. All that other activity evaporates in economics. Because it takes place in firms. Coase was right to ask the question. The response was absurd.
This was how I learned just how far economics had removed itself from reality. Not only had it no answers, it had no questions. It no longer engaged with the day-to-day experience of the economy — whatever that is — and, instead had devolved into tinkering with idealized situations that appeared laughably trivial when I first encountered them. The best and brightest privileged their excellence at method over the dirty work of pulling apart or explaining actual economies. Nobel prizes were routinely dished out to people who, on the face of it, had simply formalized common knowledge and elevated it into some sort of discovery. They invariably gave these discoveries complicated sounding names. None really contributed much to improving our ability to manage economies. Endogenous growth theory? Enough said. Who knew that technology had something to do with growth? Or that firms innovate and invent new technologies to get leg up? Goodness! Whatever next?
Only in the context of a desert can the occasional oasis look like a jungle.
Worse: when economics made contact with reality it seemed to do damage. No! Even worse: it makes economics look farcical.
Surge pricing? Do economists not realize that things like lunch hours exist? Or that businesses know about lunch hours and plan for them? So why do they persist in saying that prices ought to”surge” when lunch hour comes around and more people are looking to by food than, say, midafternoon? The concept of surge pricing became justification for price gouging. Why? Because our “price theorists” said it was appropriate to raise prices when demand spikes. Like in lunch hours. Or rush hours. The theorists then smugly say that all they are trying to show is that we can “smooth” demand and make everything more “efficient” — whatever that is. I think they should have their lunch hour at three in the morning. Let them smooth themselves before they dump silly ideas on the rest of us.
And don’t get me started on tenure for economists. Interference in markets … discuss.
Which brings me, ever so slowly, to Ha-Joon Chang and this morning’s Financial Times.
In an Op-Ed he berates economics for being pretty much what I just said. Only he is more polite and much less snarky. As an academic he pulls his punches somewhat — the guild closes ranks easily and quickly against criticism. But he goes there when he says:
“The consequences of bad economics teaching not stop at the university gates. They spill out into the world. They shape our policies, our pay cheques and our climate.”
If economics blithely ignores its impact on the world outside itself, and, instead, revels in its abstraction, what is the point of it?
Chang then goes on to talk about an initiative called “Rethinking Economics” which is an attempt to break the stranglehold of orthodoxy on the subject as it is taught.
Good luck. No. Really: good luck!
In my experience there have been many such efforts each with — so far — limited effect. Orthodoxy still rules in all its ugly irrelevance. This is, perhaps, because all the so-called “best” schools remain firmly in the grip of the high priests of the old ideas, and they are rather proud of their lineages: who mentored whom matters to them more than what they know. It is also, perhaps again, because the entire edifice needs reconstruction rather than modification. Then there is, of course, the rather practical problem that economics is a profession, and like all professions, advancement within it relies on reputation as well as contribution. Being a squeaky wheel is, therefore, not a good career option, and so-called “peer review” becomes a weeding out process designed to protect the guild rather than to invite or encourage novelty.
Speaking of which: isn’t “peer review” something of a restraint on trade? Put it in the same bucket as tenure?
“Do as I say, not as I do”?
Enough. You’ve all heard this before. You have grown tired of it. Some of you have become more defensive of the guild. Others are, perhaps, less certain of your knowledge. Still others have become somewhat cynical.
Economics needs a re-branding to free it to start over. You can do that. You really can.
There is urgency to the re-boot because the economy is so central to our collective wellbeing. And economics ought to be so so useful to society and not a plaything for an over protective guild. It ought to be offering up solutions and insight into the pressing matters that we face instead of being a caricature of itself.
Markets and transactions within them are but small parts of economies, so markets are not the be-all and end-all of economics.
And there are these collectives called firms doing all sorts of planning and coordination.
Tell me again: why do they exist?
And what on earth do they do?
And just how will the flood of information alter them?
Oh, and is the economy just a giant information processor?
I once called it a “system of thought”. But that got me nowhere.
One more question. The really big one: growth. Why? How? Where? When? Will it last? Can it last? What happens when it stops? Does no more growth imply too few degrees of freedom for the wealthy to tolerate democracy any longer? Are we simply avoiding the question because the answer gets messy? How, then does economics sit with politics? As an adjunct? An equal? Or is it the same thing expressed in a different language?
Do I really need to end with my favorite Coase quote? Yes. Here goes:
“Economists have no subject matter. What has been developed is an approach divorced (or which can be divorced) from subject matter.”
Economics is a subject without subject matter?” That should make it easy to start over! Find something real to talk about.
