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Economic with the truth

Disparaging economics is not always justified

By John Kay   October 2000

one of the problems faced by economists is that everyone knows about economics. Most people are ready to accept that a physicist, or a lawyer, or a historian knows something they don’t. Economists encounter no similar deference. If you introduce yourself as an economist, you will probably be asked for a prediction about what is going to happen to interest rates, which the recipient will-rightly-not take very seriously.

Politicians regularly express views on economic matters. Not just on the objectives of economic policy, but on technical questions such as the relationship between the money supply and the level of output. When they express similar opinions about questions in hard sciences-as with Stalin’s adoption of Lysenkoism or Mbeke’s opinions on Aids-it is understood that they have overstepped the mark. Not so in economics.

Maybe economists do not deserve the professional respect accorded to physicists, lawyers or historians. Perhaps economics is tosh, like spiritualism or scientology; perhaps what students learn in-demanding and sought-after-undergraduate and postgraduate courses is mumbo-jumbo: perhaps the language of economics is useful only in talking to other economists. But if I were writing an article, or a book, refuting spiritualism, I would expect to begin by setting out the claims of spiritualists. I would allow practitioners themselves to define the leading proponents of spiritualism. I would then show that the claims made by these proponents contradicted other well-attested scientific propositions which suggest that communication with the dead is impossible. That is the scientific method applied to demolish non-science.

In this book, David Howell is severely critical of modern economics. He claims that “politics in the new millennium continues to revolve around economics” but that “economics continues to rely on time-expired theories about how individuals and economies behave and on ever more unreliable statistics.” Disparagement of economics and economists is pursued to almost obsessive lengths. There are five chapters devoted to the topic, with titles such as “The Discipline that Failed.”

Howell writes: “Mainstream economic theory, as set out in countless textbooks, stipulates that a perfectly knowledgeable man or woman will always make a rational and fully informed decision on what to buy and what to sell and at what price… this starting proposition is dotty.”

Indeed it is. This is why mainstream economic theory today does not stipulate anything of the sort. The economics of imperfect information has been an important research theme-perhaps the most important research theme-of mainstream economics in the last 30 years. Four years ago, James Mirrlees and William Vickrey were awarded the Nobel Prize for their contributions to this work-published in the 1960s and 1970s. It is a good bet that Joe Stiglitz will receive the prize in the next five years for his theory of markets with imperfect information. (Stiglitz has written an accessible introduction to his work, germane to Howell’s interests: Whither Socialism? (1994).)

The idea that the behaviour of participants in markets is influenced by what happens in markets is presented as a new insight which had been overlooked by economists until it was pointed out by George Soros. But there are-literally-thousands of books and articles written by economists on this topic. Game theory is all about this. So are descriptions of signalling, of commitment, the modern analysis of advertising and reputation, and most of modern financial theory.

And what of “ever more unreliable statistics”? Much of this comment seems to derive from a belief that both information itself and productivity improvements which result from information technology are left out of account in measuring economic statistics. But this is simply not true. What is true is that measurement of output growth and price changes encounters difficulties in taking proper account of new goods and quality improvements. This is not a new problem. It was as true in the past when electricity, or antibiotics, was introduced as it is now when information technology is changing our lives. Indeed, economic statistics are probably better at picking up the benefit of information technology than of many other technological advances. These benefits are largely translated into improvements in the performance of existing processes, unlike new consumer goods like automobiles or televisions.

Michael Boskin chaired a US government commission which exhaustively considered this issue in the context of inflation measurement. The commission concluded-not entirely persuasively-that the unrecorded effect of new goods was quite small. On the relationship between productivity gains and information technology, Robert Gordon is the leading figure among many. A fair assessment would recognise that there are problems, both conceptual and operational, in the collection of economic statistics, and that patient scholarship is in progress to try to sort them out.

Yet none of these studies-on asymmetric information, on information technology, on price and productivity measurement-is referred to in Howell’s book. In fact, the bibliography contains very few items by major economists at all. Of the half dozen or so listed who fall into this category, all but one is either retired or dead. That one is Paul Krugman, whose distinction as an economic theorist is not in question, but who is more widely known for his journalism. And it is to his journalism that Howell refers.

Economists have no monopoly on economic commentary or wisdom. If an author writes about economic events, I might, as a professional economist, hope or believe that what they write will benefit from the insights of professional economists. But I am still required to judge what they have to say by the quality of the argument rather than the extent of their references to the scholarly literature. But in the chapters I am discussing, Howell is not writing about economic events; he is writing about what he alleges to be modern economic theory. And to do that, you have to refer to modern economic theory as it is defined in the work of professional economists.

The reaction of most of my professional colleagues to a diatribe like this is that it is not worth discussing. They argue that ill-informed popular criticism simply shows the dangers of attempting simplification of economic ideas for politicians and business people. They will continue the dialogue they are inclined to prefer in any event-with each other. This has indeed been their response to other books in similar vein, several of which are commended by Howell. Those who believe, as I do, that the incestuous nature of scholarly debate is inadequate for the development of an applied subject such as economics, and that it is important for economists to involve themselves with institutions and policy, see the ground cut from under our feet.

What is more infuriating is that when Howell writes of things he knows about, he does so with great intelligence and practical wisdom. I suspect he may be right on some “big picture” issues-matters that are often obscure to people immersed in the technicalities of a subject. He is right to emphasise the importance of markets as processes over markets as devices for signalling and information management. I share his excitement at developments in evolutionary theory, and their broader application. I even think he may be right to endorse EO Wilson’s vision, in which psychology is firmly based on biological science and economics is an account of human behaviour derived from that new psychology.

But what is missing from this breathless book is a framework to unite its thinking. There are repeated assertions that rules have changed, new paradigms are required. But these observations lack coherence as analysis or prescription. It is possible, just possible, that the economics Howell disparages might provide some of the glue required to hold his thinking together.

“The Edge of Now” by David Howell (Macmillan, rrp ?18.99) can be bought for ?16.99+99p (p&p). Call 020 8324 5649

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