2 January 2018

The last thing we need is an economic reformation


It was a smidge over 500 years ago that Luther nailed his 95 theses to a church door, insisting that we should all change how we save our souls. That’s the rather flimsy rationale behind the publication of 33 Theses for an Economics Reformation, “a detailed critique of mainstream economics produced by students, economists, and academics convened by Rethinking Economics and the New Weather Institute”. Because there’s nothing like co-opting an anniversary, is there?

The problem with this new set of insistences is that the writers don’t really seem to understand their subject. For a start, they complain that “neoclassical” economics overwhelmingly dominates “teaching, research, advice to policy, and public debate”. But “neoclassical” economics isn’t really the subject of their ire. Their complaint is really aimed at people like me, economists who insist that markets are good things, bureaucracies less so, which isn’t an example of neoclassical anything. In fact, they’ve got their terms muddled up. They should be using “neoliberal” to describe their bogeyman.

Moving on, they insist that the purpose of the economy is for society to decide. Sure, which is why economists (neoclassical ones!) insist that economics is a positive, not a normative, science. It does not say “should” or “desirable”, it says “is”. Economics doesn’t tell us how we should be, nor what we should be doing. Rather, it shows us what to do – and what not to do – to achieve our desired goal. Thus does their opening complaint miss the very foundation of their subject.

Their second gets better. It states that the distribution of wealth and income should be central to economic theory. Their assertion that the idea is being ignored is an odd one: it turns up in the current GCSE syllabus, where it is covered in some depth.

The oddities keep coming, including some wibble about how nature is important and we really all must pay attention. “Economics,” they insist,”must recognise that the availability of non-renewable energy and resources is not infinite…..” Well, yes, I suppose so. One useful definition of economics is: the study of the allocation of scarce resources. Which does rather include the idea that resources are scarce. This lot would seem to be complaining that the study of scarce resource allocation doesn’t admit that resources are scarce.

This is not a great basis for a call to action.

The authors then point out that markets are shaped by laws and custom and we should think more about this. This is to miss the central point of the Ur-economics text, Wealth of Nations. Which is, largely, a discussion of the customs and laws which make up successful and not so successful economies.

They also remark that institutions are important, since they are the codifications of those customs and laws. Well, yes, that’s why development economics these days continually defaults down to the explanation of abject poverty being “bad institutions”.

Nor, they inform us, does today’s economics properly consider the idea that who gets what wages, profits and so on depends upon who has the power. Yet this is precisely what the neoclassical toolkit explores. It’s the law of supply and demand: incomes flow to the people who are in short supply and thus have the power. This is why we use the neoclassical toolkit, because examining the margin allows us to identify what changes in such distributions as plenty or dearth alters. Yet again, the authors have missed the point.

And then another stricture: economics must learn from psychology. Richard Thaler and Daniel Kahneman both gained their recent (Economics) Nobels for doing exactly this. That ship might have sailed.

Finally, when they get to what should be done about the teaching of economics, they insist it must not be value neutral. This means two things: that they’d like to have their own prejudices encoded into the subject. And that they’ve just contradicted their own first insistence, that the purpose of economics is for society to decide.

The problem is that once we’ve insisted that values must determine economics, then we’re in the realm of allowing economics to dictate what we should do, rather perform its present function – to present us with the palette of actions we need to achieve our goals.

The authors’ motivation is obvious, really. They simply disagree with other economists. Which is fine, perhaps as it should be. But it doesn’t mean that we should change the subject in order to agree with them.

Luther, with his Theses, was talking about something intensely personal, the inner life of the soul. Economics is about what interest rates should be, and taxes, and whether these will help us reach our goals and achieve our desires. Better that we leave that analysis of policies and possibilities to an impartial calculation than a series of embedded prejudices, no?

Tim Worstall is Senior Fellow at the Adam Smith Institute