from Peter Radford
That’s the subtitle of Robert Skidelsky’s little book “What’s Wrong With Economics”?. A primer for the perplexed. With the U.S. election past us, I decided to start reading some of the books that had accumulated in my “to read” pile. Skidelsky being one of my favorite authors I started with his. The problem is that perplexity is insufficient to describe my usual emotion or state of mind whenever I engage with economics. So, here I am, a mere fifty or so pages in, and already I am experiencing that same exhaustion I have felt these past few decades any time I wander into the morass that passes for economics. Time and again I do this to myself. It seems such an important topic. It seems so relevant and useful to understand. It seems so necessary for anyone who wants to think about the policy or policies we need to further the lot of our fellow citizens. But. Then economics slaps you on the side of the head.
Just what purpose does all this nonsense have?
It employs lots of economists. So that’s useful. It is the intellectual equivalent of digging holes and then filling them in. No long term use comes from the endeavor, but paychecks are cut and unemployment is lower.
I know. I know. I am being a tad critical.
Which is why it’s useful to read someone like Skidelsky.
He is clearly exasperated too. He feels what I feel: that there’s a whole lot of gibberish masquerading as pseudo-science. And yet, below all that mathematical disguise are a few useful nuggets, that might, in the right hands, contribute to our collective aim. The problem is that sifting those few nuggets from the vast pile of chaff is no mean task. It is a task that leaves many of us mightily perplexed.
Just how did this discipline get to be so warped and littered with irrelevancy?
I cannot answer that. I am too jaded by the nonsense and the overly inflated sense of self importance that the discipline is weighed down with. It just isn’t worth the time. Is economics simply a whole basket of mathematical techniques? In which case it is a branch of mathematics and ought to conform itself appropriately. Is it a coherent body of thought distinct from the other social sciences? In which case it ought to pay attention to its boundaries and conform them to the thought in its related disciplines. Is it simply ideology? In which case it ought to come clean and subject itself to the disciplines of political theory. I could go on. So could you. Your list is probably better than mine. I think one reason the the flummery that passes for economics survives is precisely because no one quite knows what it’s all for. The answer seems to slide about before us. Economists have a bevy of answers, each contingent upon the circumstance of the question.
Ultimately economics is, of course, what economists do. Whether it’s useful is not for them to say. We consumers of the product, to use a clever intellectual device used by economists themselves, are the ones who decide. What’s the saying? “The consumer is king [or queen depending on your point of view]”. If so, economics lacks — how should I say this? — credibility.
Nonetheless Skidelsky gives it his best shot. The problem with demystifying economics, so as to clear the fog of perplexity, is that it runs the risk of exposing what remains as something open to ridicule.
Take equilibrium as an example.
Never has a concept been more debased than that of equilibrium. Skidelsky devotes a short chapter to trying to explain what it means to economists and how odd it is that they still cling, despite all the evidence, to it. Skidelsky tells us that Schumpeter saw equilibrium as the “magna charta ” of exact economics. There is nothing exact about equilibrium in the real world economy, but in the confines of the straight jacket imposed on the test economies that economists study, it is of critical importance. It is a way of imposing order where there is none. Apparently Samuelson said that: “There may have been an initial period of trial and error, of oscillation around the right level, before price finally settles down in balance”. Notice his hesitation, there may have been. You can sense the economist in him screaming in horror that there may have been a disturbance in the price system. Surely this is an error. Prices are just wonderful. Whatever they are. Wasn’t a Nobel prize awarded to someone for arguing that prices always reveal the truth? No matter what they are. A Nobel prize, dammit, that’s proof right there that economists are right. Markets are “efficient”, remember ?
Snark aside, the desperate clinging on to equilibrium despite the apparent constant disequilibrium around us can be quite baffling. It’s a sifters economics defies any conclusion that might move it beyond that desperation. For instance, I still regard the so-called socialist calculation debate of the 1930s as one of economics’ low points. Not because of the debate itself, but because of what was learned: nothing. The discipline has done this a few times: whenever its preferred theory, concept, or idea takes a beating, it moves on and ignore the argument. As if nothing happened. In this case the argument was about a logical extension of the Walrasian vision of general equilibrium. The entire concept of GE obviates the need for markets. As was pointed out in the controversy, a central planner could, with the necessary information, execute an equilibrium solution. So what’s all this hoo-ha about markets? It was Hayek who tried to resolve this inconvenience by arguing that the information is so diffuse throughout the economy that it is impossible, in practical terms, for such a central planner to gather and process the data. Only the markets can undertake such a task. Phew! Market ideology can rumble on. Except: notice that caveat is not based on any logic, it might be theoretically possible for a central planner to do the job. It’s just that it isn’t practical. Hmm. What about “big data”? What about our current computing power? Is it getting closer to practical possibility nowadays?
No. It isn’t. I would agree with Hayek on this.
But there is another problem that follows from the Hayekian position: how would we ever know if the current situation represents an equilibrium of the sort economics postulates? Surely we can never “know”. The information, as Hayek argues, is simply too diffuse. We have no idea of whether there is an equilibrium. It’s impossible to tell. That’s the essence of Hayek’s position. Not one, not even the cleverest economist, can gather enough information to know whether there is an equilibrium.
This was, as I have argued many times, decisively proved by Arrow and Debreu. Their triumphant work on GE concluded that the entire concept is a fantasy and only exists under such ridiculous restrictions, that it is patently absurd to consider it a useful concept. Or, at least, that would have been the conclusion had the entire effort not been wrapped in such glittery mathematics that the process swamped the conclusion. Indeed, this is an iconic display of what perplexes us all about economics: here is a magnificent disproof of GE for all to see. The concept is throroughly debunked and ought to be discarded as an irrelevancy, or as an example of a bad turn in the history of the discipline. Instead, economists become bewitched by the virtuoso mathematics and logical chicanery and prefer to continue as before, only now secure that GE can exist, even if only in their dreams.
There is, as Skidelsky tells us, a slight variation on this story, one that is a better explanation of the continued existence of GE in the vocabulary of economics: it was ideological necessary to move on, even with the absurdity of the Arrow-Debreu assumptions. After all, if there is no “proof” that markets are naturally “self-balancing”, and if governments are not simply an example of a friction in the magnificent market machinery, chinks in the market edifice open up. And economics wanted to avoid accepting that as fact.
Don’t forget the moment and the historical context in which both the socialist calculating debates and the Arrow-Debreu tour-de-force were taking place. It was necessary, in the minds of the leaders of the discipline, to construct a market based, anti-statist, theory. They were willing to shed their pretense to science in order to create a more ideologically tenable home base. Which is where, by and large, economics remains. Is it inevitable that economics is ideological? Is it because of this inevitability that it has wrapped itself in excessive mathematical adornment in order to disguise itself as a pseudo-science? What nuggets its masters have turned up during its history can we trust?