What’s wrong with economics
What’s wrong with economics —1 (Science)
Natural scientists search for patterns and correlations in the data that they compile from systematic experimentation and observation of events. Having measured the data and identified these relationships, they can then make predictions that help human beings understand and control the world they live in. An understanding of mechanics, for example, enables us to build engines, ships, aircraft, bridges and skyscrapers.
Economists seek to do something analogous; to identify and measure economic data (such as wage rates, prices, unemployment rates, investment levels, trade volumes, housing starts, growth figures and much else), and look for correlations in the data that might identify causal relationships between them and so inform economic policy.
But there are important differences between the natural scientist’s task and that of the economist. The observed data that natural scientists use in their computations is observable, objective, and universal. The data can be detected, are matters of fact rather than personal opinion or judgement and apply in all relevant circumstances. But the economic data that the economist needs are often hard to observe and measure, subjective in nature, and greatly dependent on context. And the data may be incomplete, limited, fleeting, dispersed, uncertain and even contradictory.
The economist’s problem is not one of data computation but of data collection. Economics concerns the choices that people make in accessing and using scarce resources such as materials, effort, time, money, and capital. But different people make different choices, depending on their personal, subjective values, which are shaped by their personality, upbringing, culture, aspirations and much else. Their values and the influences upon them cannot be measured; the relevant information is inaccessible, inside the minds of the individuals concerned.
And tomorrow, that information will be different, because different individuals, in different circumstances and with different values, personalities and priorities will be making different choices about how they work, spend, save and invest and every other choice that the economist hopes to examine.
What’s wrong with economics — 2 (Aggregates)
Mathematics can help economists describe the patterns they see in economic statistics such as total investment, consumption, growth, inflation, and unemployment. They formulate equations to show the correlations between these total (or ‘aggregate’) measures.
But while such equations can reveal the general patterns in economic life, we can never put precise numbers on the parameters in those equations. So we can never know or predict precisely how these measures will behave in future.
Economic aggregates are not real things that affect and influence each other. They are statistical measures, like totals of averages, of real things. It is those real things that affect each other. No buyer or seller decides to buy or sell because of the ‘price level’. They buy or sell according to their opinion on individual prices. We can put a number on the volume of purchases versus the number of sales, for example, but it is the individual purchases and sales that have an effect on things, not our statistics.
Nor are the things that the aggregates summarise homogeneous. We may talk of ‘total capital expenditure’, say, but what is important is how and on what the expenditure is made. The economic effect depends on what capital goods that are assembled, and how well they work productively together to produce things that consumers want (rather than what private investors think they want or investing governments think they should have).
And all the millions of economic actors whose activities the aggregates summarise are different, and they change their minds for many reasons that we can never know. So any parameters that economists put into their equations today may not hold tomorrow.
The relativities between the real things that are summarised by the statistics change as well. We can measure the price of a basket of traded goods and come up with a price index, a measure of the ‘price level’. But economic outcomes will be different depending on which prices within that total are rising and which are falling; and will depend also on how people react to those rises and falls. So the statistic merely conceals what is of real interest.
Therefore, while might regard their aggregates as objective signals that inform public policy, the results of that are uncertain because we can never know precisely what individual decisions and actions lie behind those statistics. Indeed, public policy made on the basis of these aggregates may itself cause individuals to make different decisions, including decisions that undermine the policy. Economists may argue that stability requires taxes to be increased, but that may simply induce the most productive and mobile individuals to leave the country or move their production elsewhere.
Of course, economists want their discipline and their prescriptions to be scientific. But if, in trying to be so, they focus only on the things they can measure — economic aggregates — they will miss everything that is truly important.
What’s wrong with economics — 3 (Prediction)
We can’t predict football matches, so why think we can predict the economy? The outcome of a match depends on so many factors: the teams’ structure and support, the players’ motivation, skill health, energy, confidence, ability to spot opportunities, and luck in taking them — and more. Yet a football match has only 22 players. A national economy embraces millions of actors, the world economy billions; and their actions are far less constrained than the players on a football field. We cannot possibly know everything that shapes their actions and interactions.
Economics textbooks suggest that entrepreneurs pitch their price according to the demand curve. But an entrepreneur introducing a new product cannot predict the shape of that curve. It is more of a demand fog. For guidance, they may look at how previous produces have sold, but customers may react quite differently to theirs. Customers may prefer known brands or existing technologies, the product marketing may be badly targeted, influencers may sink the product with poor reviews, and much else can go wrong. Why should economists — or economic planners — fare any better?
Another problem for prediction is that the choices people make are contextual. Which of us has not gone into a shop for one thing, and come out with something completely different. We do not know with certainty even how we ourselves will react when presented with particular economic choices between products, quality, and prices. Or again, each year there is a sellout, must-have Christmas toy; though it sells out precisely because its suppliers cannot predict the demand. And yet it is such unpredictable choices that determine the outcomes that economists aspire to predict.
Accidents happen. Fires, floods, pandemics, wars and mass migrations scupper all our certainties about our economic future, as did, more happily, the discovery of wireless and penicillin. On the day before the death of Diana, the former Princess of Wales, who could have forecast the enormity of the demand for floral bouquets that was about to happen?
Technological change is unpredictable too. Futurologists in the 1950s thought that by now we would all be commuting in flying cars, but none predicted the internet on which you are reading this. Meanwhile, manufacturers of slide rules, steam engines and typewriters, publishers of dictionaries, atlases and encyclopaedias, crossing-sweepers and owners of livery stables have all experienced the fact. But changing technologies have significant impact on employment patterns and other measures that economists hope to forecast.
Government policy can also change unexpectedly, ad can have unexpected results. Few people would have predicted the Brexit referendum, or how little changed after it; and few predicted Donald Trump’s election and the large changes in events that it brought. And when economists recommend policies to governments, these can go awry too. Their recommended tax increases may cause entrepreneurs to work less, sell up or move themselves and their businesses abroad. Their recommended increases in public spending may crowd out private investment and replace it with less responsive public projects. Their attempts to stimulate the economy through easier credit and monetary expansion may produce only inflation and malinvestment that cannot be sustained.
Prediction is not easy. In terms of everything that really matters, it might even be impossible. Economists, and those they advise, should understand that.
What’s wrong with economics — 4 (Big choices)
Economists believe that, with proper scientific understanding and analysis, they can make policy recommendations to governments that will improve the stability, efficiency, and operation of economic life. But in believing that, they have already made a crucial assumption: that big solutions work better than lots of small solutions; that decisions made centrally can be more rational, and can produce better results, than those made at the local or individual level.
In fact, local decisions can be very rational and local decision-making can be far more efficient than central decision-making. In a ‘polycentric’ economic decision process, information about market conditions is collected, processed, and acted upon locally. Dispersed and granular information can go into the analytical mix; it does not have to be compiled into statistics that average out all the important detail, which must then be somehow transmitted up to a centre to be crunched, and and pronounced upon by distant officials who neither understand the particulars nor necessarily feel great interest in producing a swift reaction to them.
The problem is not one of simply having enough computing power. The larger the information sample, the less definition it has; and that is particularly true when the relevant information comprises things that cannot be summarised in statistics. Local shopkeepers, for example, may know from long experience all their customers’ likes, aversions, and foibles, and how best to deal with each. How could they possibly transmit that information from inside their minds onto the spreadsheet of a central planner?
And even then, the further that any information has to travel from its origin, the longer it takes to be acted upon; and often, by the time it is acted upon, it is already out of date. A throng of people leaving a large party, for example, is a ready target for local taxi drivers; would a central authority even know the party was happening, never mind be able to judge how many taxis would be required? And by the time it had summoned the required fleet, the throng would already be long dispersed.
Most things in life do not work. For every species that has survived, a thousand that did not; and for every successful business, a thousand bankruptcies. Such odds are manageable when decisions are made locally, by those concerned. The failure of one small business that made the wrong choices is sad, but of small consequence. The failure of a national policy determination (e.g. on wages, prices or interest rates) can become a national disaster.
A further problem is that the economy is not an organisation with a single objective. It is merely an arrangement of different individuals with multiple, different, often competing and incompatible objectives. Each of those individuals has to forge compromises with the others whose aims are different. With millions of individuals interacting like this, not even the cleverest economist could know each one’s aims and how, in all future circumstances, they will reach compromise with all the others. And anyway, there is no possibility of scientific analysis of, and prescription for, the common good, when human beings disagree about what that good is.
What’s wrong with economics — 5 (Policy)
The illusion that one can be scientific about complex phenomena (such as the workings of economic life) that depend on facts, values and information that we could never ascertain, is a dangerous one. It leads to the elevation of people as ‘experts’ whose prescriptions are unquestioned. It leads to claims that, lacking the detailed information, are necessarily broad and easily sensationalised, creating pressure on politicians to do the wrong thing.
In the decades that followed Keynes’s macroeconomic analysis, for example, economists thought that they had truly understood the aggregates such as employment, output, and inflation, and could prescribe policies to control them. And politicians accepted that economics was now a genuine science that could maintain the health of the economy as surely as medical science could preserve the health of us all. But the economists’ prescriptions soon showed their side-effects. Expansionary policies boosted aggregate employment, but larger and larger doses of inflation were required to sustain it. The Phillips Curve (still taught as established wisdom in the fashionable French business schools), either exploded or went vertical.
Centralised production and investment was supposed to be more rational, but such policies ignored the impossibility of the planners having the necessary information and the less than benevolent motives of the policymakers who would make the decisions about how much money should be directed where and to whom. Focusing only on what they could measure objectively, economists overlooked the depressive effects of bureaucratic control, of monopoly provision, and on the sheer size of government industries on incentives, morale and motivation. And the. Policymakers they advised overlooked the wider consequences of supposedly scientific policies: for example, how tariffs meant to support domestic industries led to retaliation and the prolongation of inefficient businesses that could never match international competition.
Economists might insist that cost-benefit analysis is essential for any rational policy, but how can they measure costs? How can they measure the distress of those whose homes are demolished for a new road and the pleasure given to those who can now drive a little faster? Likewise, they might call for more competition in certain industries, but who can known what an effective amount of competition is? This is something that has to be discovered by those in the industry: it is much more in some than in others.
The challenge for economic planners is exactly that of the market: to discover where price will equal marginal cost. The market does that by poly-centric analysis and action, using local knowledge and understanding. The planners fail because they assume facts that are not known and can never be known. People have divergent values: some are buying the same things that others choose to sell. And people make different decisions about the future — something we cannot know, and have to make a judgement on before you can decide what to do. Any economist, or politician, who claims that such judgements can be made scientifically is in fact simply exposing us all to their personal opinion