Social Economics

from Peter Radford

That got your attention.

One of the great things about moving house is that you are forced to confront the pile of accumulated stuff on your desk: it has to go one way or another. At least that’s my challenge. Wading through notes, papers, reminders, and scribbles that now mean nothing can be tedious, but the alternative of ditching the lot and starting over isn’t an option. In my case there’s years of clutter to be dealt with which is a refreshing opportunity to start anew.

It also allows me to rediscover one or two threads that contributed to my current thinking. That pile of stuff may look like rubbish to others, but to me it is a memory. Or a jolt to remind me of distant thoughts.

One such is my early attraction to economic sociology.

As I re-started thinking about the economy years ago I read avidly. The economics books I picked up didn’t say much of interest. So I roamed around looking for people who had a point of view that resonated with my experience. Don’t forget I come at this from within business and my primary interest has been the theory of the firm, which gives me an institutional bias from the get go.

The group with the most interesting things to say, at least for me back then, were people like Granovetter, Dobbin, Bourdieu, and Fligstein. So I was happy to re-read some of my early notes on Fligstein’s “Architecture of Markets”, a book that has a great deal of useful stuff to say about actual, as opposed to hypothetical, markets, when I discovered them as I rummaged through that pile of papers.

I mention all this because, at precisely the same time, I came across an interview with Fligstein in Salon where he talks briefly about economic sociology and takes a couple of well deserved swipes at the sterility of mainstream economics.

What the sociologists get right, and what mainstream economists get horribly wrong, is that an economy is woven into a social fabric. Much as it appears attractive trying to extract the economy for study in isolation robs it of its very reason for being. So the results of such study are devoid of meaning when they are applied to an actual economy. The separation of economic things from the rest of life is something we all do periodically as we think about work, money and other practical things, but none of us then pretends that we can linger perpetually in a pure economic world. Reality is far more complex than that.

The problem – one of them – with economics is that it avoids reconnection with reality as if it has something useful to say based upon its abstraction. It doesn’t. Or, at least, it has far less to say than it thinks it does.

When I try to describe this problem to outsiders I use physics as an example. It is as if physicists tried to explain the world solely relying on gravity. Other forces like nuclear reactions and electromagnetism would be excluded as irrelevant. So while the gravity only models would work beautifully and be full of wondrous math they would fail utterly to explain what goes on around us. Gravity is just one part of the whole, it explains a lot, but at times it fades into the background.

Economists fall into this trap. By looking at everything through a lens of supply and demand, scarcity, competition, and incentives, they ignore other forces that deeply affect economic outcomes. They explain only part of the whole. They miss, with regularity, essential elements of reality that overwhelm and render irrelevant the nice neat analysis they perform with their limited vision and even more limited bag of tricks.

By trying to be scientific, in a narrow rather than broader sense, mainstream economists have descended into a hole of their own making and made themselves ever less useful. By denying the embedded nature of an economy they have built an extraordinarily naive edifice of great beauty but of little practical application. It is naive because of its simplistic assumptions about human behavior. It’s beauty is its intrinsic self serving logic. It looks great until you blow gently on it, whereupon it scatters like dust and has no material substance at all. It keeps economists busy. That’s the best we can say.

As a body of knowledge, hard won from two or three hundred years of trying, it’s not very good at all. In fact most of it is worthless to anyone working, living, and operating within an actual economy and looking for some theoretical guidance about how to proceed.

That was my problem when I was working in banking twenty years ago and the recent internet spat between Krugman and Keen suggests to me that economists as a whole still don’t understand banking that well at all.

So Fligstein’s scathing comments about economics – he neatly avoids falling into the trap of subdividing economics the way that economists do and just tars the entire discipline with the same brush – strike me as highly appropriate. When he ends his comments with this: “And as for the dismal science of economics, I think reality undermines it every day without the assistance of sociologists” I get what he means.

Reality does undermine economics. Actual economies don’t look like, behave like, grow or shrink like, or resemble much at all, the rarefied models economists study so carefully.

Which gets me to another paper lost in my pile of stuff.

I re-read a paper by Geoff Schneider given at last year’s ICAPE conference. In it he talks about the parlous state of the teaching of economics. What caught my eye most is the conversation about teaching students how to think like an economist. By now you can imagine that I don’t think that’s a very good idea. If by economist you mean mainstream economist. There was a time when economics had an allure as being a worthwhile discipline to study. Supposedly it taught you some handy ways of analyzing problems and looking at the world. Students studied it to get a leg up in and prepare for careers in business.

Except that economics has nothing to say about business. And it’s view of an economy is desiccated, ideologically driven, and riven through with outmoded techniques. As Schneider points out most students don’t even learn modern economics because the textbooks lag so far behind the cutting edge.

And, let me tip my hat to economics, the cutting edge is now just beginning to incorporate a few – scant but a few – more real concepts.

It is because theoretical economics is so distant from actual problems and has failed so miserably of late that the teaching of it needs to be thoroughly rethought. There is a suggested core curriculum, or rather set of standards, for teaching the subject: the Council for Economic Education publishes a set of voluntary guidelines replete with what it calls standards. These are a set of core principals that undergird mainstream thinking but don’t reflect the wider perspective non-mainstream economists have. So the recommended core of teaching is the narrow and ideologically based libertarian viewpoint that Milton Friedman would have well recognized. It isn’t economics as a whole. And it isn’t particularly useful.

Back to Fligstein: he mentions another of my favorite books on the economy, Donald MacKenzie’s “An Engine, Not a Camera”. The book is about how mainstream economics, having failed to describe an actual economy, has tried to pervert reality and twist it to conform with theory. The title itself is a joust at Friedman’s ideological driving force. Friedman was famous for denying the need for reality in economic modeling. To him the purity of outcome was paramount. So much so that he argued that not amount of garbage input could alter the glory of the output. As long as the output was correct. And by correct Friedman clearly meant that it accorded with his libertarian worldview. More to the point, Friedman saw economics as helping to construct the world as it “should be” in order to attain the heights of efficiency achieved by the models of theoreticians such as himself. So economists can build engines for the economy to drive it ever higher. They do not, in Friedman’s view, merely record camera -like what the economy is.

From this twisted perspective flows naturally an entire web of construction and social engineering. Indeed most of modern finance, including those now notorious risk models that imploded so ingloriously, are based upon the Friedmanite view that economists, knowing so much as they do, can interfere and tinker in order to mold the economy to mimic their models. They have a license to meddle based upon their supreme knowledge.

Not so much. But tinker they do.

Sociologists call this tinkering being “performative”. It is the height of arrogance that economists presume they know enough that they can ignore reality, or rather, bend it to conform to their ideas. It is Platonic nonsense of the first order. It can only exist inside the hermetically sealed ignorance of a discipline devoid of ethical values.

It is the hubris of libertarians generally to presume that they have divined a great truth, when they have spotted a minor human trait. Friedman is the epitome of this horror.

Let me end, then, with Fligstein once more.

He takes a swipe at the core of libertarian economics. He, rightly, denies that economics has much to say about entrepreneurship. Which is odd given the near godlike status entrepreneurs occupy in libertarian economics. Once again these economists trip over their own coattails as they try to ascribe great values to a person, who, bereft of humanity as they must be in order to inhabit an economic model, nonetheless is a flesh and blood person without whom we would all still be living in the Dark Ages. No one exists, nor can they, who can rise to the challenge of exploiting opportunities in an economy where there are no opportunities by definition. For in a world of perfect information there is no opportunity. So there can be no entrepreneurs.

No wonder business schools have turned recently to sociology as a source of ideas to teach about business.

Business is out there in the real economy.

That means economists don’t have much to say about business. But sociologists like Fligstein and MacKenzie do.

Which is why I like social economics. At least it’s a start.

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