Home > The Economics Profession, Uncategorized > What’s the use of economics?

What’s the use of economics?

from Lars Syll

The simple question that was raised during a recent conference … was to what extent has – or should – the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries? For macroeconomists in particular, the reaction has been to suggest that modifications of existing models to take account of ‘frictions’ or ‘imperfections’ will be enough to account for the current evolution of the world economy. The idea is that once students have understood the basics, they can be introduced to these modifications.

However, other economists such as myself feel that we have finally reached the turning point in economics where we have to radically change the way we conceive of and model the economy. The crisis is an opportune occasion to carefully investigate new approaches. Paul Seabright hit the nail on the head; economists tend to inaccurately portray their work as a steady and relentless improvement of their models whereas, actually, economists tend to chase an empirical reality that is changing just as fast as their modelling. I would go further; rather than making steady progress towards explaining economic phenomena professional economists have been locked into a narrow vision of the economy. We constantly make more and more sophisticated models within that vision until, as Bob Solow put it, “the uninitiated peasant is left wondering what planet he or she is on” (Solow 2006) …

Entomologists (those who study insects) of old with more simple models came to the conclusion that bumble bees should not be able to fly. Their reaction was to later rethink their models in light of irrefutable evidence. Yet, the economist’s instinct is to attempt to modify reality in order to fit a model that has been built on longstanding theory. Unfortunately, that very theory is itself based on shaky foundations …

Every student in economics is faced with the model of the isolated optimising individual who makes his choices within the constraints imposed by the market. Somehow, the axioms of rationality imposed on this individual are not very convincing, particularly to first time students. But the student is told that the aim of the exercise is to show that there is an equilibrium, there can be prices that will clear all markets simultaneously. And, furthermore, the student is taught that such an equilibrium has desirable welfare properties. Importantly, the student is told that since the 1970s it has been known that whilst such a system of equilibrium prices may exist, we cannot show that the economy would ever reach an equilibrium nor that such an equilibrium is unique.

The student then moves on to macroeconomics and is told that the aggregate economy or market behaves just like the average individual she has just studied. She is not told that these general models in fact poorly reflect reality. For the macroeconomist, this is a boon since he can now analyse the aggregate allocations in an economy as though they were the result of the rational choices made by one individual. The student may find this even more difficult to swallow when she is aware that peoples’ preferences, choices and forecasts are often influenced by those of the other participants in the economy. Students take a long time to accept the idea that the economy’s choices can be assimilated to those of one individual.
Alan Kirman What’s the use of economics?

  1. July 28, 2013 at 6:16 pm

    Economics is an edifice that importantly serves to obscure the omission of inflation-adjustment of asset price histories — because they look like this
    which is bad for business!

  2. July 28, 2013 at 6:35 pm

    I find it interesting that those who push the “Economic Man” heuristic, whether in pure or compromised forms, never apply it to themselves and their colleagues. They are not selfish, egoistic, narcissistic, megalomanical, compromised, competitive income/utility maximizers or “satisficers” or “optimizers”; but they do often claim or imply to be perfectly or bounded rational and informed, as well as calculating. They do not cut corners to cut costs, they do not data mine, they are not subject to confirmation bias or cognitive dissonance; no, not them or their colleagues.

  3. Paul Schächterle
    July 28, 2013 at 6:44 pm

    The problem is that (neoclassical) economists don’t try to make their models conform to observed reality but try to make models conforming to an ideological world view.
    Market good, state bad. Profits too low, wages too high. Capitalists not rich enough, workers too demanding. That is what all neoclassical models express in fancy ways.
    To achieve their ideological goals neoclassical economists not only use totally idiotic assumptions (workers prefer to starve in their spare time if wages are low enough – labour supply curve points to the origin), they also do not accept the logical deductions of their own models. So they refute reality as well as logic.
    So what is economics in its current state good for?
    Scientifically it is good for nothing. Basically the only useful thing I see in economics is the system of national accounts (which is run by the governments’ statistical agencies).
    But neoclassical economics is a great producer of ideology. Economics departments are for capitalism what the “Institute of Marxism-Leninism” was for real socialism.

    • Newtownian
      July 30, 2013 at 8:40 am

      While I am deeply sceptical that neo-classical economics is a fundamental ‘science’ I disagree that understanding it is good for nothing. What it does seem to provide empirically at least is:
      – an understanding of the current money and finance systems their history and paradigms.
      – an understanding of how people respond to the acquisition of material wealth and tend to exploit the natural world.

      This is critical information for any anyone opposed to the externalities this economics generates. Most environmental scientists I know are perplexed by economics or simply dismissive. This is unfortunate as it means they overlook the implications of economic tools – especially trading systems such as that proposed for carbon reduction and intergenerational equity or environmental taxes.

      Thankfully there is some information which addresses this gap out there notably ACKERMAN, F. 2009. Can We Afford the Future? The Economics of a Warming World, Zed Books Ltd, Cynthia Street, London. The author is a conventional economist and he deconstructs here its implications. They are horrific – but without understanding neoclassical and other economics ideas it would be impossible to understand for example why both taxes and trading schemes are flawed and Stern in his report tried to impose a depreciation rate rather than accept what depreciation was telling him – the economic tools cannot stop climate change.

      As they say – know the enemy.

      • Paul Schächterle
        July 30, 2013 at 1:32 pm

        My point of view is slightly different. I think that the economy may be (and already is to a certain extent) object of scientific inquiry. So economics is to a certain extent a science and it should be a science!
        But I think neoclassical tools and methods are fundamentally flawed so that by using those methods you do NOT acquire relevant knowledge of economic issues.
        Specifically I don’t think that neoclassical theory provides a particular insight into the money and credit system. And most certainly neoclassical economist do NOT know how people respond to the acquisition of wealth. Their utility model and theory of the consumer is fundamentally flawed as is their theory of the firm. (And of course – as mentioned – the neoclassical theory of the labour market is totally absurd.)
        Neoclassical economist are NOT experts of the economy but experts of an unrealistic (meaning false) model of the economy.
        I do not primarily criticise neoclassical economics because of their policy recommendations, I criticise them because their recommendations are not grounded on a reasonable theoretical foundations. They use counterfactual assumptions and have logical errors in their theory. Both reasons alone invalidate their models.
        I come to the conclusion that they are motivated by ideology and not scientific interest because they do not learn from the errors in their theory but obfuscate those errors and continue to teach false theories and to give policy advice that always serves the interest of proprietors.
        Also I do not say you should not know neoclassical theory. You should know it and know why it is false.

  4. July 28, 2013 at 10:19 pm

    I find it interesting that the term equilibrium is, in this essay, thought to be the same as market clearing. ut in Marshall and Keynes and in post Keynesian economics they are not the same.

    Given the uncertain future, equilibrium merely means that for any given set of expectations on which all market decisions are made, there can be an equilibrium without clearing, e.g., iinvoluntary unemployment equilibrium where the labor market is in equilibrium while there are many workers who are willing to work but cannot find a job.

    of course if the ensuing market situation alters some decision makers expectations, the equilibrium position might change without any market clearing.

    the difference is that orthodox mainstream economics assumes that if the economy does not find clearing inall markets (including the labor market), then decision makers can recontract without penalty until a general market clearing solution is obtained. But recontracting without penalty is the one thing not permitted in a legal money contractual entrepreneurial system

  5. July 29, 2013 at 8:56 am

    I study economics because I want to stop economists from destroying our lives, due to public policies which are based on fallacies and stupidities. You need to use economics to stop economists.

    • July 29, 2013 at 5:16 pm

      lyonwiss, As I wrote
      Economics is an edifice that importantly serves to obscure the omission of inflation-adjustment of asset price histories — because they look like this
      which is bad for business!

      I’m convinced that keeping the real price histories NOT ongoingly apparent is central to suckering the people. For my charts’ credibility, see WSJ and NYT here.

    • Newtownian
      July 30, 2013 at 8:50 am

      If you can find a way you will have a vast audience. The trouble is that mainstream neoclassical economics seems as impervious to their framework being wrong as the christianity is to its revealed truth being rather a shambolic product of bronze age societies, politics and some accidents of history i.e. while you will find a few dissenters – John Spong being an intelligent notable example who is focused on principles rather than dogma – more generally rather than changing the system dissenters simply get purged (like RER contributors?). There is just too much dysfunctional resilience.

  6. July 29, 2013 at 9:49 am

    When I was a business manager I did realise how silly were some conceptions of «neoclassical economics». Guess what?… I then started to study Adam Smith, Ricardo, Stuart Mill, Quesnay and – the inevitable and unavoidable – Karl Marx. Moving on to Veblen, Schumpeter and Keynes.
    And again, guess what?… Bohm-Bawerk and Paul Sweezy not withstanding, Karl Marx hat it right… He does need some updating, but he was right about the «essence» of capitalism… The rest, to quote Alan Freeman, is the production of a mathematically pure ideology.

  7. davetaylor1
    July 29, 2013 at 12:34 pm

    Economics, as a body of doctrine (I will not dignify it with the description ‘science’ meaning ‘knowledge’), and even more as a mangled tangle of incestuously related bodies of doctrine, I would say is currently about as useful as pornography in the everyday business of life: this being largely about raising families, teaching them how to act like humans rather than animals, and educating them in the ways of living safely with their neighbours. In other words, it is not useful but positively harmful. Economics as an occupation, insofar as it is merely indoctrinating youngsters in the animal arts of “dog eat dog” competition, is equally despicable.

    However, we do need to learn from each other about how to raise decent families that know how to live together in comfort and security. Thus engagement in the scientific activities of untangling the complicated and reducing know-how to principles simple enough to be grasped by children is as praiseworthy as mischievous incitement of others to evil is blameworthy.

    Economists unfortunately find themselves in a double bind, for the mischief has infected the teaching of scientific method, which is now portrayed as building descriptive models rather than seeking (as Whitehead put it) “the few general ideas which illuminate the whole”, so even children can see how to develop the know-how they need. To untangle that mess even brave and well-intentioned heterodox economists may need to go back to school to study the development of science and mathematics. They could do worse than start with Bacon’s “The Advancement of Learning” and W W Sawyer’s “Prelude to Mathematics”.

  8. July 29, 2013 at 7:35 pm

    Lars –

    Um… I think you’re missing a critical ***NOT*** in your second-to-last paragraph, n’est-ce pas?

    Lars wrote:
    “… Importantly, the student is told that since the 1970s it has been known that whilst such a system of equilibrium prices may exist, we cannot show that the economy would ever reach an equilibrium nor that such an equilibrium is unique.”

    Assuming you’re referring here to the Sonnenschein-Mantel-Debreu conditions, shouldn’t this sentence instead begin: “… Importantly, the student is ***NOT*** told…”?

    As far as I am aware, undergraduate students are never exposed to SMD, and even some significant fraction of graduate/post-graduate students are equally clueless (not to mention the profs themselves).

    • July 29, 2013 at 8:20 pm

      Pas du tout – since it’s a quote and it’s Alan writing!

  9. sergio
    July 30, 2013 at 4:06 pm

    Economics is completely irrelevant to reality. It is artificial field of intellectual exercise, created by economists to show others how smart they are.
    They create puzzles, knowing the “right” answer in advance and getting prizes for solving self invented puzzles. They manipulate the same set of variables and concepts (utility, maximization, equilibrium), calling such manipulation a process of scientific discovery and they conclude always the same.

  10. C.Cummings
    February 10, 2014 at 4:13 am

    A lot of people seem to think that economists have all have all the rights answers and that their predictions are suppose to be “right”… I believe that the models economists create or propose only serve as guidelines on what is to be a possible outcome in the future, given the current variables or factors. It is impossible to even be as accurate as one would hope, given the the wealth of information and data that surfaces almost every day, as such, this call for continuous modifications of such models.

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