Economics is what?

from Peter Radford

This week’s Economist magazine includes an article designed to uplift the hearts of depressed economists everywhere. It devotes a whole page under the headline “Meet the market shapers”, to a catalog of what it regards as cutting edge examples of economists doing useful stuff at the ‘micro’ level. By micro in these cases the Economist means working inside or alongside a business firm.

All the cases in the article are about some clever folk doing some clever analysis that, so we are told, really and truly helps the firms in question do better. In particular a theme emerges that the work seems to help the firms match what they have to sell with people who are likely, though not certain, to buy.

Naturally, although the magazine doesn’t admit to any added value in this, all the firms cited are Silicon Valley start ups and the like. As we know all Silicon Valley firms are very, very smart – they disrupt the dullards who have only managed to survive a few decades by shooting into orbit and surviving [gasp] for months and even years. So to help firms that are already clever is a real feather in anyone’s cap.

All this cutting edge stuff has the Economist really excited. Not only does it give the story a full page, but it even devotes one of its editorial columns to explaining what micro-economists do: 

“they hone in on a particular area, often a single type of market or firm, and try to find out how it works”

Then:

“Armed with vast data sets produced by tech firms, macroeconomists can produce startlingly good forecasts of human behavior.”

Call me skeptical.

I have a few of issues here I need to address.

First: there is nothing inherently economic about big data analysis. Anyone armed with the right technical and analytical background could do the work being described in the article. Indeed they have. Analysts in other disciplines were comfortable with large-scale analysis before economists were. While I have no doubt about the quality of the work, what I do doubt is that it has anything to do with economics. If all it takes to be called a micro-economist is to be working on market or firm level analysis, albeit using some fancy math, then there are droves of such people most of whom would never dream of calling themselves economists. The word ‘analyst’ seems to fit rather nicely. That the analysts happens to have a PhD in economics is merely an indicator of how economics has become a technical training and left behind being a science devoted to investigating economies. So quite why technical analysis can be claimed as a triumph for, or the exclusive territory of, economics is something I cannot fathom.

Second: while I have no doubt the results are of value to the firms where the economists work, if they are ‘startlingly good forecasts of human behavior’, then I have to assume that the analysis ignored anything taught in standard micro-economics classes. If there is one claim economics cannot make is that it has a deep and well grounded understanding of human behavior. It has gone out of its way to ignore human foible in order to compress behavior into a suitable shape for its own ends. For instance, the entire theory of rational choice is absurd on its face except to economists who wanted something they could base their imaginary economies on. No one can credibly claim that standard micro is a model of actual human behavior. All the work underway in behavioral economics is finally unmasking micro’s naivety. Besides anyone familiar with thinking outside of the tunnel vision of economics would be aware of the ghastly simplification and muddle that micro is when compared with the higher understanding that exists outside. No one looking in can avoid being stunned at the silliness embodied in what standard economics treats as basic knowledge. So, I repeat: for the work the Economist cites to be ‘startlingly good’ I have to assume it isn’t based on economics. Which, perhaps, is why the Economist is startled.

Yes there is a world out there. A real one. And a real world where there are analysts with a good grip on reality.

Thirdly: The entire premiss of the article, and the Economist’s breathless expose of the work, is a touching example of how standard economists are driven to take credit – for economics – for just about anything that sounds both clever and remotely accurate. After the economic crisis of 2007/2008 exposed the dismal shambles that occupies the once highly regarded intellectual space called economics, with its fragmented and contradictory explanations, overly formal methods, stale thinking, and ideological taint, of course economists want to rehabilitate their art. Instead of fixing its many and manifest errors they have taken the easy way out: they invade other spaces and re-brand their technical methods as being economics. In other words they no longer even worry about the economy, they are now content to be technicians-for-hire, and number-crunchers par excellence.

One last thing: the Economists bravely ends its article with this:

“While they are too busy to realize it such firms are also providing the best defense of economics against its critics. Far from being unrealistic and out of touch, the role of chief economist will design the way that the firm works.”

On the contrary. The message is almost the opposite. Because economics is unrealistic and out of touch, economists have had to look for work elsewhere – where their inability to understand the economy is not an impediment. As for designing how the firm works: I think there are plenty of other hands at work there, and if a young person is setting out to have such influence, there are many, many, shorter and cheaper avenues towards that goal. Most of which avoid micro-economics like the plague.