Coase and Reality
from Peter Radford
In his introduction to a collection of his own work, Ronald Coase tells us:
‘Becker points out that: “what most distinguishes economics as a discipline from other disciplines in the social sciences is not its subject matter but its approach”’.
He then goes on:
‘One result of this divorce of the theory from its subject matter has been that the entities whose decisions economists are engaged in analyzing lack any substance. The consumer is not a human being but a consistent set of preferences. The firm, to an economist, as Slater has said, “is effectively defined as a cost curve and a demand curve, and the theory is simply the logic of optimal pricing and input combination”. Exchange takes place without any specification of its institutional setting. We have consumers without humanity, firms without organization, and even exchange without markets.’
All true, too true.
Criticizing the bulk of modern economics for its extraordinary lack of realism has become a tiring and unproductive exercise. All that happens is that each such essay engenders the usual torrent of criticism from the unorthodox islands within the archepeligo of economics. This criticism is usually of the form “well, we all know that”. The critique from the much larger island of orthodoxy – if anyone there is bothered to respond – is either a yawn or a paternal pat on the head to signify that they understand that one day I will get why they do what they do, but until then they will tolerate my childish naivety.
My problem is that it isn’t me being naïve. The orthodox are. They are naïve and myopic. No: naïve, myopic, and very, very limited.
I read recently, I forget where, that cosmologists have answered a question that worried them for a while. Apparently there is a vast ‘cold spot’ in the universe, whose coldness is explained, somewhat, by it being relatively bereft of matter and so on. The universe is a very lumpy phenomenon full of spaces surrounding concentrations of stuff. This distribution seems to be a result of the origins of the universe. Cosmologists look at all this lumpiness and concern themselves with developing theories about how it all came to be. This gets them, no doubt, into deep formal modeling, but those models are to explain what they see. This is because physics seeks to explain stuff.
But, as Coase no doubt realized, and as Becker proudly proclaimed, economists do not seek to explain stuff they see around them. They seek to explain things they only imagine.
Hence the ability of orthodox economists to ignore the context, structure, and even the cost of operation of such things as markets. And hence their willingness to begrudge even a smidgeon of humanity to the consumers who patrol those markets like so many robots marching to an internal code written by an anonymous and evidently vastly under socialized and inexperienced programmer.
Coase repeatedly refers to modern microeconomics as ‘price theory’. We could call it ‘choice theory’ too. It really doesn’t matter what we call it because it is largely a fairytale without much relevance to the economy. It is, however, a hugely successful and well-constructed set of ideas. It is a marvel of consistency and logical thoroughness. That it floats free in the air above the reality far below seems not to concern those who revel in it. It takes several hundred pages of dense verbiage and scads of mathematics to lay out the entirety of microeconomics. Looking at the doorstop sized books inflicted on students – not to mention the price of said books – one has to assume that great insight can be gained by slogging through their pages.
Naturally, for instance, we could reasonably assume that somewhere within those hallowed pages we would be told where prices – the magical glue of the entire system – come from. But we would be wrong. The question is left unanswered. Instead we are given a series of highly unreal possibilities. We are told we can imagine an ethereal ‘auctioneer’ sitting presumably on some mountaintop performing the task of figuring out the prices that we need to ‘clear the markets’. Or we can imagine all our robotic consumers submitting acceptable prices to some authority who then digests them and announces those that establish the same market clearing result.
And so on.
In other words the central character in the entire narrative that the orthodox economists want us to accept as a theory of actual market activity appears magically from nowhere. Or, rather, appears from some make-believe hocus-pocus that we are supposed to ignore and/or accept so we can move on and explore the logic of their models.
I refuse to give economists a free ride. Prices do not appear magically. They are constructs of thought by actual human beings. They are thus within the system being explained. Those humans reside, most likely, within business firms with limited information, facing deep uncertainties, and thus resorting to all sorts of dodges and wheezes to approximate what they think ‘the market will bear’. And, no, orthodox theory is not a pretty good approximation of this messy reality. It relates in no way at all.
Coase is correct in his assessment. Economics is divorced from its erstwhile subject matter. Which means Becker is correct also: economics is a technique. Economists are technicians roaming around looking for opportunities to apply their technique. That their technique seems inappropriate when applied to the economy is of no concern to them. It is what they know.
Whether it is what the rest of us need to know as we grapple with our economic issues is another matter entirely.