Wednesday, February 07, 2007

What's the Matter With Mainstream Economics

As much as economics itself enthuses me - I like the way its axioms challenge my left-wingedness, and I like the rigidity as a constraint against woolie thinking - I still can't shake the fact that mainstream economics bugs me.

Here's why. But first I want to emphasise one thing: this isn't an attack on economists per se. And to emphasise this I've tried to note in brackets economists who have made similar points to my own or who are working in areas which incorporate the critiques made).

1. Rational, Self-Interested decision making agents. (Daniel Kahneman et al)
Oddly enough, such assumptions, I think, will get you quite a way in predicting human nature. The trouble is they're at their most wrong where it most matters: it's those elements of our lives where we don't act with naked self interests that are crucial to a functioning society. (call it Social Capital if you will - the sum total of all our unselfish acts). What's more, by ignoring the less cut-throat elements of human behavior certain economists have neatly used something akin to a tautology to smuggle in their political beliefs. If you believe that humans only act in their own self interest then it follows that you'll have system that venerates this. On top of this such thinking seems to me likely to create something of a self fulfilling prophecy. If you treat people in a certain way to an extent they will start acting that way.

2. (Related to 1) An apparent willful neglect of the impact of advertising/marketing on people to make decisions in their own interest. (John Kenneth Galbraith)
Actually, that's not quite true, some economists like Gary Becker haven't ignored this - they've disputed it. They are - in my not entirely humble opinion - wrong. Consider this. Businesses spend billions each year on advertising/marketing. If marketing really has no impact on consumer choice (no more than simple factual adverts) why do they continue to do so? Either businesses are behaving irrationally or consumers are. Given that businesses are subject to the fairly strict justice of the market, while people aren't exactly renowned for being able to calculate well between alternate utilities, my bet is that businesses are right.

3. A willful ignorance of power. (John Kenneth Galbraith)
From the subtle power of manipulation (as per 2) to the larger power of vested interests, wars and borders, many economists just don't seem to get it.

4. An unnatural love of markets
There's a lot to be said for markets and market mechanisms. But I honestly think a lot of economists are biased in favour of market solutions in the same way that scientists who study tigers are biased in favour of large, orange, stripy cats.

5. A Positivist Bias
Likewise, there's a lot to be said for empirical evidence and mathematical models. But there are other ways of generating knowledge. Now lots of economists are aware of this, but I'd hazard a guess that not many major economics journals public articles without maths in them. I suppose that an economist might argue back that maths is their stock, trade and comparative advantage. Fair enough, but better then that they leave some subject areas to historians and the like.

6. A tendency to ignore other social sciences
Hello, all you public choice people, ever heard of political science?

7. Underneath those paving stones - value judgments (Amartya Sen)
Contrary to what many economists appear to think, much of their work is not underpinned by laws of science but rather by political philosophy and value judgments. Should we go for the most efficient economic system or one that offers certain things to all? Is it better to give a dollar to a pauper or a millionaire? These are the sort of questions that don't seem to get debated nearly enough.

8. Diminishing Marginal Utility (Richard Layard)
This ought to be a no-brainer. It just amazes that there's even a debate on this, let alone a treasury department in my own country which appears to think the opposite.

9. An apparent unwillingness to consider that things other than GDP impact on utility (Richard Layard)
Or indeed that GDP might eventually (past a certain level) have little impact, while other things like inequality do.


George Darroch said...

Hey, nice post. Mostly things I've been thinking for a while, but a few new ideas there. Well articulated, and having the academic backing of those thinkers gives it more depth - having a writer to turn to for further reading is always nice when you're confident of an idea, but haven't got the details or intellectual basis mastered!

I've returned the favour and linked you - you are, now, a 'blog I read' :)

You might also find DeLong and Thoma's blogs interesting if you're not familiar with them already - and

Terence said...

thanks George.

I read Brad Delong from time to time. In a different day and age I would have said he was too moderate for my tastes (have a read what he thinks of Noam Chomsky* or capital market liberalisation at some stage and I think you'll see what I mean). Nevertheless, he's interesting, smart and a good read (and good at beating on Bush) so I do stop by there.

The other blog I wasn't aware of - so thanks for that.

*I might add I'm not even a huge Chomsky fan - but I do think he deserves a better critique than the one Delong offers.