One of the problems faced by economists is that everyone knows about economics. Most people are ready to accept that a physicist, or a lawyer, or a historian knows something they don’t. Economists encounter no similar deference. If you introduce yourself as an economist, you will probably be asked for a prediction about what is going to happen to interest rates, which the recipient will – rightly – not take very seriously.
Politicians regularly express views – their own views – on economic matters. Not just on the objectives of economic policy, but on essentially technical questions such as the relationship between the money supply and the level of gross domestic product, or on how financial or product markets function. When they express similar opinions about questions in hard sciences – as with Stalin’s adoption of Lysenkoism or Mr M’Beke’s opinions on the origins of AIDS – it is understood that they have overstepped the mark. Not so in economics.
Now maybe economists do not deserve the professional respect accorded to physicists, lawyers or historians. Perhaps economics is tosh, like spiritualism or scientology; perhaps what students learn in – demanding and sought-after – undergraduate and postgraduate courses is meaningless mumbo-jumbo: perhaps the language of economics is useful only in talking to other economists. But if I were writing an article, or a book, refuting spiritualism, I would expect to begin by setting out the claims of spiritualists. I would allow practitioners themselves to define the leading proponents of spiritualism. I would then show that the claims made by these proponents contradicted other well-attested scientific propositions, from neurophysiologists and philosophers, which suggest that communication with the dead is impossible or meaningless; and that alleged instances of such communication had frequently been identified as fraudulent. That is the scientific method applied to demolish non-science.
In this book, David Howell is severely critical of modern economics. He claims that “politics in the new millennium continues to revolve around economics” but that “economics continues to rely on time-expired theories about how individuals and economies behave and on ever more unreliable statistics.” This critique of economics is a primary theme of this book. Disparagement of economics and economists pursued almost to obsessive lengths. There are five chapters devoted to the topic, with titles like “The Discipline that Failed”, “The Economist’s Dilemma”, “A Failure to Explain”.
“Time-expired theories”? “Mainstream economic theory, as set out in countless economic textbooks, stipulates that a perfectly knowledgeable man or woman will always make an entirely rational and fully informed decision on what to buy and what to sell and at what price”…. “this starting proposition is dotty”.
Indeed it is. Which is why mainstream economic theory today does not stipulate anything of the sort. The economics of imperfect information has been a major research theme – arguably the major research theme – of mainstream economics in the last thirty years. Four years ago, James Mirrlees and William Vickery were awarded the Nobel Prize in economics for their founding contributions to this work – which were published in the 1960s and 1970s. It is a reasonable bet that Joe Stiglitz will receive the same prize in the next five years or so for his development of the theory of markets with imperfect information. And Stiglitz has written an accessible introduction to his work, highly germane to various theses that Howell puts forward (The Future of Socialism, 1994).
The idea that the behaviour of participants in markets is influenced by what happens in markets is presented as a new insight which had been overlooked by economists until it was pointed out by George Soros. But there are – literally – thousands of books and articles written by economists about this. The theory of games is all about this. So are descriptions of signalling, of commitment, the modern analysis of advertising and reputation and most of modern financial theory.
And what of “ever more unreliable statistics”? Much of this comment seems to derive from a belief that both information itself and productivity improvements that result from information technology are left out of account in measuring economic statistics. But this is simply not true.
What is true is that measurement of output growth and price changes encounters difficulties in taking proper account of new goods and quality improvements. This is not a new problem. It was as true in the past when electricity, or antibiotics, were introduced as it is today when information technology is changing our lives. Indeed, economic statistics are probably better at picking up the benefit of information technology than of many other technological advances. These benefits are largely translated into improvements in the performance of existing processes – which standard techniques account for – rather than the creation of new consumer goods, like automobiles or televisions, which is more difficult to accommodate.
Michael Boskin chaired a US government commission which exhaustively considered this issue in the context of inflation measurement. The commission concluded – not entirely persuasively, in my view – that the unrecorded effect of new goods was quite small. An impressive study by William Nordhaus attempts to measure the price of electric light over four millennia. Nordhaus concludes – for the most recent period – that the difference between the price of light, and the price of things for making light (which is what we measure), has averaged 4% per year. On the relationship between productivity gains and information technology, Robert Gordon is the leading figure among many discussants. A fair assessment would recognise that there are problems, both conceptual and operational, in the collection of economic statistics, and that patent scholarship is in progress to try and sort it out.
Yet none of this work – on asymmetric information, on information technology, on price and productivity measurement – is referred to in Howell’s book. In fact, the bibliography contains very few items by major economists at all – if by major economists one accepts, for the moment, the profession’s own criterion: the holding of a tenured position in the economics department of a major university. Of the half dozen or so people listed who fall into this category, all but one is either retired or dead. And that one is Paul Krugman, whose distinction as an economic theorist is not in question, but who is more widely known for his journalism. And it is to his journalism that Howell refers.
Economists have and should have no monopoly of economic commentary, or of economic wisdom. If an author writes about economic events, I might as a professional economist hope or believe that what they write will benefit from the insights of professional economists. But I am still required to judge what they have to say by the quality of the argument rather than the extent of their references to the scholarly literature. But in the chapters I am discussing, Lord Howell is not writing about economic events; he is writing about what he alleges to be modern economic theory. And to do that, you have to refer to modern economic theory as it is defined in the work of professional economists.
The effects of such remarks are just the opposite of those the author intends. I know that the reaction of most of my professional colleagues to a diatribe like this is that it is not worth discussing. They argue that ill-informed popular criticism simply shows the dangers of attempting popular simplification of economic ideas for politicians and business people. They will continue the dialogue they are, in any event, inclined to prefer – with each other. This has indeed been their response to other books in similar vein, several of which are commended by Howell. Those who believe, as I do, that the incestuous nature of traditional scholarly debate is inadequate for the development of an applied subject such as economics, and that it is important for economists to involve themselves with institutions and policy, see the ground being cut from under our feet.
What is still more infuriating is that when Howell writes of things of which he knows, he does so with great intelligence, good sense, and practical wisdom. More than that, I suspect he may be right on some “big picture” issues – matters that are often obscure to people immersed in the technical development of their subject. I think he is right to emphasise the importance of markets as processes over markets as devices for signalling and information management. I share his excitement at contemporary developments in evolutionary theory, and his perception of their possible application to business and society. I even think he may be right to share E. O. Wilson’s vision of a world in which psychology is firmly based on biological science and economics is an account of human behaviour derived from that new psychology.
But what is missing from the remainder of the book is a framework which unites its thinking. At the end, one is left with a sense of breathlessness, and a tone of excitement. There are repeated assertions that rules have changed, new paradigms are required. But these observations lack coherence either as analysis or prescription. It is possible, just possible, that the economic theory Howell is so insistent on disparaging might provide some of the glue that is required to hold his thinking together.