This week I finished The Econocracy – the perils of leaving Economics to the Experts, by recent economics graduates Joe Earle, Cahal Moran and Zach Ward-Perkins, which considers a number of flaws with our current approach to economics:
- A reluctance to consider any ways of analysing economics other than neoclassical economics (which focuses on equilibria resulting from individual agents optimising their utility).
- An inability to acknowledge that economic decision making fundamentally reflects political values, insisting that neoclassical economic policy conclusions are objectively the only rational ones.
- The effective exclusion of the vast majority of the population from economic decision making, threatening the democratic legitimacy of its decisions.
- Universities being too focussed in their teaching and research on applying neoclassical tools to abstract problems, with insufficient attention being given to how to understand the real (complex) world or to understand when these tools might be inappropriate.
I realise that this isn’t the kind of book that all my friends will enjoy, but for those that are inclined, I found the book excellent – readable, thought provoking, calm (never angry or unfairly blaming) and open-minded. I enjoyed the many good examples and quotes, for example, the this one from John Maynard Keynes (one of my heros) in 1924:
“The master-economist must possess a rare combination of gifts … He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words … He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regards.”
which contrasts with this more recent quote by Gary Becker: “The combined assumptions of maximizing behaviour, stable preferences, and market equilibrium, form the heart of the economic approach as I see it.”
If you’re after more information on the book, there’s a longer review of the book on the Guardian and a more critical one on the Financial Times, however I thought I’d instead use the rest of this blog post to reflect a bit more on neoclassical economics.
Some wider thoughts on Neoclassical Economics
The neoclassical economics framework is a broad class of models, which consider the behaviour of (mostly) rational agents mechanically seeking to optimise outcomes.
It is incredibly flexible, capable of incorporating almost any feature you like. This makes it difficult to challenge, as its fans can just respond “whatever feature you think is missing, you can add, so why are you complaining”. But, like one of those expanding suitcases, it is only useful when you don’t put too much in it, and I do think it is as much a fault of the framework as its users that they tend to leave out a lot that the wider population would rightly consider important (like the environment, social well-being, inequality).
As well as being flexible, many neoclassical models are well-suited to quantitative treatment, mathematically and computationally solvable. This should be an obviously good thing – except that it leads to a particular tendency to prioritise some factors (which are more easily quantifiable – like money) and ignore others (like feelings). It also gives an impression of scientific objectivity, when in fact its conclusions can be drastically altered based on arbitrary choices of assumptions.
I am undecided whether our best hope is improving our use of neoclassical economics, or of building other frameworks to use instead or alongside neoclassical economics. Clearly neoclassical economic models can be improved, and this is definitely the path of least resistance in the economic community. But I also respect the views of those who think this is ‘collaboration’ is dangerous, and after all, an agent based optimisation model is unable to recognise the fact that we are more than optimising agents.
What I am sure of is that neoclassical models are likely to be around for some time, and it is crucial that those using them are aware of both their fundamental limitations and the weaknesses in how they tend to be used. I believe that broader economics training in our universities, along the lines argued in The Econocracy, would help create more useful economists. But most crucially, I believe we desperately need greater public engagement and scrutiny of economic decision making: most importantly to ensure it takes into account a wider range of interests, but also to legitimise its decisions.