What on earth is “the economy”? It is a term much bandied about. Its study is an academic heavy industry, and its exponents are listened to with great reverence, but what is it ultimately all about, and why should we care?
Economics as a discipline is said to have originated with Adam Smith, who was a moral philosopher and theologian. When you think about it, this is an odd starting-point for something so relentlessly materialistic. For the first century or so of its existence it was known as political economy, but the political part has mysteriously gone away, or so we are to suppose. The word itself has Greek roots, meaning something like “household governance” (from oikos – house, and nomos – custom or rule), but the concerns of economists have long since ceased to be of any relevance to the domestic sphere.
We think of economics as being about money, but this is only partially the case. The Merriam-Webster definition of the term calls it “a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services” and actually there’s nothing in there about money as such. It so happens that in our society we facilitate a great many of these things by the use of money, but we don’t do everything that way.
Consider, for example, all the things that friends or family or even complete strangers routinely do for one another free of charge. If I give a passer-by directions, or my partner makes me a sandwich, no money changes hands, and it would be surprising and somehow a bit weird if it did. Then there are all those other arrangements where there is payment in kind of a sort, even if it may not be formalised; you do me a favour, I buy you a drink.
The problem with all this from the point of view of economics is that none of it appears in readily-available statistics, and boy do economists love statistics because they can be used to construct mathematical models. Financial transactions generally do appear in statistics, and money of course is a mathematical quantity, so economists study the money economy for much the same reason as the proverbial drunk searching for his keys under the streetlight.
Theoretical physicists also construct mathematical models. The key difference is that the physicists’ models are supposed to be accurate descriptions of the world. If the model is contradicted by experimental data, then the model needs to be fixed so that it matches the data. As I write this, it is reported that this process is happening right now in regard to the expected behaviour of muons; the discrepancy between theory and experiment is extremely small, but it appears to be there. Theoretical physics is hard.
Luckily for economists, their models don’t have this problem. The economic system, even the subset of it that economists actually study, is too complex to model exactly, so a simplified model has to be used. This is of course fine; nobody would want a map the same size as the territory it represents. Unfortunately this offers some temptations that economists have not always resisted:
- Mathematical elegance – the model is so lovely that it ought to describe reality, but it doesn’t. Prizewinning economist Paul Samuelson said: “In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly to the relation between reality and these assumptions.” This results in a model that is ornamental rather than useful. To be clear, I have nothing against pure mathematics; I merely ask for it to be called what it is.
- Detachment from reality – like all academic disciplines, economics has a tendency to become an end in itself. One could easily imagine a model in which all economic activity consisted of computers selling one another financial instruments, while everybody starved. As far as I can see, there is nothing in modern economic thought which would consider this invalid.
- Political convenience – the model gives the answers that are most acceptable to the rich and powerful, who may well be funding the economist one way or another. A nice example of this is the famous Laffer Curve, which is supposed to prove that cutting tax rates will increase tax revenue. When this was tried in the USA under Ronald Reagan and George Bush Sr, public debt quadrupled. (The official statistics can be viewed or downloaded here if you want the gory details.) Naturally Arthur Laffer got the Presidential Medal of Freedom for this outstanding contribution to human knowledge.
This last point reminds us of the mysterious disappearance of the word “political” from the name of the discipline. Economics is supposed to have some sort of supra-political authority. In the deathless words of Dr Wolfgang Schäuble, “Elections can not be allowed to change the economic policies of any country.” In this view, the economy, which is an entirely abstract concept, somehow trumps everything else. And of course the only ones capable of interpreting its sacred mysteries are economists, who – entirely coincidentally – find themselves with access to highly-paid employment.
The rest of us are essentially at their mercy. We have no agency: The Economy causes the world to be the way it is, and we just have to put up with it. Certainly, if the good Dr Schäuble is to be believed, the way we vote won’t make much difference. We are but the playthings of impersonal market forces. Free will is an illusion: either we act in the way economics says we should, or we are behaving (gasp) irrationally.
This is an interesting perspective, especially when you think that for countless millennia everyone was blissfully ignorant of all this. People were of course aware that goods and services were produced, distributed and consumed, but nobody seems to have supposed that this was all that was going on, or even the most important thing. I suppose it is possible that everyone who lived before The Wealth of Nations was published was an idiot, but these are the same people who came up with the wheel, the arch, double-entry book-keeping and moveable type.
It seems to me that because economics has such prestige in our society, we are inclined to overlook all the parts of the picture that are missing from its world-view. (This sort of thing, for example.) Economics is about human beings, and even then only about some of the things that humans beings do or care about. Until economists change their world-view to something that corresponds to reality, we should stop giving them any credence. At this point, to take them seriously is, well, irrational.
Comments are welcome, but I do pre-moderate them to make sure they comply with the house rules.