July 12, 2017 / 3:36 PM / 9 days ago

Hadas: Fear not, you can get economics right

6 Min Read

The rooftops of the university city of Oxford are seen from the south west, January 22, 2003,Peter Macdiarmid

LONDON (Reuters Breakingviews) - They don’t understand how the economy really works. That’s a legitimate criticism of many of the protesters who tried to disrupt last week’s G20 meeting of world leaders in Hamburg, Germany. It is also a reasonable comment about the explanations which professional economists would typically offer the malcontents. That similarity was noted at a much smaller, if less raucous, meeting last week of a group of rebellious economic thinkers who gathered for a two-day seminar at Oxford University's Blackfriars Hall.

The men and women at Blackfriars would agree with many of the G20 politicians and the street crowds that the recovery from the 2008 financial crisis remains incomplete. Few economists anticipated the crisis, but many of them are persuaded that they now know how to create jobs and push up growth rates. Unfortunately, they argue furiously with each other about what precisely to do. No one has a killer argument to silence the opposition. 

It is the same story – missed trends, contradictory theories and unpersuasive recommendations – when it comes to explaining and dealing with many current economic issues: two decades of global disinflation, the right economic role of governments, the rise of inequality in some countries and the pace of technological innovation (experts cannot even decide if it slowing or accelerating). Any healthy intellectual discipline will always have some big unsolved mysteries, but economics has enough to suggest that its basic approach to reality is deeply flawed. 

That is where the developing “Blackfriars School” comes in. Of course, this small band is neither the first nor the only group to complain about the standard approach to economics.

There was a great wave of dismay as early as 1798, when English cleric Thomas Malthus first claimed that a rising population would always keep wages close to subsistence level. Critics said he was inhumane and unduly pessimistic. After two centuries of rising prosperity and almost a century of falling birth rates, it is clear the critics were right. However, Malthus has been almost as influential among economists as he has been wrong about reality. 

The critics have also been right to complain that many other once standard economic beliefs were dangerously simplistic and incomplete. Marxists were wrong about total state control of the means of production; the old-style liberal trust in totally free markets was excessive, as is the new-style liberal trust in big governments. None of a series of monetary theories has been able to keep away or to defang financial crises.

Perhaps the worst basic idea in economics is the nasty picture of human nature as purely self-interested and calculating. Many economists admit that these assumptions are both unrealistic and insulting, but they still feature in introductory textbooks, and are still widely used in game theory and so-called Welfare Economics. The justification is that the assumptions are supposed to be useful. But how useful can something so far from the truth really be? Not very, to judge by all the unsolved mysteries. 

Complaining is easy. Finding a better way is much harder. The Blackfriars group, led by Senior Fellow Peter Rona, is one of many efforts by so-called heterodox thinkers to present a coherent new approach. This group’s first result is a book, published earlier this year, "Economics as a Moral Science". Last week’s symposium is expected to lead to a second volume. 

The book’s title holds the key, actually the two keys. First, there's science. As Rona pointed out in his Oxford presentation, the objects that economists currently study are essentially different from the objects of physics, chemistry and other mathematically modeled sciences. Economists’ demand curves, utility functions and inflation rates are mere mental constructions or statistical oversimplifications. Such unnatural and nebulous concepts tend to generate narrow, impractical and implausible theories. 

The way forward is to recognise that economics is a social science. There is no point in studying market exchanges in isolation from social institutions and power structures, or from people’s varying and shifting beliefs, aspirations and fears. 

The protesters in Hamburg want economic justice, and economists should be able to help. To do that, they need to integrate morality, the second key word, into their theories. Economists cannot really describe what people do without understanding what they are trying to do, and thinking about whether their goals are actually laudable. 

Even if arguments about the economic good are never resolved, they can still be helpful. For example, morally aware economists could guide a debate on the relative value of, say, investing in countering climate change or in reducing absolute poverty. They would think more clearly than the average G20 protester. 

Today’s economists, who exclude morality from their studies as unscientific, are not up to this challenge. Their standard professional techniques – think multivariate regression analysis and complex specifications of indifference curves – are not relevant. Still, they do know something about costs and benefits. Add some recognition of the value of aspirations and the indignity of misery, and the pace of intellectual innovation could definitely accelerate. 

Right now, the leading university economics departments are about as likely to sponsor social and moral economic analysis as the G20 leaders are to invite protesters to run their meetings. But failure breeds frustration. Who knows, maybe the Blackfriars School is planting the seeds of a revolution.

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