Thursday, November 20, 2008

DIY economics

There I am, performing a bit of rotary sanding on top of a piece of the newspaper that I’d considered disposable (the Business pages of the Guardian), when something catches my eye. Namely, a reference to ‘the science weekly Nature’. What’s all this?

It is an article by the Guardian’s Management Editor Simon Caulkin, explaining why ‘self-interest is bad for the economy’. Needless to say, that’s not quite right, and presumably not quite intended. The economy relies on self-interest. What Caulkin is really saying is that self-interest without restraint or regulation is bad for the economy, especially when it generates the kind of absurd salaries that promote reckless short-termism and erosion of trust (not to mention outright arrogant malpractice). Caulkin rightly points out that Adam Smith never condoned any such unfettered selfishness.

But where does Nature feature in this? Caulkin refers to the recent article by Jean-Philippe Bouchaud that points to some of the shortcomings of conventional economic thinking, based as it is on unproven (indeed, fallacious) axioms. In physics, models that don’t fit with reality are thrown out. “Not so in economics”, says Caulkin, “whose central tenets – rational agents, the invisible hand, efficient markets – derive from economic work done in the 1950s and 1960s”. Bouchaud says that these, in hindsight, look “more like propaganda against communism than plausible science” (did anyone hear Hayek’s name whispered just then?).

Now, the last time I said any such thing (with, I hope, a little more circumspection), I was told by several economists (here and here) that this was a caricature of what economists think, and that I was just making it up. Economists know that markets are often not efficient! They know that agents aren’t always rational (in the economic sense)! Get up to date, man! Look at the recent Nobel prizes!

In fact I had wanted, in my FT article above, to mention the curious paradox that several recent Nobels have been for work decidedly outside the neoclassical paradigm, while much of economics labours doggedly within it. But there was no room. In any event, there is some justification in such responses, if the implication (not my intention) is that all economists still think as they did in the 1950s. These days I am happy to be more irenic, not only because that’s the sort of fellow I am but because it seems to me that thoughtful, progressive economists and those who challenge the neoclassical ‘rational agent’ tradition from outside should be natural allies, not foes, in the fight against the use of debased economic ideas in policy making.

But look, economists: do you think all is really so fine when a journalist paid to comment on the economy (and not just some trumped-up physicist-cum-science writer) not only possesses these views about your discipline but regards it as something of an eye-opener when someone points out in a science journal that the economy is not like this at all? Are you still so complacently sure that you are communicating your penetrating insights about economic markets to the world beyond? Are you so sure that your views are common knowledge not just in academia but to the people who actually run the economy? Maybe you are. But Nobel laureates like Joe Stiglitz and Paul Krugman aren’t.


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