The Naivety of Economics

Economics plays a large part in the determination of policy and thus has an impact on our lives way disproportionate to its accomplishments. Because we are about to enter a period of great uncertainty that many of you express deep concern over, and because economic policy looms large within that concern, some of you ask me what I think economics is.

I don’t know.

Here are some suggestions:

1. Economics is an archipelago of unrelated ideas. Each island in the archipelago is occupied by a number of zealots who refuse to talk much with anyone else, and certainly refuse to explore ideas that might disrupt their version of economics. It’s important that you know what island an economist lives on before thinking about what they say. Different islands might offer totally contradictory advice. Different islands might not even be aware of the existence of other islands. Different islands all will tell you that their particular version of economics is the one that is the “truth”.
2. Economic is a faith. Since modern economics is largely resistant to empirical testing and has that slithery ability to ignore its own internal contradictions — economists are quite capable of retaining two completely opposite ideas at the same time and ignoring the contradiction whenever it is convenient to do so — we can all assume that it is more a set of beliefs grounded on faith than it is a set of beliefs grounded on a relationship with reality.
3. Economics is a caricature. Much of modern economics is so laughably absurd that an outsider coming across certain aspects of it might feel that it is a deliberate comic act, or at least, a satirical caricature of what a science or scientific pursuit might look like. For instance, when we discover that we are all assumed to know the future completely in order for certain economic models to work, we might ponder the integrity of the economist making the claim. Or we might simply assume it is some form of clever academic joke. Economics can be very funny if you are able to ignore the pomposity of its practitioners as they intone their comic lines. Just because economists take themselves seriously doesn’t mean the rest of us have to.
4. Economics is simply applied mathematics. This is increasingly true. Unfortunately economists nowadays like to wrap all their thinking in clever looking math so that no one outside their club can interrogate them too much. This is, I think, all part of the recent social trend to defend intellectual silos and make them impregnable to outside interference. In any case, economics in its contemporary incarnation is a maze of math. Some of it useful, most of it spurious. It is no accident that many graduating economists are hired to be mathematicians in businesses like finance. They really aren’t able to talk much about the economy, but they’re good at numbers.
5. Economics is a technology for politicians. This is particularly true in the post-Hayek and post-Freidman era. There was a time when economics was called political economy because its early practitioners thought of it as integral to politics. It is. It always has been since it was invented to justify the belittling of central authority as a capable economic actor. Those early folk were honest. The current batch of economists not so much. They like to pretend that economics is what they call “positive”. This means they pretend that they are like natural scientists uncovering timeless truths immune to human meddling. You might think this attitude odd when you consider that an economy is intensely humanly constructed, but economists would argue with you. Anyway the real purpose of the pretense is that economists can then make horribly anti-social claims and then simultaneously aver any ethical responsibility for the consequences of those claims. So-called positivity is simply a veil to disguise the political bias of economics. It is a libertarian project meant to undermine democracy. Or to is a Marxist project meant to undermine capitalism. Or it is a project meant to prop up social democracy. And so on.
6. Economics doesn’t exist at all. Because of its constant babble and total inability to converge on any one coherent theory or explanation of real economies, economics doesn’t actually exist. Instead there are a bunch of sub-topics that are very interesting in their own right, but which fail to add up to anything resembling a grand theory. This, I suppose, is simply a more extreme version of the archipelago explanation of economics, only with a more drastic yet realistic conclusion.
7. Economics is the scientific discovery of timeless truths about exchange. This is the preferred version held by most mainstream economists. They study exchange, its consequences, its motivations, and its characteristics. They build everything upwards from assumptions about individual behavior, with that behavior tightly described and controlled so as to be amenable to modeling. They ignore any phenomena that cannot be reduced to individual behavior. And they obsess over the twin holy grails of “efficiency” and “equilibrium” both of which they describe in highly limited fashion so as to be amenable to modeling.  This is the explanation of economics that includes references to “rationality”, “perfect information”, and all the other paraphernalia acquired through the decades to shore up celestial spheres of economic theory. It is a tottering mess. And it has ever decreasing relevance to anything we come across in the real world. Yet it sits proudly occupying the central territory of social science.

That’s enough.

Take your pick.

When I think about it I can see aspects of all these explanations lurking in contemporary economics. What is most annoying is that patently absurd nature of much of it, and the equally patently absurd way in which many economists elide discussion of that absurdity. They’ve grown up with it, they have embraced it, and it gives them their gravitas: they cannot afford to be honest.

I actually agree with Hayek: economies are vastly complex. This means that any and all theories about them are naive. They cannot possibly be comprehensive for precisely the same reason that Hayek argued complexity debunked centralized planning. We simply have insufficient information to know. We have, for example, insufficient information to know whether any particular configuration of an actual economy is “efficient”, or in “equilibrium”, and so on. So we invent microscopic artificial economies in which we can control everything and then identify those kinds of configurations. This is a meaningless activity since we can never take what we learn in those artificial worlds and apply it in the real world. We have no idea, and according to Hayek, we can have no idea, of whether what we observe in our experiments has any relevance to what we see out there in reality. There is no way of testing. Which lets economists off the hook of having ever to change their minds about their pet theories.

Hayek and his zealot followers then went further and argued that because we can rule out the chance of central planning ever arriving at an “efficient” configuration, we must assume that decentralized planning will get us there. This is nonsense. By the same process of thought we can also say with certainty that we have no idea whether free markets will ever produce an “efficient” configuration in the real world.

The smooth move from eliminating central planning to the subsequent assumption that, therefore, decentralized planning must be more “efficient” is simply a statement of ideology. It was designed to affirm the libertarian and anti-democratic trajectory of economics that Hayek and his acolytes wanted so much to send it on.

So they must have believed in the explanation of economics as a form of technology for politicians. They certainly didn’t believe in it as a science.

You would be naive not to realize that economics is an adjunct to politics. Then again, I think all economics is naive with respect to the complexity of real economies. So, of course, it’s political.

It has to be.

Doesn’t it?