Can Economists Explain Much?

Greg Clarke ends his book “A Farewell to Alms” with a not too encouraging summation about the ability of economists to explain much. Allow me to give you three lengthy quotes:

“In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.”

“Since then economics has become more professional. Graduate programs have expanded, pouring out a flood of talented economists armed with an ever more sophisticated array of models and statistical methods. But since the Industrial Revolution we have entered a strange new world in which the rococo embellishments of economic theory help little in understanding the pressing questions that the ordinary person asks of economics.”

“Our economic world is one that the deluge of economics journal articles, working papers, and books – devoted to ever more technically detailed studies of capital markets, trade flows, tax incidence,sovereign borrowing risk, corruption indices, rule of law – serves more to obscure than to illuminate. For the economic history of the world constructed in these pages is largely innocent of these staples of the discipline. The great engines of economic life in the sweep of history – demography, technology, and labor efficiency – seem uncoupled from theses quotidian economic concerns.”

It must be frustrating to try to stay within the boundaries of economics and end up having to admit that fully three-quarters of all growth since the Industrial revolution crops up in the standard models of growth as a “residual”. That residual being, as Moses Abromovitz suggested, being a measure of the ignorance of economists.

Which, apparently, is a very large ignorance.

Huge in fact.

The plain matter of fact is that economic theory has little to say about the most important artifact in world economic history: the enormous leap forward in prosperity the world, or some parts of it, has experienced over the last two to three hundred years.

We can forgive the early theorists. They were living at the beginning of the leap forward. They cannot be expected to theorize about it fully. The novelty and extent of the disconnect with the past might have been apparent to them anecdotally, but its persistence and thus its underlying drivers could not. We can thus allow them to appear parochial in their focus and in the relative naivety of their models.

Not so later writers.

Especially those since World War II, because in these more recent times we have had a second major artifact to explain: the apparent break from long term growth rates seen in the 1950’s through the 1970’s. Coming as it did shortly after the Great Depression and the manifest break down of early 20th century capitalism, this second discontinuity could have been used to stress test any theory seeking to explain the first. The appropriate question to ask would have been: what sort of theory can explain both the break out from long history represented by the Industrial Revolution, and the post-war acceleration? And, presumably, the more recent slow down.

Does such  theory exist?