New Institutional Economics

Who knows?

If measured by the standards of the current elite of the subject, then clearly not. I am apostate. I am an outsider.

Let me explain: I had the good fortune to attend The London School of Economics – I only mention this because it is important later in the story. It was too long ago for me to recall all that I studied there, but my concentration was what was then called Diplomatic History. What they call it now I have no idea. The only course in economics that I took was the common first year class for those who were not going on to become economists. I can, at this distance, only assume that the class was designed to be less specialized. Somehow I dimly recall the name Alchian. I do remember, however, getting stuck in the elevator with Lord Robbins as we both were on our way to his history of economics class. The book based on that class – although produced much later – still has pride of place on my book shelf.

Now this does not mean that I wasn’t interested in economics. My decisions back then were much more driven by my greater affinity for history rather than a distaste for what economics was, or was about to become.

Upon graduation rather than pursue history further, which is what my academic advisor suggested, I took the advice of my father and became an accountant. His attitude towards an academic lifestyle was both stern and unrepeatable, and I was too callow to resist. So accounting it was. By default. To this day I have no idea why I thought I would make a good accountant. For one thing my problems with dyslexia present an obvious hurdle, especially in those days of pre-calculator and computer. I struggled along doing moderately well, but it was clear I wasn’t destined for anything other than mediocrity. Besides, I really didn’t like it.

So I decided to switch. On a whim I applied to business school, this being the time when the allure of an MBA was untainted by what has befallen the business world subsequently. To the astonishment of all who knew me I managed to finagle my way into a prestigious American school and so embarked on another path through the real economy. And I mean finagle: the partner at my accounting firm who I had write a recommendation for me laughed when I told him I had been accepted. His reaction was clear: my success in gaining entry clearly had nothing to do with what he wrote.

So off to business school I went, only to be deeply disappointed at what I found. Nowhere were we told anything fundamental. Everywhere were we told the latest fad. This is when I was re-exposed to some economics, and I thought the juxtaposition of standard micro-economics with all its wonderful certainties and lovely ignorance of reality alongside classes that taught us how to develop strategies in order to baffle and confound the marketplace was perfect. Although, apparently, not many of us appreciated the irony. It was clear to me that I was being taught something clever in the finance classes, but that the cleverness depended entirely on the efficacy of the underlying theories – which we weren’t taught. And it was equally clear that whilst it was heretical to question the greatness of markets in general, it was perfectly fine to undermine markets with strategy and the other devices of marketing and so on, just so long as we provided something called ‘shareholder value’.

Upon graduation, and having discovered an interest in the aforementioned finance, I found myself in banking. And its was there that my life as an economist began.

It was an accidental reintroduction.

The Chairman of our bank wanted to increase our outreach into the press and the business community. For some reason this led him to search for someone who could communicate and give talks about the economy. He mentioned this to my boss, the Chief Financial Officer, who recalled my attendance at LSE – see I told you it was important. The CFO came to me one morning and said: “You’ve been to LSE, we need you to give a talk about the economy to a group of our customers”. So there I was, a week later, giving a talk to two hundred local business people about the national economy, its outlook and so on. The speech was the easy part. The questions were a tad more difficult. I clearly need to learn a bit about economics.

So I set out to educate myself. Those of you who know me will realize what comes next: I was disappointed, to say the least, in what I read. The subject was in tumult and had taken a radical turn since my previous tenuous exposure to it. The explanations were obscure. The relevance not clear. My audience[s] wanted more information than the subject wanted to provide. The trajectory of the discipline was tangential to the business world. It touched briefly, but then disappeared into what seemed to be a fog of convenient assumption designed to allow its practitioners subsequently to pluck precision from midair, magic like, and declare all sorts of attributes for markets that were simply not visible around me.

But it was fun, this economics. It was really fun. So I started getting my hands on all sorts of articles. Since I had no idea of curriculum I wandered all over the place. I recall reading a type written version of Allyn Young’s 1929 paper and thinking it sounded appropriate long before I ever came across the Santa Fe Institute. And Ronald Coase on the firm grabbed my attention: he has never been answered well, especially by the New Institutional guys who claim to be his heirs.

When I was ignominiously kicked out of banking I decided to dedicate myself to economics. My particular interest was how changes in technology would affect business. This seemed to be a fine intersection of business with economics. Back then we were all talking about ‘digitization’ and the impact of the internet. Since then we have been engulfed by endless business school fads like ‘innovation’ and ‘disruption’. And where are they in economics? Where in growth theory do we find them? In a residual. Well, it’s improved some since its beginning, but growth theory is still a tough issue for most economists. They’re too busy running the math of transactions in perfect markets.

That’s it. For the past thirty years or so I have read and listened. I have tried to understand. I have tried to explain what I have learned to those who ask. And I have written this blog for the past ten years.

So I am I an economist?

Not if by economist you mean someone who is blind to uncertainty: after all the entire structure of business is to seek profit from the uncertainties of the marketplace. Strategy is simply a method to create an alternative reality – one not so beset by uncertainty that investment can never be justified. Not if by economist you mean someone who believes in the mysteries of equilibrium: the world I worked in is for ever changing, if there is an equilibrium it is so remote that its presence is of little practical relevance. It might be out there somewhere, but who cares? Not if by economist you mean someone who believes in the rational choice described in economics books. That is a phenomenon I never have met. Yes people are rational, but in an idiosyncratic and personal way that defies the simplicity of economic theory. Not if by economist you mean someone who thinks that values are somehow set on the margin. I recall  pricing decisions being an administrative process loosely based on an understanding of scarcely reliable management accounting, profit targets, and pricing feedback from the marketplace that entered the discussion only in extremis. Marginal theory is a convenience for economists it is not a fact of reality. Not if by economist you mean someone who is blind to the subject’s political association. One advantage of being self-taught is that I realize the quirks and contexts within which current theories developed. And I know of the conveniently forgotten potholes that people like Joan Robinson or Oscar Lange thought ought ensnare modern theory.

Oh, this list could go on and on: what about the relationship with our environment? Or the evident sexism in the entire history of economics? Or, for that matter, in the way we measure an economy?

Economics has an allure for me, not because of what it purports to know, but because of what it quite obviously doesn’t know. Most of which it has chosen to forget or not explore at all.

So am I an an economist?

Yes, I suppose I am. Although I am still learning and quite prepared to acknowledge the gaps in my understanding.  Why? Because there’s so much yet to learn, and in the possibility of that learning, in that potential, we are all equal. Aren’t we?