Student Essays on Post-Autistic Economics

from post-autistic economics review : issue no. 19, April 2, 2003

Politics Versus Economics: Keeping It Real

Daniel Gay (PhD student at the University of Stirling, UK)

For someone who previously thought of duality as part of the Kama Sutra and the business cycle as an environmentally-friendly way of getting to work, the last year has been a struggle. A struggle not foremost in understanding complicated mathematical techniques and learning theory (although these tasks were far from easy), but a battle to understand why otherwise clever people devoted so much time to limiting their horizons.

Following my British undergraduate education in politics, philosophy and economics I completed a mainstream masters degree in political theory. After a few years as a journalist trying to decode the pronouncements of the dismal science, I returned to university to study a masters in economics. But if I hoped for a clearer understanding of how real people share out scarce resources, I was maximising the wrong function. If I thought I would gain a better understanding of real economies, I was sorely mistaken. If I believed I would at last hear the God Oikonomos, I was surely beyond redemption.

Here, I would like to compare my experiences of learning politics and economics as a postgraduate. I found that three features of mainstream economics teaching made it less helpful for understanding real life than political theory: its shortage of rigour, the dogmatic way it uses concepts and its lack of usefulness.

Rigour not figures

Rigour, according to the latest edition of the Oxford English Dictionary, means “the quality of being extremely thorough, exhaustive or accurate”. Usually someone is considered rigorous if they have delved into an issue and thought about every angle, arriving at a conclusion that attempts to tie up loose ends.

Mainstream economics, as is well known, prides itself on its rigour. Applying a general equilibrium approach requires showing with numbers how demand and supply interact simultaneously in several markets to produce prices for all goods. The practitioners of mainstream economics castigate those in other social sciences for “hand waving” and failing to quantify variables. Political theory, like sociology, is particularly vulnerable since many strands of the discipline openly dispute the idea of measuring society. For instance much of Marxism denies the possibility of reducing human society to individuals that can be added or subtracted.

But if political theorists are idle gesticulators, then mainstream economists are invisible hand-wavers. Their version of economics is, in fact, unrigorous because it leaves out so many possibilities. It is not thorough because it mostly analyses only things it can measure. It isn’t exhaustive because it is implicitly bound by an uncritically positivist and strictly utilitarian worldview that precludes uncertainty. It is inaccurate; economists themselves endlessly repeat the mantra that they are no good at forecasting levels – only directions – and often even these are wrong.

And if accuracy is judged by explanation rather than prediction, then many important parts of economics only appear rigorous insofar as they assume their results. For example that jewel in the crown of the new classical tradition – real (surreal?) business cycle theory – simply assumes a close approximation of real economic fluctuations and therefore produces similar predictable output movements to the data. Nelson and Plosser’s well-known test disputing predictable trends in GDP over time might be one part of the argument against government intervention but it surely shouldn’t be considered a conclusive piece of evidence when teaching the theory of economic fluctuations.

If I had handed in a politics essay containing within its argument only the blind empiricism of econometrics, it would have been graded a ‘D’. In politics, years are spent drumming in the need to combine facts, theory and values in the correct combination to achieve a compelling syllogism. Simply pointing out a historical relation between several variables, however complicated the maths, is considered insufficient to prove a case. True rigour is achieved only through a combination of argumentative forms and evidence; empirical, theoretical, epistemological, ontological. To misquote Paul Krugman: a half-hearted cheer for formalism, and reserve the other two for broad-mindedness.

Creative concepts

The analytical pretensions of economics derive in large part from the dogmatic way it uses concepts. Where politics frequently strays into the never-never land of creativity, economics steadfastly sticks to its tried and badly-tested tools. In political theory we read the creative writing of Hilaire Belloc and GK Chesterton for their espousal of community values, or the novels of Jean-Paul Sartre for their subjectivist approach to existentialism, concepts that couldn’t be communicated through standard philosophical works. But in economics we paced the well-worn treadmill of Samuelson, Solow and Sargent – geniuses no doubt, but hardly the free-thinkers of their generation.

Economics sticks to prefabricated concepts because it thinks it is gradually improving its grip on the world. But what it fails to recognise is that the real world is dynamic and elusive, and that understanding it requires an ever-changing and nuanced approach. A variety of human activities that can be described as economic cannot be understood by strictly analytical tools. Does it clarify matters to label the Indonesian exchange rate between 1997 and 2000 – a period during which it swung between 2,500 and 15,000 to the US dollar and back again – by an ageing metaphor borrowed from physics? Or would it make more sense to question and redefine the concept of equilibrium in crisis situations?

Because economics builds up an edifice of analytics, it is simply hard to understand. That is why so many undergraduates drop out early on and take up more intuitive subjects. It is easier to grasp subjects that obviously relate to changing, everyday life. Most of the physical sciences change their views of the world around us, as do the humanities and social sciences. Economics is almost alone in the way it clings so tightly to past ideas. If it was open to wholesale re-evaluation – like physics accepted the quantum revolution – it would be much easier to understand and more popular.

Most students can see straight through the attempts of economists to present the subject as a seamless whole. I remember countless post-lecture whinges: about how if Akerlof and co. say that information is distributed asymmetrically then why does general equilibrium theory assume that it isn’t? Or about why many Brander-Spencer type arguments for strategic trade think that assumptions should be realistic, while the rest of macroeconomics argues precisely the opposite.

Not that there’s anything wrong with contradiction. Reality is contradictory. The point is that economics would be much more honest explicitly to admit its points of difference, and would arrive at better conclusions if it was creative in its use of concepts. The only compulsory course on my political theory MSc was entitled: “Methods and Controversies in the History of Political Thought.” Method, controversies and history are all practices studiously avoided by conventional economic thought. But arguing about and redefining concepts is part of good science.

Useful or toothless?

A lack of rigour and rigid use of concepts might be excusable if economics was useful. It isn’t. Even though many students study economics to postgraduate level instrumentally – usually to gain a career in finance – they rarely use the tools they learn. Nobody would become an investment analyst if the strong form of the efficient markets hypothesis were true. Many financial professionals carry at the back of their minds a vague intuition that supply and demand are supposed to equilibriate, and so on, but much more useful is a practical understanding of how real exchange rates move, and of how stock and bond markets work in different countries.

Even some students academically interested in economics grumble about its uselessness. It is an oft-heard refrain that microeconomics is a cosy exercise easily performed in an exam, but trying to pin it down in research is much harder because reality starts to intrude. For me, microeconomics asserted a kind of Stockholm syndrome – in the end I grudgingly indulged my imprisoner. But it was less useful than the techniques learnt in politics.

You might think that political theory was about as abstract as it is possible to be. How can a discipline whose sole intent is – by definition – theory, have anything to offer everyday life? But because political theory is self-critical and pluralistic, it offers tools that are much more useful. Economics may purport to get down to the nitty-gritty details, but because of its rigidity it remains hopelessly stuck in its own nether world of axioms, lemmas and symbols.

Reading the business pages of a newspaper becomes a lot more informative if you have studied Marx’s theory of ideology, whereas much of academic financial economics is irrelevant. Michel Foucault’s definition of power relations says more about the behaviour of actors within the capitalist firm than does microeconomics. The Weberian theory of legitimacy offers a broad and adaptable understanding of the political state because it doesn’t depend on unusual assumptions and can therefore be applied in a variety of situations. As a number of authors have shown, using unrealistic assumptions as an heuristic device often robs economic concepts of real world validity. Students often accuse academics of being out of touch, but it is university economics above all that refuses to engage with the ordinary world.

Conclusions

Of course a lot of economics is realistic. As I have suggested, applying some models from the new trade theory requires realism of assumptions. John Maynard Keynes gives a nod to real people by making uncertainty central to the general theory; the more uncertain agents are, the more likely they are to hold money and the higher the interest rate. Critical realists identify the existence of a deeper level of economic reality of which we can gain open-ended knowledge.

Political theory is only more realistic than economics because of certain features common to all broad-minded sciences – including pluralism and disagreement over certain basic issues. It has no inherent superiority. Parts of political theory can be woolly, distant and difficult to use. It is plainly harder to apply the knowledge of a diverse discipline. The so-called analytical thinking of economics at least has the merit of being able to supply answers, albeit in a limited sense.

But therein lies the problem: reality is messy and difficult to grasp. Usefully comprehending messiness and difficulty requires intuition, an open mind and common sense. And just because a discipline is hard to apply, it doesn’t mean we shouldn’t try. What are we doing, if not trying to understand real life? Are our ivory-tower proclamations aimed at constructing a cosy scheme that holds internal consistency, or are we highlighting and explaining useful features of real life with a view to changing them?

Rigour, flexibility and usefulness are linked. A discipline must at least show willingness to comprehensively rethink its use of terms if it is to remain objective and rigorous. If it doesn’t, it is not as useful as it could be. If it can’t incorporate a number of different tools then it is neither fully rigorous nor useful. If it isn’t useful, it should surely think again about the concepts it uses. Avoiding rigour, dogmatically adhering to old concepts and forgetting that knowledge must be useful, all ultimately deny realism.

Economics could easily rise from the status of idiot, to idiot savant of the social sciences. And elucidating economics could be at least as rewarding as pontificating about politics. But only when economists remove their blinkers.

Bibliography

Akerlof, G. (1970) ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, The Quarterly
     Journal of Economics, 84: 488-500
Brander, J. and B. Spencer (1985) ‘Export Subsidies and International Market Share Rivalry’, Journal of
     International Economics, no. 18: 83-100
Foucault, M. (1980) Power/Knowledge (London, Harvester Wheatsheaf) (Ed. Colin Gordon)
Keynes, J. M. (1936) The General Theory of Employment, Interest and Money (London, Macmillan)
Krugman, P. (1998) ’Two Cheers for Formalism’, The Economic Journal, 108 (Autumn): 1829-1836
Lawson, T (1997) Economics and Reality (London, Routledge)
Samuelson, P. (1947) Foundations of Economic Analysis (Cambridge, Harvard University Press)
Sargent, T. (1987) Macroeconomic Theory (Boston, Academic Press)
Solow, R. (1956) ’A Contribution to the Theory of Economic Growth’, The Quarterly Journal of Economics,
     vol.70, Issue 1 (February): 65-94
______________________________
SUGGESTED CITATION:
Daniel Gay, “Politics Versus Economics: Keeping It Real“, post-autistic economics review, issue no. 2 April 2003, article 1, http://www.btinternet.com/~pae_news/review/issue19.htm