ECONOMICS: AN APOLOGY

The tens of thousands of students who began their university courses in Economics this year are going to be disappointed. A large part of their time will be  wasted. They deserve an apology.

Western economies have  made great progress since 1950; today we  enjoy living standards unimagined by our grandparents. Unfortunately, the textbook economic theory  taught today will not help students to explain how that progress came about.  Indeed, it obscures an understanding of how a market economy actually works. It is of little assistance in tackling the most pressing policy issues of our time, and remains a major obstacle to the development of economics as a science.

The essence of a market economy is change, as Marx, Hayek and other classical economists understood. New ways of doing things, whether they be new technologies, new products, new services or new patterns of trade are the characteristic ingredients of progress. Yet students  will be taught to look at  economic activity  through the lens of a theory in which almost nothing changes.

Since there is no place for change, there is no possibility of discovery or adaptation. In fact, no learning at all. There is no need for learning because  everyone knows what is available not just today but tomorrow and ever after.

In the real world, change creates uncertainty, one of the key facts  of  business life. In textbook economic theory it is assumed away.  Nor is there any room for human behaviour, politics, or the environment. But perhaps the strangest feature of the theory is its exclusion of those prime movers of progress, entrepreneurs.

Entrepreneurs are the human agents of change; in Cantillon’s phrase they are the pivot on which a market economy turns. They are not just headline-makers like Jeff Bezos or Elon Musk. Everyone in business who does something new is an entrepreneur, like the managers of the Moonrise Distillery in Clayton, Georgia who responded to a local shortage of hand sanitiser with a product adapted from their botanical gin.

Instead of recognising the fact of incessant change, textbook theory offers  a snapshot of economic activity at a single moment in time. Despite the fundamental differences between physical and human behaviour,  it mimics the style  and method of the physical sciences  without attempting verification of its assumptions or its conclusions. Its single virtue is logical consistency. Keynes observed that  a foolish consistency is the hobgoblin of small minds.

After the Second World War full employment became the principal objective of economic policy in Western countries. To teach students how this might be achieved, something called macroeconomics was introduced into the core curriculum. The peculiar feature of macroeconomics is that it is composed exclusively of totals and averages. Everyone nowadays has become familiar with phrases like ‘GDP’, a measure of total national output,  ‘the level of prices’, (an average) and ‘the quantity of money’, (a total).

Under the rubric of macroeconomics it was taught that increasing the total supply of money would cause the average level of prices to rise, and that a fall in total unemployment would lead to a rise in average wages.  These propositions no longer appear to be true. In order to find out why, we need to break down the totals and averages and introduce qualitative arguments as explanations. So macroeconomics does not seem to be very useful, except perhaps for back-of-an-envelope calculation. Yet  it continues to dominate the Economics curriculum and thereby the language of public discussion.

The  failings of  Economics have not passed unremarked, most notably by the Queen. Conventional economic policy prescriptions have lost credibility. As a result, outlandish ideas that would have been laughed at only a decade or two ago are now seriously entertained. Proposals for the erection of new barriers to trade,  negative interest rates, unlimited government borrowing and the unrestrained printing of money pass almost without challenge. They are widely believed not only to be harmless but even desirable.

There are several ways forward. Economic thinking over the centuries has produced a rich heritage of ideas that contemporary teaching has neglected. Those who like formality can study the economy as an evolving human complex system in which change is self-organising. Others may resume the tradition of political economy unwisely abandoned sixty years ago. The origin of both of these approaches is to be found in the theory of economic progress sketched out by Adam Smith in the first three chapters of his Wealth of Nations. The rest of the book is also worth reading.

Meanwhile, on behalf of my teaching colleagues and myself, may I apologise to Economics students past and present for our  underperformance.

[The author taught Economics at Harvard (1960-64), University College London (1967-69) and the Universities of Stirling (1970-74) and Strathclyde (1975-88) before becoming Economic Adviser to Standard Life (1989-2001).]