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Economics – where are we?

August 19, 2011

I write as an amateur in economics. By that I mean that no-one has yet paid me for my views on economics, nor do I have any formal qualifications in the subject.

But anyone who has been paying attention can see that the whole area of economics is in a strange state at the moment. On the one hand we have brilliant technical people writing papers – mostly in universities, but sometimes in ‘think tanks’ or ‘quangos’ – on something they call Economics; on the other hand most commentators agree that the world has serious economic problems and that the West, at least, may be on the edge of some kind of economic collapse. And the professional economists cannot agree on how to sort this out.

In some ways all I am doing here is trying to understand the sort of economics we get in the news. Sometimes this involves making, what seem to me at least, obvious criticisms of current analysis, current paradigms: Why do we care so much about GDP? Why is it OK to bail out one sector but not another? How come some productive elements of the economy make money ( making things, helping people) but so do some elements which involve taking stuff away, reducing: waste removal, diet programs, retreats? What are we going to do about money? The entire world of economics seems rife with contradiction and confusion. This part of the blog is trying, in a small way, to progress my thoughts in this area.

The openness, the ‘amateurness’, if you like, of the discussion is exciting, refreshing. It takes you back to the early days of enlightenment philosophy, when scholars of the 18th century could write their papers for a general public and communicate on equal terms with them. This was fertile ground for interesting development and the youth of the subject made it seem alive and important. So now you may find comments on websites from – well we don’t know exactly who they are from – but they appear to be from amateurs and ‘men and women in the street’ who offer comments on the financial and economic crisis which are as insightful and helpful as many you can read in the textbooks.

I’m wondering, then, whether the real study of economics is now just beginning, just as enlightenment philosophy had a beginning before it was professionalised. All that other stuff in economics: the abstruse mathematical models; the blitheness with which external shocks were ignored; the avoidance of the inclusion of psychology or politics in some models; the disregard for the relationship between man and his environment, these were just the teething pains. Maybe this ‘classical economics’, as it is often called, is to economics what Medieval scholasticism was to theology: an intense, self-referential episode of analysis which ultimately withered due to its lack of relevance to anything outside itself.  I want to make it clear that I am in no way knocking the importance of quantitative thinking in economics – it is difficult to see how any meaningful analysis can take place without using mathematics in some part of that analysis – but it does look as if the way economics has used mathematics is no longer relevant or helpful in understanding the economics of the real world.

I’ve been struggling to find an analogy for the current impasse that thinkers on economics seem to be stuck with. I agree with Chrystia Freedland that there is an ideological stand-off. The talk of ‘political failure’ is just for journalists trying to stir things up. The real issues are much deeper, more conceptual than that. The stand-off is essentially between those who think we need to spend our way out of trouble (usually characterised as Kenynsians), and those who think we need to cut back our spending and our debt to return, eventually, to increasing economic growth. And no-one knows what the answer is.If there were a consensus answer, there wouldn’t be the stand-off.

Is this like the debate between Newton and Huygens over the corpuscular vs ray characterisation of light? That seems a bit of a weak analogy, even though it has the same flavour of contrasting opposites and mutual exclusivity as that famous discussion. Is it like the debate between the Lamarckians and the Darwinians over acquired vs inherited characteristics of living things? That doesn’t feel like a great analogy either, for those two positions may not even be mutually exclusive – witness the revival of interest in epigenetics which threatens to let Lamarck back into our understanding of evolution. Or is it like the perpetual debate between aetheists and theists? Nor does that analogy hit the spot; there is something of a qualitative difference between these positions which does not exist in the current impasse in macroeconomics.

Why do I care about finding an analogy? Well, I guess if one can find a similar stand-off in a different field, and look at its solution, one might get some hints about how to solve the current economics debate. It’s a long shot, but at least it’s a shot. And at the moment, this debate seems to be going nowhere. Interesting as the discussion is in itself, positions are hardening, bridges are being burned.

For myself, I think the solution may come completely from left field. We may need a completely new sort of money, a new concept of banking or accounting, a new way of oiling transactions in society. This is highly speculative stuff – and some of it even strays into science fiction – but we need to speculate, to try to think our way creatively out of this, now that the old models have ground to a halt, have ossified and risk shattering, bringing everything down with them.

I’ll write about money and Speculative Economics in another blog.

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