Monday, March 30, 2009

What is economics

So far, my posts on economics have been fairly general if not lame. I have been trying to come up with an approach to talking about the economy that is unique or that would provide insight into its workings that are not available elsewhere. During the current economic crisis there are many cogent examples of intelligent analysis that one can turn to for insight. Paul Krugman, James K. Gailbraith, Amartya Sen, and Joseph Stiglitz are a few of many people I turn to for wisdom regarding the global financial system and the roots of the current crisis as well as proposed solutions. I agree with much of their analysis.

But, it is also true, that I disagree fundamentally with each of these economists in regard to their approach to their field. Economists are trained to do a particular analytical type of analysis that has a heavy reliance upon statistics and mathematics. There is nothing wrong with turning to statistics (or econometrics) or mathematics when doing economic analysis and looking for some insights into how economies function. However, over the last 60 years, as econometrics and neoclassical economics—with heavy reliance upon mathematical analysis and modeling—have increased in importance, economic analysis relying upon rhetoric and storytelling has been shunted aside and the field of economics has become increasingly hermetic and unintelligible to the average person.

My goal is to tell a story about economics that brings this trend toward mathematics into sharp focus, but does not veer away from the ultimate story about what the economy does and how it allows us to live in the world. To do this we have to start from the beginning and describe what economics is.

When I was a graduate student in economics, I taught an introductory level undergraduate course in economics. On the first day of class, I asked all my students to define what economics was. There were as many definitions as there were students. Most of the definitions said something about money. After going through my students answers I told them that Economics is the study of the economy, which begs the question, “what is the economy?”

Lets begin with the standard neoclassical definition of Economics. Lionel Robbins provides the modern definition of economics as “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.” This differs markedly from Alfred Marshalls turn of the century definition that states economics as “a study of mankind in the ordinary business of life.” Marshalls definition is much more general and allows much more to fall under the rubric of economics and what it is that economists study. Marshal elaborates further to say that economics “examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.”

What Marshall was one of the fathers of welfare economics and Robbins did not think economics should be concerned with concepts that were not measurable. Thus, Robbins became the father of a more rigorous economics that tried to study only what was measurable. The influence of Marshall and Robbins was enormous among modern economics known as neoclassical. However, in Marshalls time there were still economists, such as Thorstein Veblen, who relied upon rhetorical analysis and focused on the “more important side, a part of the study of man.” Robbins definition refined Marshalls Welfare analysis, which created supply and demand curves with the Lagrangian equations behind them, and cast aside all analysis from economics that could not be appropriately measured.

Robbins definition of economics as “the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses,” restricts the study of human behavior to relationships. These relationships are all measured using price as the common metric. The given ends are what is produced for consumption and the means are the resources we use to produce them. The alternative uses refer to the choices we make for both production and consumption. All of this is captured inside of equations describing relationships between ends and means with price as the common metric tying them together. Price is the quantity of money, so we can see how the influence of money to the study of economics became the dominating focus of economics until it becomes difficult to think of the economy without thinking of money.

We compare products and make choices based upon price and the amount of money we have. When the price of a product goes up, we demand less of that product, ceteris paribus. When price goes up, producers also wish to produce more to that product, ceteris paribus. The result of all this economic analysis is the false impression that we can measure and predict our choices. No other social sciences come close to economics lofty ambitions for predicting human behavior, although many, such as psychology, are trying very high. Because of this, economics is often referred to as the queen of the social sciences and is said to be closer to a science than all other social sciences – even offering a yearly Nobel prize to economists for their contributions to the science.

I want to go back to describing the economy using rhetoric and focus more on the study of humanity by observation and not necessarily by measurement and relationships. Rhetoric is often called the art of persuasion and many people think it is inferior to science or mathematics because it does not reveal a truth or essence, but rather is capable of tricking or fooling someone into believing a false conclusion. Although it is true that some one may be able to lead a person to the wrong conclusion, rhetoric also requires one to make a compelling argument and allows the reader to come to their own conclusions based upon the evidence provided from the author.

In rhetorical economics, the author (me) is not trying to prove an economic insight or accurately predict the future. It the author could do either of these things he most assuredly would. However, the author believes that neoclassical economics with its overreliance upon mathematics and econometrics is also engaged in rhetoric. Neoclassical rhetoric operates under a false rubric that defines itself as science and claims to be offering proofs instead of evidence.
But, the main drawback of neoclassical economics is that it has become a field in which only a few are baptized and allowed the keys for understanding and then truths are revealed from the high priests above in which we all are supposed to accept without question. If Economics is a part of the study of humanity we should all be able to engage in this discussion.


Dr. Rich said...

Its a lot like what Pirsig said about the high priests of physics who dictate what reality is to the rest of us, only to change it around every few years. Reality should'nt only be understood by a handful of people, so he changed all that and now we understand reality as Quality. And so it should be for economics.

Andy B said...

Kind of also like what Matt said about the high priests of the MOQ, too.