I\’ve heard this before put slightly differently

Yet, like most economists, I don’t view the study of economics as laden with ideology. Most of us agree with Keynes, who said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

The slightly different formulation was that neo-classical economics is a toolbox, one with which you can attempt to unpick and analyse certain problems and questions. Certain assumptions are useful at certain times, at other times they need to be discarded and others take their place.

Rational expectations for example, the assumption that our views of the future are randomly, not structurally wrong.

In one sense this is a tautology: if we\’re trying to work out how people behave then we must indeed measure how they do, thus whether they should, logically, behave another way is a non-sequiteur.

In another sense this is an assumption that should be junked at important points: for example, when we\’re trying to work out whether humans are systematically wrong in their beliefs.

One example might be hyperbolic discounting: we don\’t place enough weight on matters far into the future according to some metric of what we *ought* to do. If you want to try and predict what people will do then you need to assume hyperbolic discounting. Even if you think it\’s wrong that people do this.

Another example might be the entirely stupid idea that politicians are in the game for the good of the people rather than for the good of politicians. The stroking of the ego that exercising power provides. We might know that politicians are venal liars but we still need to study psephology as if at least some part of the electorate is dumb enough to believe them.

A toolbox, one with the hammer, the screwdriver and the pliers, the skill in using the toolbox being knowing which tool to use and when.

6 comments on “I\’ve heard this before put slightly differently

  1. Another example might be the entirely stupid idea that politicians are in the game for the good of the people rather than for the good of politicians

    Derisive satire aside, politicians are people too, therefore they are part of any equation.

    Recalling the “no such thing as society” quote, an important rule is to not invent spurious entities such as “the state” to explain economic policy. Friedman’s speech explaining that a tax on companies is actually a tax on people is a great example.

  2. “Economic policy is based on a collection of half-truths. The nature of these half-truths changes occasionally. Economics as a scholarly discipline consists in the periodic rediscovery and refinement of old half-truths. Little progress has been made in the past century or so towards understanding how economic policy, rules, legislation and regulation influence economic fluctuations, financial stability, growth, poverty or inequality. We know that a few extreme approaches that have been tried yield lousy results – central planning, self-regulating financial markets – but we don’t know much that is constructive beyond that.

    The main uses of economics as a scholarly discipline are therefore negative or destructive – pointing out that certain things don’t make sense and won’t deliver the promised results.”

    Willem Buiter: a fine piece of writing, that.

  3. Let me agree with the previous poster’s quote. In my limited experience, economics is mostly useful in explain what went wrong once you have screwed the pooch. Sure, if you are about to do something grossly stupid, it will warn you, but if you’re just doing something routinely stupid, you can find an economist or two who will support or oppose it, sometimes both.

  4. An unusually deep post! Of course all economic theory, and not just the neo-classical variety, provides only one prism (or toolbox) with which to interpret the world. There are many others to hand – the political and the religious come immediately to mind. All of them are inadequate. In William Golding’s words, “I have hung all systems on the wall like a row of useless hats. They do not fit. They are suggested patterns.”

    But to their adherents they are not; they are sufficient unto themselves. So it’s impossible “to work out whether humans are systematically wrong in their beliefs” because that’s the whole point of beliefs – they can’t be wrong, at least from the point of view of those who believe them.

    So when you say that politicians are “venal liars”, that’s just a point of view that disregards other, equally valid, perspectives.

    Let’s take an example close to your heart – the Financial Transactions Tax. I take it as read that the economic arguments against such a tax are overwhelming. However, there certainly seems to be a widely held view that such a tax would be a powerful message to senior figures in the financial sector that their behaviour over recent years has been a contributory factor to the UK’s current economic plight, and that their continuing indifference (huge bonuses, massive pay rises, etc) to the day to day reality of the circumstances of most of the British population
    is, quite simply, unacceptable to a lrage proportion of the electorate.

    So what is David Cameron to do? Well, obviously, he has to please the electorate by saying he fully supports such a tax, but he also has to accept the economic reality, which he does by imposing impossible conditions on its implementation.

    In political terms, that isn’t venal. It’s just realistic.

  5. Can economics be seen as a way to succeed in economics? Did anyone ever make a study of how employment as a university professor in economics (and also a student of one) influences your economic views; a published work a bit like what Tullock and Buchanan has done on the incentives in politics? There does at times seem to be something of a Keynesian beauty contest about the profession – a lack of true independence, indicating a certain amount of politics being performed. No?

    It would suit my ego to find something there; perhaps Deirdre McCloskey is worth buying?

    Tim adds: McCloskey’s latest, on hte bourgeois virtues, is definitely worth a read, yes.

  6. CR: “Well, obviously, he has to please the electorate by saying he fully supports such a tax, but he also has to accept the economic reality, which he does by imposing impossible conditions on its implementation.”

    Well, he could try explaining, in terms that a reasonably intelligent layman could understand, that FTT will not work, ever, and for that reason the idea is dead in the water. If “the electorate” as a whole is wrong about some economic fact of life, surely there’s a duty to correct it.

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