Economics on Trial

The Death of Economics
by Paul Ormerod
Faber:  London, 1994

ATTACKS ON the practice and profession of economics are not new to Australians.  For some years now we have seen a succession of books and conferences denouncing, in particular, the evils of "economic rationalism";  a crusade now joined by Brian Toohey's Tumbling Dice, which adds economic modelling to the list of heresies.  It is, therefore, interesting to have a British book which seems to belong to the same line of debate.  Despite the title, however, The Death of Economics is very different from its Australian predecessors.  It is written from inside the profession, by one who appears to have an impressive command of the technicalities of his discipline.  It will give some comfort to the anti-rationalists, certainly;  and irritate some of their bêtes noires.  It is in the end, nevertheless, a plea for better economics, rather than an irrational demand to give up economics altogether.

Perhaps the title was wished on Ormerod by his publishers.  It is certainly misleading, in that it is not about the "death" of economics at all -- perhaps rather, if Ormerod had his way, a rebirth of economics.

The book is directed at the public policy debate in general, rather than at fellow economists.  It is for the most part clearly and forcefully written, at about the same level, say, as an Economist briefing, and though economists will find it much easier going, it is accessible to determined non-specialists.

MUDDLED MODELLING

Ormerod's argument, very briefly, is that much of economic practice is flawed.  He believes in particular that the theory and practice of economic modelling (and hence much of the economic policy advice based on such modelling) are widely astray, because of the extent to which that practice depends on competitive equilibrium theory.  It is that which enables economists to say what happens when one part of a given set of economic circumstances changes, moving from one notional point of equilibrium to another.  Ormerod believes, strongly, that it is a theory which cannot bear close scrutiny.  That leads into the most interesting section of the book, in which Ormerod tries to explain why linear mathematical models are of limited usefulness for complex phenomena such as economic behaviour, and why non-linear theory (now becoming familiar to laymen in its "chaos theory" guise) offers a more useful starting place for better theory and practice.

Ormerod illustrates his thesis by a discussion of unemployment, showing how unemployment levels tend to fluctuate quite closely for some years around notional "attractor points" until an economic shock moves the point, up or down, to provide a new focus.  His point here is that the traditional economic measures (such as demand management) will affect only the oscillations;  what is needed is a way of shifting the attractor points.  He goes on to offer his own minimal non-linear model of the macro economy -- the details of which we can leave to professional economists.

Economists and non-economists alike will find much to chew over in all this.

NARROW FOCUS

The focus on varieties of economics is remarkably narrow.  The reader would never guess that there are whole schools of economics which do not share the theoretical framework which Ormerod so forcefully criticises.  No single economist of the "Austrian" school, for instance, is mentioned.  And many "free market" economists would be surprised to discover that their preferred approaches are alleged to depend intimately on competitive equilibrium theory.

Indeed, it has to be said that Ormerod, in concentrating so heavily on equilibrium theory, gives a rather skewed picture of the huge range and wealth of economics as a discipline.  In fact, his views on the pitfalls of modelling would be shared by many economists;  his critique is not quite the solitary voice in the wilderness that his tone would have us believe.  In Australia, many practising economists are very wary of the applicability of anything much beyond the classical micro level -- and for reasons which have as much to do with politics as economics.  Much economic policy-making in Australia since the early 1980s has been a caricature of the management policies Ormerod criticises.  It may be fortunate that the notions summed up in the claim that "I have my hands on all the economic levers" have been fairly thoroughly discredited in Australia in recent years by the politicians who have practised it.

Ormerod also indulges in what can only be called some cheap shots.  It is unnecessarily irritating to read, for instance, that "It may, of course, be mere coincidence that at a time when barriers to trade within the European Community are lower than ever before ... Europe is entering a sharp recession!"  It is simply silly to eliminate all factors apart from free trade from such an observation.  This sort of shallow prejudice characterises quite a number of his observations, such as his discussion of the US labour market.

BLIND SPOT

Ormerod shares, too, some of the blind spots of the tradition which he is attempting to demolish.  Like too many economists since the 1930s, he devotes too little attention to the problems caused by institutional rigidities in labour markets;  apparently sharing the common belief that even temporary downward movements in the price of labour are not to be contemplated.  (This is curious in that his proposal for job-sharing to alleviate chronic unemployment amounts to much the same thing, in a rather less efficient form).

Perhaps the single biggest flaw, however, in a book so obviously directed toward improving the public policy debate, is the omission of any serious discussion of the interaction between economics and politics.  Economic policy is not formed and implemented in a vacuum.  Nor is it implemented by benevolent, disinterested guardians of the common good.  So while it may be quite easy to agree with much of Ormerod's critique of the traditional macroeconomic policy apparatus, it is unwise to omit the political failure which may well have caused far greater economic damage (unemployment, for instance) than any misconceived economic theory.

What one misses in all of this is a sense of the real wealth of economics.  The real virtue of economics is not in mathematical modelling, in the pages of calculus which adorn the journals, but in providing ways of thinking about the world which are quite unique and uniquely helpful.  It is this that has enabled economics to extend its empire so much in the last 50 years.  Notions such as the scarcity of resources, efficiency, equity, comparative advantage, ascertaining and satisfying preferences, the role (good and bad) of self-interest -- to name only a few -- are hugely valuable tools.  This is a damaging omission, and for two reasons.

First and not least because those ways of thinking offer a logic superior to what former senior OECD economist David Henderson so aptly characterised as "Do It Yourself Economics".  One of the problems economics faces -- one acutely present in the current "economic rationalism" debate in Australia -- is that its outcomes are so often counter to intuition.  The argument for industry protection, for instance, seems unassailable, and not only to committed "economic irrationalists".  (Indeed, Henderson's short book Innocence and Design, taken from his 1985 BBC Reith Lectures, should be one of the principal starting points for economists trying to improve the quality of public policy debate).

Second, those ways of thinking do in fact seem to correspond closely with observed patterns of human behaviour.  This would seem to mean that if the complex models generated by competitive equilibrium reflect the same patterns of economic behaviour, then the problems with their application lie in areas other than those suggested by Ormerod.

POLITICAL ECONOMY

Apart from his brief historical introduction, this sense of the richness of the economic approach is absent from Ormerod's polemic.  This absence is strange, because ultimately what Ormerod advocates is a return to old-fashioned "political economy", with the integrated understanding of politics and economics and ethics which so strongly characterised Adam Smith and his successors.  He is perfectly justified in criticising the simple-minded application of model-based economic theory;  he is right in trying to find models which can more accurately reflect the complexity of human behaviour;  and equally right to try to end the divorce between theory and society.  For those points alone his book is worth reading.  One cannot help feeling, however, that the arguments could have been better put.