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Rethinking Economics Talk
- 1. Rethinking Economics Marc Gomez, Kishan Rana
- 2. Introduction
- 3. Critiques of economics aren’t new Milton Friedman (1999): “…economics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems“ Mark Blaug (1997): "Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing.”
- 4. Rethinking Economics Student-led movement in the UK 14 branches “Demystify, diversify and invigorate” economics Started with Manchester University Post-Crash Economics Society – founders of whom wrote The Econocracy.
- 5. The Econocracy Noun. A society in which political goals are defined in terms of their effect on the economy, which is believed to be a distinct system with its own logic that requires experts to manage it. Gives power to those who understand it – but how do they view the world?
- 6. Economics profession under criticism, especially after financial crisis. Failed to predict it and arguably contributed to it Accused of producing theories that are irrelevant to the world
- 7. But this seems strange, why are economists so prestigious, why does nothing change? Seems like critics are asking you to believe in a conspiracy theory or saying that economists are dumb
- 8. I will try to give a peak into what economists do and what university students learn about. The core problem with economics is quite subtle. If it is not pointed out it is very easy to miss. Note: Not all critics agree with this
- 9. CORE PROBLEM: THE BELIEF THAT ANY ECONOMIC THEORY HAS TO BE EXPRESSED IN THE FORM OF A MATHEMATICAL MODEL If your model makes sense mathematically, then it must be right
- 10. A model is a simplified representation of something Not 100% accurate but makes important things clear
- 11. A MATHEMATICAL model is similar but it’s on a graph Simplest model: supply and demand Supply Curve Demand Curve Price Quantity 10 20 30 40 50 60 70 80 Market Price Total Quantity Produced 10 20 30 40 50 60 70 80 90 100 110 120
- 12. Demand Curve Price Quantity 10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 80 90 100 110 120
- 13. Supply Curve Price Quantity 10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 80 90 100 110 120
- 14. Supply Curve Demand Curve Price Quantity 10 20 30 40 50 60 70 80 Market Price Total Quantity Produced 10 20 30 40 50 60 70 80 90 100 110 120
- 15. Using the model as a tool to answer economics questions WHAT HAPPENS IF THE PRODUCT BECOMES CHEAPER TO PRODUCE? e.g. technological progress – more will be supplied at every price. More people think it’s worth it to supply. Supply Curve Demand Curve Price Quantity 10 20 30 40 50 60 70 80 Market Price Total Quantity Produced 10 20 30 40 50 60 70 80 90 100 110 120
- 16. WHAT IF THE PRODUCT BECOMES MORE POPULAR? More people are willing to buy it at any given price (more is demanded at each price) Supply Curve Demand Curve Price Quantity 10 20 30 40 50 60 70 80 Market Price Total Quantity Produced 10 20 30 40 50 60 70 80 90 100 110 120
- 17. The model makes a set of simplifying assumptions to reduce the amount of moving parts. Mainly: That the product is homogenous, all business produce the exact same product, same quality, only important factor is price That no one consumer or business is big enough to single handedly alter price, they are all “price takers”, the price is given by the marketplace as a whole Consumers are aware of all available suppliers and they can change from one to the other easily It ignores other issues about the world, like inequality, politics, money and credit, marketing and branding. Supply Curve DemandCurve Price Quanti ty 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 Marke t Price Total Quantity Produced 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 0 1 0 0 1 1 0 1 2 0
- 18. Economists are aware that all of these can contribute to prices and quantities produced but they are treated as ‘noise’. These things can affect prices, but they aren’t the underlying mechanism that drive markets to reach a certain price and quantity. Explain how the economy works in a vacuum, to apply it to the real world . Find the underlying mechanisms, otherwise you just have a lot of case studies
- 19. This is an example of a (simple) economic model All economists learn about, and practise, are this sort of thing. Learn and come up with models and try to apply them to the world. No model = Not real economics 2 anecdotes
- 20. The problem with this is that assumptions are made for the sake of mathematical tractability, not because they’re realistic or it somehow makes sense to asume them. “For the purposes of medelling simplicity, we will asume that…” “It is intuitively plausible that…”
- 21. Assumptions made in models taught at univeristy, published in journals or that have won Nobel prizes include: -That people can and do collect all available information about markets, bothhow it is now and how it has been in the past, and instantly make complex calculatons based on this information to predict what the probability of some event occurring in the future is. -That natural resources are endless -That banks are simply intermediaries between borrowers and savers -People make decisions based on their own independent judgement, are in no way affected by others’ judgement of a situation -Some models start by saying “asume there is no unemployment” or some other economic state -That all businesses have a choice to completely replace labour with machines and vice-versa -And many more!
- 22. Example – University of Exeter Lecturer Research published
- 24. Models ignore many important issues about the world – politics, inequality, … To understand what is happening in the world around you, you have look at the things that are making it happen.
- 25. Summary NO NEED TO BELIEVE IN CONSPIRACY THEORIES OR THINK ECONOMISTS ARE DUMB. The discipline has gone astray for other reasons: -Every theory mut be presented as a model for it to count as “real economics” -Models make simplifying assumptions for the sake of modelling simplicity and ignore many important facts about the world -These assumptions tend to be unrealistic but tend to be accepted -Conclusions follow from the assumptions -Not clear how to use the models to help with real world problems because the world isn’t how the models describe them to be and the models ignore facts that might help explain the problems
- 26. THE UNDERLYING PROBLEM THE BELIEF THAT ECONOMICS IS A NATURAL SCIENCE, NOT A SOCIAL SCIENCE. REINFORCES THE OVERUSE OF MATHS – MATHS GIVE THE IMPRESSION OF UNBIASEDNESS – IF IT IS PRESENTED IN MATHS IT MUST BE TRUE, NOT JUST SOMEONE’S OPINION
- 27. What can be done? We’ve focused on what is wrong, but not on what can be done about it No single way of thinking about the economy One thing that can be done: PLURALISM – economics shouldn’t be a textbook subject.
- 30. Context is everything - The decision on what to ignore in the abstraction process is affected by the economists’ standpoint
- 31. Conclusion Not saying everything goes. Not saying that if you know all the schools of thought then you will have a complete picture of reality.
- 32. Conclusion This requires economists to concede that economics is not a natural science. You can never achieve truth, only clarification of certain things in a certain time. Make your best guess using all the tolos that you do have.
Editor's Notes
- So as Kishan just explained economics as a discipline or the economics profession or whatever you want to call it has been criticised, there have been always been critics but there has definitely been an increase after the failure of economists to foresee the recent financial crisis and arguably to partly contribute to it. Mainstream economists are accused of coming up with theories that are irrelevant to the world, and which are useless to understand what is going on around us.
- But to someone that hasn’t studied economics this probably seems quite strange and counter intuitive, after all. If it was the case that what the vast majority of economists do makes no sense or is useless why do their theories get Nobel prizes, why do policymakers listen to them or more importantly why do these economists not realise? Are they just dumb or do they have no interest in understanding the world around them and they for some reason enjoy to publish useless predictions and laugh in their offices when people take it as truth? Probably not. When you first hear these criticisms it almost seems like critics are claiming there is some sort of conspiracy theory to keep the world misinformed or that mainstream economists are just dumb, do they not see that more often than not they make predictions that are worse than useless?
- So these are all huge questions and there is enough to say about them to write 50 books about it. But what I will try to do is give a peak into what economists do and what economics students learn at university so that you can understand why the core problem of what is wrong with economics is not very obvious, but not because of that is it less important. The book the econocracy for anyone that is interested is more focused on how economists have become these bigger than life people that seem to be able to understand everything going on about them and what the consequence of any decision will be and how this is completely unjustified, but doesn’t really tackle these questions which I think are probably the most interesting ones for non-economics students especially. Not all critics of the discipline agree in what is the core problem with economics, but I guess this is my talk so I’ll give what I think is the core problem which I think explains most of the problems with economics, and I’m definitely not alone in this.
- So the main issue is the BELIEF THAT ANY ECONOMIC THEORY HAS TO BE EXPRESSED IN THE FORM OF A MATHEMATICAL MODEL. So any concept you want to put forward or any theories about why the world is like it is why things that happen happen have to be presented as a mathematical model for them to count as ‘real economics’. And almost most importantly, that if you present an idea as a model and the model seems to make sense and the conclusions you come up with seem intuitive then your explanation of the process that your theory describes about why something happens must be accurate. So now you’re probably wondering what a mathematical model is exactly, which I will explain, but what I want to get across is that this belief is widespread in economics academia, so much so that people don’t realice they believe this or if you pointed it out to them then they would find it obvious and unintereting.
- So what is a mathematical model. So, first, a model is simply a simplified representation of something in a sort of diagram, so for instance you learn about atoms in chemistry you are shown models of atoms. Now this is not how an atom looks like, the electrons are flying about in a cloud and the protons and neutrons aren’t actually little balls, but you get it, and it would be harder to understand how an atom works if you just got shown a picture of it, if you could do that. Or the solar system is another example.
- A mathematical model is similar but it’s on a graph, and it’s corresponding equation and set of variables. So the most basic model is the supply and demand model. Supply and demand so basic like a doctor doesn’t know heart pumps blood. I will base my explanation of what is wrong with economics using this model. All it is expressing is basically that for a given product, say apples, quantity demanded will be higher the lower the price is and that supplier will be willing to provide a higher quantity the higher the price because more people will think it is worth their while to produce this product. There comes a point where suppliers and consumers meet on a price and a quantity, and that becomes the market price and the amount produced, because the only people in the market left to buy the product will only buy the product at a price no one is willing to supply at. So for now it doesn’t really seem that controversial, yes in the real world the curve of how much people are willing to but at a certain price is not very smooth, but it gives us the intuition that what the price of a product and the quantity of it that is produced is mostly to do with what consumers are willing to pay and what producers are willing to supply and that there comes a point where a certain quantity produced and price are arrived where no supplier thinks its worth it to provide any more of that product at that price and no additional consumer thinks it’s worth.
- Another example, what if it becomes more popular or more valued, some scientist discovers that apples are extremely good for your health. So the world might not look exactly like this but it seems like we have isolated the core mechanism which drives what you see around the world, it allows us to think about economic questions in some systematic way, and it’s better than just saying ‘Based on my general knowledge I think this will happen”. And the results we come up with seem quite intuitive too.
- Like I said, this model is not an accurate representation of the world, it makes a set of assumptions to simplify the world. Mainly, it assumes that: That the product is homogenous, all business produce the exact same product, same quality, only important factor is price That no one consumer or business is big enough to single handedly alter price, they are all “price takers”, the price is given by the marketplace as a whole Consumers are aware of all available suppliers and they can change from one to the other easily We asume that this is the case to reduce the amont of ‘moving parts’ so we can focus on specific factors (namely the direct relationship between price and quantity. Our models says nothing about politics, about inequality (we simply say that some people are willing to pay higher prices than others, but this might be simply down to preferences), we say nothing about money and credit, marketing and branding, product differentiation, although these are all things that contrubite to the prices and quantities produced.
- Economists are aware that these assumptions are unrealistic, but they would argue that this gives a better understanding of the world, that although it doesn’t include every last detail about the world it allows us to understand it better. We remove all the noise to uncover what is behind the underlying mechanism, and that if we have to stop and think about every single detail in every situation, then you wouldn’t have theories you would just have a collection of case studies, we have to be able to abstract from reality to see what is important and that you have to make some assumptions to simplify and keep things constant so you can explain the underlying mechanism by which quantities and prices fluctuate. The example that is always given is acceleration of falling objects/due to gravity is 9.8 m/s/s and that if you understand how the economy works in a vacuum then you can take that and apply it to the real world.
- So this is an example of what is meant by an economic model. The whole of economics and all economists do and what people studying economics are these sorts of thigs but about different things to do with economics. 2 anecdotes, Dudles and my cousin.
- The issue is that what determines what an economist thinks about and what he assumes is determined by what he or she can model mathematically, and you end up making all sort of assumptions about the world which are wildly unrealistic. So for instance, before we assumed that products were completely indistinguishable, but in real life businesses always compete on quality/branding, or even location, but how do you put that in a model? So we assume that they only compete on price, because price is an important factor it seems like it makes sense to assume this. They don’t start by observing the world and then figuring out which assumptions make sense, they will sit on their desk and make a set of assumptions whech seem “intuitively plausible” or “introduced…” and then draw conclusions. When economists talk about the behaviour of firms, economic theories aren’t really based on what firms actually do, but on what an economist in his room making a set of assumptions about how a firm works concludes that the best way to run a business is, and will then make conclusions on what firms will do in response to a certain government policy say based on that. In the book there is the joke “if an economist wanted to study horses he would’t go out and look at a horse, they would sit in their room and think “how would I act if I was a horse”. But like I said, because it is presented as a model, the maths is correct, and the conclusions aren’t outrageous, then it is passed as theory.
- For instance, they asume that… read from slides… And because the conclusions models gives depend on these assumptions, they follow from these kinds of assumptions, it is not clear how you can apply what you have learnt to a real problem in front of you where these assumptios do not hold. It is also no clear that even the intuitions about how the world works you get form the modelare necesarily accurate because the conclusions follow from flawed assumptions. For instance, most models for simplicity asume something like the first assumption, that people are these calculating machines that always more or less know what is best, of course you will conclude that you should leave people to themselves and remove the government from trying to manage the economy, because free markets will yield the most desirable outcomes. So it is not clear that this holds in the real world.
- To show I’m not lying. This is the introduction. Monetary cooperation is basically having central Banks coordinate their actions. I’m not going to pretend to understand all of that, it is incredibly complex. What is important is that he SHOWS that endogenous… these conclusions and explanations, based on the model he constructs. i.e. his conclusons and whatever policy prescriptions might come up are based on the model
- And this is his model. SO he is creating a world. He is making very explicit what happens in this world. But why does he asume there are only two countries, why do all firms fund their working capital, basically the money they have for day to day spending, through banks? Why are these all of the things he considers and not others, why doesn’t he feel like he has to include in his model issues about politics? For modelling simplicity.
- Also, like you saw the supply and demand model brushed over inequality, politics, etc. This is not exclusive of this model, and it limits economist’s ability to understand the world, beause they have nothing to say about how these real facts about the world affct the economy An economist would say because as an economist you are looking for the pure technical reasons behid phenomena in the world, let politics academics talk about that. But this makes no sense. I’ll explain with an example. My housemate studies history and he has to read things like law documents from the British empire for instance for his class. So it’s not that actually history is necessarily very interdisciplinary or that you also have to be an expert about law to understand history, but it makes sense that if he wants to learn and understand about things that have happened that he looks at the things that made those things happen. You wouldn’t say he has to focus on purely historical sources, because what is purely historical? Same with economics, can’t understand the world through “purely economic reasons”, and it makes sense that if you want to understand things going on around you then you look at the things that make them happen. You might say that economics isn’t the science of absolutely everything, and you are only interested in things that are related to prices, production, unemployment, work and trade, but why only talk about these things, when there are other things in the world that affect them such as politics or psychology or historical events, or things that are hard to model like inequality, the fact that many businesses are much larger than others, the fact that some businesses have lobbying power and others don’t,…
- So hopefully now you can understand what economists do and why it is called “unrealistic” or out of touch and why so many students go into university wanting to study economics because they hope it will help them make sense of what is going on around them and have their dreams shattered one optimizating equation at a time, but also how this issue is very hard to spot and that if you go your whole life without anyone pointing it out then you might very well think that if you are gaining an understanding of the world, like you hopefully did with that supply and demand model, and that this is what learning about the economics is.
- Which is underpinned by the idea that economics is a natural science, if you dig deep enough and think hard enough you can uncover law-like properties like the ones found in physics, which determine how the economy works and that these laws apply in all situations, all historical periods and cultures, and that the purpose of economics is to uncover these laws. This belief is not as explicit, but when you look at what economists do you realise that they must believe this, otherwise they wouldn’t be saying what they are saying. And thus if you present a theory about why some economic phenomenon happened as a verbal argument and you include things which can’t really be put into a mathematical model, then it sounds too much like an opinion, and not like an unbiased judgement of the world, then you are not doing “real” or “serious economics” ***** Just because it’s maths it seems real/must be true***Belief that to do science you must express everything in the form of maths***
- So we’ve focused a lot on what is wrong and not what can be done about it. I guess mainly because not continuing to fall for these mistakes would be a pretty important step. Simply making theories be grounded on the real world and only use maths where appropriate and not as default would change things. But there isn’t a single way of doing economics that is the “right way”. What I will now argue is that economics should be a pluralist science, I will explain this. To ensure that future economists better prepared to understand the world is to stop teaching economics as a textbook subject.
- So right now economics is presented to students as a streamlined discipline with no real major disagreements and also that the only way of doing economics is through mathematical models. And that what you see in the textbook is the inherited wisdom from previous economists. That this is the very tip of the progress of economic thinking that has been handed down after all the ideas that were good were expanded and those which were wrong were discarded. But the truth is that throughout history there have been many approaches to economics, many schools of thought. What we are taught is basically just what is produced by the neoclassical and new Keynesian schools. The rest of schools of thought are ignored not because they have been proven wrong or useless, but because they don’t fit into the mainstream way of thinking, that everything must be presented as a mathematical model.
- Each school of though is different in that it focuses on different things. What the teorists in those subjects see as the main driving force behind the events we observe, their judgements on what people behave like are different. What we are taught is that everthing that happens in the world is the world is reduced to consumers trying to get as much out of firms as they can and firms trying to survive and trying to get as much money from customers, and if you find a problema that isn’t about businesses and consumers you just treat it as if it was. Different schools of thought have different ways of conceptualising the world and what we want to argue is that economists should be exposed to and be familiar with all of them, because each theory is necesarily incomplete, let me explain.
- Whenever anyone comes up with a theory they are attempting to make sense of the chaos that is reality. They look at it and from it try to abstract what is important, right, they try to take what is key away from all the noise in order to spot processes and mechanisms that explain why what you are observing is such, what is going on beneath the surface. And all theorists are necessarily biased, I don’t mean biased as in they are all trying to push their agendas, but biased in terms that they re all participants in the economic systems they are trying to explain, and they have preconceptions about them. We all do, from the time we are born we have to make judgements about the world around us, and those judgements will be affected by the context we’re in, what is normal what is strange, what makes sense and what is counter intuitive, what is an important problem to solve and what isn’t. Their historical and social standpoint necessarily affects this abstraction process, what is noise and what is important. And importantly it affects the abstraction process in ways the theorist is not aware of. Economists won’t include say the weather, peoples’ hair colour etc into their theories, not saying they should, but I want to illustrate that there are many facts about the world which one would count as irrelevant and still be able to say something meaningful about the world. For instance for neoclassical economics property rights and who owns what is irrelevant, they just assume that if you don’t own something is because you don’t think it’s the best use of your money, but for Marx the fact that there is a group of people that own machines and factories and others that don’t is key. Doesn’t mean one is necessarily right and the other is wrong, they both illuminate reality from different standpoints, they both have blindspots too.