The Virtue of Economists
Part of the problem is a misunderstanding of academic study
With much of the usual hoo-ha that surrounds these things the winner of the 2015 Nobel Prize for economics was announced this week. He is Angus Deaton, who was recognised for his analysis of consumption, poverty and welfare.
This field of study is not likely to be greatly appreciated in the business world.
But then again other recent Nobel economics laureates have also been greeted by some scepticism in these quarters where anti-intellectualism is sometimes worn as a badge of pride. Indeed there is often intense scepticism over whether economists have any value at all, reflected in jokes such as, ‘if you were to place all the world’s economists in a long line they still wouldn’t ever get to their final destination’.
Those who like to mock economists, and specifically to disparage the Nobel prize for economics, love to cite the example of the 1997 award, which went to Myron Scholes and Robert Merton for their work on understanding derivatives and producing a safe yet lucrative model for trading these products. They were among the founders of the Long Term Capital Management hedge fund that collapsed the following year with losses totaling US$4.2 billion. What a joke, eh? Give economists experience in the real world and see just how they manage.
Part of the problem here is a fundamental misunderstanding of the nature of academic study that rarely sets out to find a fix for specific problems but strives to provide a conceptual framework for better understanding.
This misunderstanding is compounded by many economists who insist on describing their discipline as a science, implying a level of precision in problem solving that simply does not exist. Maybe this is why Alfred Nobel had not intended economics to be in the rooster of prizes but a donation from Sweden’s central bank in 1969 added economics and described it as a science.
Whether or not it is a science, economists can produce work that has immense practical application. A case in point being the Nobel laureate Daniel Kahneman, who showed the importance of psychological factors in understanding business cycles and the way that markets operate.
Robert Shiller, the 2013 prize winner, was a pioneer in the field of predicting long term share price movements, an approach that has influenced and made a great deal of money for investors around the world.
There are, of course, also examples of prize winners with flawed theories and highly controversial views but economics should not be seen as being capable of always producing definitive predictions. Yet most economic theories have value, if only to provoke new thinking into old problems or at the very least to provoke thinking per se.
Business people who pride themselves on being no nonsense realists focusing on results, maintain that the figures on the bottom line tell you all you really need to about business. This logic is attractive because it is the kind of talk that reduces complexity to an easily understood maxim.
However the complexities do not disappear and the relevance of conceptual frameworks is important even to those who are disparaging of the need for such things. Indeed it is possible to argue that those who dismiss these ideas unconsciously absorb them.
Let us take one of the most famous business concepts of all time, the law of supply and demand, discovered by the Cambridge academic Alfred Marshall back in 1890. It is now so commonly employed that many people believe that this idea somehow emerged from the ether and hardly needed to be discovered in the first place.
But there is nothing out there in the ether, nor do academics have an exclusive hand in inventing basic business concepts. Double entry bookkeeping, for example, the fundamental principle of accountancy, is credited to the Florentine merchant Amatino Manucci at the end of the 13th century. The idea that two accounting entries are required for every transaction seems pretty damn obvious yet the obvious only becomes so once someone has the nous to point it out.
This then is the genius of economics and the reason why it is important and why it often takes someone who can be described as a non-practitioner to spot fundamental business-related concepts. The problem is that there are far too many puffed up economists strutting around, making predictions and pretending to know things that are un-knowable. They do far more damage to their profession than the smaller coterie of people in the field who are tentative in their approach and wise enough to admit to gaps in their knowledge and uncertainty in their predictions.
Lamentably the meek economist is not a good performer in the countless business television shows and big fee conferences that proliferate nowadays, leaving the field wide open to the bold and the brash.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster