When economics is not common sense, it’s a wake-up call for us all
Andrew Sheng says that, with pundits unable to read the obvious warning signs, and with ‘collective action’ a distant dream, it is time for greater awareness to avert a repeat of the global crisis
As we watched the US presidential debates, and now await the outcome of the November 8 elections with bated breath, I was struck by how much the world is moving on different planes. Donald Trump and Hillary Clinton are trading insults, giving democratic politics a bad name. In the meantime, Hong Kong Legislative Council members are swearing at each other over oath-taking, while Philippine President Rodrigo Duterte called President Barack Obama a name not normally used in polite company.
Having attended several economics conferences recently, it struck me how mainstream economics is increasingly divorced from helping us to navigate this complex world. Each economist I met with presented very complex models with lots of equations that purported to explain what is going on. But they were all like blind men describing an elephant by touching different parts of the animal.
They were blind to their own blindness. Worse, they were deaf to each other’s point of view and simple common sense.
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The Clinton versus Trump show says it all. Both are around 70 years of age, managing millions and trying to speak on behalf of 99 per cent of the voters who would be lucky to accumulate 1 per cent of what these candidates earn or own. One suggests that under her and her husband (they entered the White House in 1993), everything will work as before – more welfare, more military spending. The other says that everything he has been accused of can equally be applied to Bill and that the present system is rigged.
John Maynard Keynes, in his General Theory of Employment, Money and Interest (1936), famously said, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Mainstream economics, as taught at many universities, is truly defunct. In most natural sciences, such as neurosciences, computing and mathematics, most of what undergraduates learn would be obsolete by the time they graduate because of fast scientific advances.
This is not surprising. The population of Europe when it embarked on the industrial revolution in 1750 was only 125 million, of which fewer than 2 per cent were educated. In other words, probably 2.5 million people then were responsible for the scientific, technological and cultural revolution that created Western intellectual dominance.
Today, the world population is 7.4 billion, of which 3.2 billion or over 40 per cent are using the internet, which means they have access to knowledge and are creating a new global industrial revolution. Scientific knowledge is being created at internet speed, and not just in the rich countries. Many such hubs of new creativity are in Asia, such as the silicon valleys in Shenzhen and Bangalore.
In the meantime, the economics profession makes ever more elegant mathematical models based on unrealistic and simplistic assumptions that ignore four key issues that affect us all today – social inequality, climate change, rapid technological change and geopolitical dynamics.
Writing in 1933, Keynes had this to say, which eerily echoes the sentiments of today: “The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods. In short we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.”
In trying to be a science, mainstream economics focused on mathematical macro-economics and micro-economics, but largely ignored at least two other fields – mezo-eonomics and meta-economics.
Mezo-economics is the study of institutions, social organisations that humans built collectively to deal with the uncertainties and threats from nature and other humans. Institutions are the link between the macro or broad trends of markets and the micro behaviour of companies and households.
Quantitive economists find this field too messy, leaving it to management scientists, sociologists, anthropologists and political science.
But, today, the main obstacle in not being able to implement economic policy is largely due to the vested interests of conflicting institutions, suffering from bureaucratic infighting, incompetence, outright corruption and lack of cooperation because these policies conflict with departmental interests.
We can’t get anything done because it is almost impossible to arrive at “collective action”, meaning that no one is willing to work together to solve our common problems. We can’t even agree on what the common problem is.
Every politician, expert or agency claims that if you give them more resources, staff or power, they will solve the problem. But we know more and more about less and less. So if everyone digs deeper and deeper without understanding what they are doing to the system as a whole, the world becomes like Swiss cheese, with so many holes that the whole has become more fragile.
We are taught by the current individualist creed that individual greed is a public good. That is at best an ideology and at worst an outright lie.
This is where meta-economics comes in. Meta-economics is the study of why economists think the way they think about the world. A carpenter trained to use a hammer thinks every problem is a nail. An economist trained to look at data only is like a drunk looking for lost keys under the streetlight. He forgot to look in the dark, where he lost them. Shadow banks are not shadows – they were right in front of all the central banks and regulators to see. They just chose not to see them before the crisis, attributing it elegantly to “radical uncertainty”.
We went into the last global crisis with our eyes wide shut. Time to open at least one eye. When economics is no longer common sense, believe in common sense, not the expert.
Andrew Sheng writes on global issues from an Asian perspective