Book report: The Death of Economics
30/01/2012 § Leave a comment
Used book stores are odd. It is hard to get really good books, because people hold onto them. So, you get middling books, textbooks, and very common books. The economics section is usually quite grim: a volume of Galbraith, a 4th edition of Samuelson, and Atlas Shrugged.
It was in such a shop that I found The Death of Economics by Paul Ormerod. I’d heard his name in relation to Butterfly Economics, so I gave it a shot.
Here’s the quick summary: Ormerod overstates his case. A lot. The book is internally inconsistent, because he uses economic research to show that economic research is mistaken about economics. It is also inconsistent with the external world. My exhibit: yesterday’s FT blog by Martin Wolf. He describes a panel discussion on ‘The Future of Economics’, in which four very senior economists had criticisms and suggestions that were nearly identical to Ormerod’s. Maybe economics has an amazing capacity for renewal and reinvention, so that Ormerod’s criticisms of 20 years ago are now the received wisdom. Or, possibly, the situation was not so dire as he suggested in 1994. Neither explanation suggests a dying discipline.
On to the details. The first half of the book criticises mainstream economics, following a well-worn path. Classical economists were better because they were philosophers and political economists. The marginalists took a wrong turn by adopting a physics model for economics. In the 20th century, the focus on mathematical prowess turned economics inward and away from real life. In particular, the fiction of the rational individual has led us astray.
This is a selective reading of economics. As Ormerod himself explains, there have been many disagreements throughout these different eras. He counters the dangerous mainstream of economics by citing…other economists! For example, while discussing the problems with general equilibrium theory, he relies on work by von Neumann, Arrow, Lipsey, and Lancaster. Economic research doesn’t appear as blinkered as he would have us believe.
The second half of the book proposes new ideas, focusing on determinants of unemployment. There is some interesting stuff here. For example, he has graphs that suggest the rates of unemployment and inflation have a more consistent relationship than the levels. He also runs through some work on attractor points and the Lotka-Volterra system. His point is that an economy cycles around an equilibrium relationship between unemployment and inflation, but the specific equilibrium point can be shifted by external forces or social preferences.
In effect, Ormerod is saying that he has a better model. He favours a different set of variables (rates rather than levels) and a different mathematical expression (attractor points rather than linear regressions). Structurally, though, his argument is basic economics. A mathematical equation, properly specified, can describe human behaviour.
The last chapter reveals Ormerod’s real confusion. He forgets that economics comes in two flavours, micro and macro. Macro examines economy-wide indicators; its behavioural foundation can be rather thin. Micro is about rationality and its limits and what they imply. There have been attempts to bring them together, but the Grand Theory still escapes us. And this is, perhaps, his real criticism of economics:
Over the course of time, the system possesses many potential solution paths. Any actual path which is observed, from the myriad potential paths which could have been followed, will not correspond, except by the purest of coincidences, to the one which would have been chosen by the globally optimal maximising behaviour of ‘rational’ individuals. (p. 209)
Perhaps this is just a book of its time, 1994. Rational expectations theory hadn’t lived up to its promise in the 1980s. Unemployment was rising in Europe, Japan was in trouble, the US growth was low. Economists had new things to explain.
Perhaps, too, the biggest issue with the book is its title. Economics, even the mainstream general equilibrium theory Ormerod so heavily criticises, has not died. But then, Some Suggestions for Improving Economic Theory probably wouldn’t have sold as many copies.