Saturday, May 02, 2009

Saturday Morning Musings - the rise and fall of economics

My train reading has briefly switched to another professional interest, economics, although in this case the book - Robert L Heilbroners' The Worldly Philosophers:The Lives, Times and Ideas of Great Economic Thinkers (Touchstone, New York, revised seventh edition, 1999) - actually spans interests.

Heilbroners' book was given to me some time ago by Joseph, then a work colleague. It is only now that I am getting to read it. I find it a remarkably good book. Well written, it brings people and ideas alive.

Recently a number of prominent economists have suggested that too many in the profession are failing because they do not know enough economic history, that the profession itself has failed because of the way that economic history has been squeezed out of a busy professional curriculum. I suspect that they are right. However, I would go further, and say that they they do not know enough history, full stop.

When I first studied modern history at school, much was made of the agrarian and  industrial revolutions. Frankly, I found this pretty boring stuff. The discovery of the Bessemer process for the mass production of steel from pig iron was clearly important, but I was much more interested in other topics.

I think that part of my problem lay in the way the topic was taught with its emphasis on facts. There was too little linkage between the discussion of changes in technology and the economic outcomes and other changes that were taking place in society and in the way people thought. 

One of Heilbroner's great strengths is that his discussion of the development of economic thought treats his selected economists as people and links their ideas to changes in the world around them. I found his discussion especially interesting because the book actually sits at the centre of a number of my current pre-occupations.

At a first level, the agrarian and industrial revolutions are important in economic terms. The development and application of scientific and commercial farming practices that formed the core of the agrarian revolution led to an expansion of agricultural production that supported a higher population and and helped lay the basis for the industrial revolution. The industrial revolution with its focus on technology, on new forms of production and organisation and on the accumulation of capital is arguably the central defining event in the formation of the world as we know it in 2009.

What we do and how we do it forms our thinking. However, what we think then feeds back into the what, how and why of doing. This simple statement sits at the heart of a lot of my writing as I seek to understand our changing views of the world and the impact this has on actions.

Heilbroner suggests that economics as a discipline is linked directly to the industrial revolution.

In the pre-industrial world with its feudal structures there was no scope for economics as such. As I argued long ago in my original honour thesis on the economic structure of traditional Aboriginal life in Northern New South Wales, the questions that economists ask are relevant to the study of different societies. However, economics as a discipline depends in part upon the concepts such as accumulation, private property, investment, profit, specialisation and "the market", and these concepts did not really exist before the industrial revolution.

First political economy and then economics emerged because of changes in the way we do things. However, the ideas then developed fed back into our thinking about the world.

Smith, Ricardo, Marx were all responding to current events and thinking. Smith's arguments were then used by those opposing Government intervention with business, Ricardo's arguments by those wishing to abolish the corn laws, Marx by those opposed to capitalism. We can see this today in the use and abuse of the ideas of John Maynard Keynes.

Just as Smith became the symbol of laissez faire capitalism, so Keynes has become a symbol for Government intervention. Neither man would have supported the use to which they have been put. However, that is beside the point. They existed, therefore they will be used.

In writing about current events and thinking, I have placed great stress on what I see as an increasingly mechanistic approach to management and public policy. I have also attacked what I see as an overwhelming and wrongly conceived obsession with measurement.

I have linked all this to the the computer age, to the structuring of the way we do things to fit with the approach to decision rules required to make computer systems work. I have also suggested that this began well before computers, but that computers have rigidified and codified the approach.     

I thought that this argument was important and, to a degree, new. Important it remains, new it is not.

I find that that strange, socially dysfunctional, American economist Thorstein Veblen captured the essence well before me.

In The Theory of Business Enterprise published, would you believe in 1904, Veblen presented a theory of the eventual decline of the businessman and of the system that sustained him. In Heilbroner's words,

Veblen believed that the days of the business leaders were numbered, that despite their power, there was ranged against them a formidable adversary. It was not the the proletariat (for the Leisure Class had shown how the underlying population looked up to its leaders), but a still more implacable foe: the machine.

Veblen was writing in a world where the unrestrained excess of business buccaneers had created a system of creating wealth independent of the real productive capacity of the economy. Sound familiar? He was very much a man of his times. However, in writing he captured ideas still relevant today. Again to quote Heilbroner:

For the machine, thought Veblen, " throws out anthropomorphic habits of thought." It forced men to think in terms of matter of fact, in terms precise, measurable, and devoid of superstition and animism. Hence those who found it increasingly difficult to swallow the presumption of "natural law" and social differentiation which surrounded the leisure class. And so society divided; not  poor against rich, but technician versus businessman, mechanic against war lord, scientist opposed to ritualist.

Veblen saw this leading to a revolution in which business would be replaced by engineers who would run the economy along the lines of a huge well-ordered production machine. To some degree this has happened. However, what Veblen did not foresee is the way in which the machine would capture humanity, the full way it would affect thinking.

In forcing us to think in terms precise, the machine has effectively forced us to throw out those things than cannot be measured. Dreams, visions, faiths, hopes and emotions have no place in a well-ordered machine. Worse, the machine has taken away freedom for discretion and even mistakes. Just as the robot on a production line will destroy you if you walk in front of it, so the modern Government or business machine stamps on those who will not comply or simply do not fit.

So, to my mind, Veblen was right in pinpointing the impact of the machine on thought, but wrong in his assessment of the implications.

This type of failure is, in fact, a feature of all the great economists. It arises because all economists necessarily write from a current perspective, exploring and explaining what they see as the lessons and conclusions.

Today's economists have, I think, become captives of Veblen's machine. Their focus has narrowed. They forecast, project, apply their skills to current problems. Their focus is on technique.

This is not new. Heilbroner talks about the rise of the academic economist such as Alfred Marshall. They effectively codified the discipline, but in so doing (and there is a dreadful irony here) they laid the basis for its subsequent decline.

Initially this was concealed. The first half of the twentieth century was the age of the economist. Keynes stands out because of his prominence over a long period, but he was not alone. Economists provided new insights in many areas and played a dramatic role in public policy. We can see this in Australia or New Zealand where the small number of economists became public names, active players in intellectual debate as well as public policy.

Things changed from the 1950s. This was partially a matter of scale. There were a lot more economists. However, it was also a question of focus.

More and more economists became technocrats, using economics' skill sets to solve particular problems. The larger profession fragmented into fields - labour economists, health economists etc. Those engaged in research focused on more technical issues. Mathematics proliferated. Journals became full of arcane articles beyond the understanding of those without a certain level of mathematical understanding.

Not all these changes were necessarily bad. There were considerable advances of knowledge in particular fields. However, economics as a discipline both fragmented and passed beyond the understanding of even the educated lay person.

To my mind, the strength of economics has always been in the rigour of its thinking, the way it forces new questions, the way it integrates a range of thinking about aspects of the human condition. Once economics became a set of tool kits the discipline was, to my mind, damned.

I stand to be corrected here, but I do not think that any economist would challenge my view that the discipline has retreated greatly over the last fifty years in terms of student reach and public prominence.

Now with the global recession, economics and economists are back. At a purely personal level, that's great. However, I am struck by the apparent inability of economists to explain what has been happening and, more importantly, to suggest what we might do.

Am I being unfair? Perhaps.

Certainly I no longer claim to know the detail of current thinking. Here I am always conscious when I talk about economics or the economy of my lack of knowledge, of the risk of making simple errors. However, as a former professional economist who was drawn in different directions, the thing that stands out when I read the economics' commentary is its fragmentation.

I think that the problem that many economists face at present is the need to move from the particular to the general. At the particular level, they are comfortable. But the skill sets intended to explain the particular do not necessarily help in explaining the general. In a sense, we are back to where we were in the past when economics addressed broader questions.

I think that this is enough for this morning. I actually need to look at the latest statistics on the economy! 

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