Wednesday, October 12, 2011

Pause for a Reflection

Hywell Williams, an historian, author, and columnist, writes in his Daily Mail Blog:

“Economics: the futile predictions of a pointless 'science'”


Looking at how trade and business patterns of manufacturing, investment and productivity have operated in the past is well worth doing. And the people who pioneered that investigation in the 18th- century - such as the famous Adam Smith - called their subject 'political economy'. They were under no illusions that they were pursuing a science which might yield laws in the way that physics often does. Smith and co. understood that economic behaviour and phenomena are always variable. They are part of the life of human beings in society, and since men and women are not machines their behaviour in matters of consumption, production and investment simply can't be predicted.

We can have trends and probabilities of course. At some point demand for some goods - let's take oil as an example - having been elastic, will stop being so. But nobody can ever predict at what point people will decide they're not prepared to pay a high price for oil any more.

'Political economy' was a good phrase since it showed how politics and social life generally give a context and a meaning to economic behaviour. But that wasn't good enough for all those economists who laboured over their quasi-mathematical models in the late 20th century. Career building was all important here. All those grants from supposedly respectable research councils - all the subsidies and the 'funding' - were only available if economics could be made to appear to be a subject that could actually give you mastery of the world here and now, and in the future as well. It was meant to be the key to a predicted prosperity. 'Approve my funding mechanism for a macro-economic study and you - secretary of state - will learn how to produce economic prosperity and thereby ensure your party's re-election'.

But there's a very simple reason why all the economic charts in the world will never really demonstrate what might, or might not, work as a policy. At any one time, and especially during a major crisis as at the moment, there are in fact all sorts of economic policies that are in place. A bit of quantitative easing here - a spot of inflation toleration there, supplemented by a tightening of the money supply if that seems necessary or some restructuring of the tax regime. A time lag then occurs. Its length can never be predicted. Some people take a long time to respond to economic prompting. Others may be quicker off the mark, while yet others carry on being indifferent

I make no claims that Hywell Williams is particularly perceptive, nor that his ideas about economics are necessarily suspect for his not being recognised as a main-line orthodox economist. I was drawn to his article for its theme that struck a chord about Adam Smith and the current fashion for economics as being a predictive science – though, of course, there is much controversy about the reliability of competing predictions by economists, including among economists.

Adam Smith did not make predictions about what might, let alone what would, happen in the circumstances in which he lived. He always looked backwards historically, trying to explain what had happened. He made specific recommendations about how certain economic affairs ought to be managed to deal with specific problems that he regarded were unsatisfactory and could be improved upon and tried to identify why specific outcomes were less than beneficial compared to what they could be if they were arranged differently.

Thus, Smith’s critique of mercantile political economy – his ‘very violent attack on the whole commercial system of Great Britain’ – had much to say critically about recent 18th-century events in intervention policy by sovereigns and legislators, by ‘merchants and manufacturers’, and assorted interest groups who had influenced the kings since medieval times. These criticisms of the interventions of kings through their governments and laws were not an absolute hostility to state interventions, as is often presented by modern economists and political activists. They were measured and specific observations on the, often deleterious, consequences, of political – and theological – policies by people who didn’t (and often still do not) know
what they were doing.

In spreading his criticisms of economics to modern economists, Hywell Williams makes some telling points about the root causes of the hubris of much of modern economics. Our science is not physics, despite the pretensions of the priesthood, lightly clothed in a mathematics resting on a fatal fault-line that Smith (an accomplished mathematician by 18th-century standards) called ‘men of system’, who are ‘apt to be very wise’ in their ‘conceit’, who ‘seems to imagine’ that they ‘can arrange the different pieces upon a chess-board’, where ‘the pieces have no other principle of motion besides that which the hand impresses upon them’, when in fact ‘in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress on them’ (TMS VI.ii.2.17:233-34).

Carbon atoms, like all others, respond to forces in exactly the same way in the solar system, and probably throughout the universe, according to their common nature. People, however, are different because they are different. They are not infinitely predictable. Some choose a life of crime, others are saintly, and all stations in-between and beyond are observably different. Nor is tomorrow’s economy predictable; bets can be taken, and some will win, others lose. These suggest a degree of humility is required among economists. An imaginary world endorsed with its terms by mathematics and computing power does not the real world replicate. Smith understood that barrier to predictability; ‘tis a pity that Samuelson’s generation did not.

So, instead of taking cheap shots at Hywell Williams, and his ilk, we should pause and reflect on our limitations and try to understand more about how we got to where we are in our understanding, and rely less of what our equations tell us. Perhaps we would have less cause provoke the Hywell Williamson’s contributing to the current discourses about the current recession, what caused it, and what might be done about it, given our limited knowledge of how the real world works, or rather doesn’t.

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