By Indy Media
Jan 11, 2008
At the forefront of economics, major changes are happening. And many of them are changes for the better. The old economics view of the world, in which everyone acts purely in his or her own self-interest, in which free markets are the solution to almost everything, has been abandoned.
The list of economics Nobel laureates in the twenty-first century reflects these changes. It is largely made up of scholars who have worked outside the traditional Rational Economic Person, free market paradigm. The work of Daniel Kahneman and Vernon Smith deserves special mention even in this distinguished list. They created almost single-handedly the burgeoning discipline of experimental economics. Standard economics merely assumes that people act in a particular way. Kahneman and Smith actually tested how people really do behave. Many of the assumptions economists make turn out to be wrong in important ways.
But there is a problem, and a very big one at that. Most economists continue to try to shape public policy as if very little has changed and that the old view of the world remains generally valid. Got a problem with inflation? Just fix the money supply. Want to develop out of poverty? Just privatize all industries and pull down trade barriers. These answers are routinely trotted out regardless of the evidence. And the evidence is often starkly different from the theory. Look at trade: with the sole exception of the first country to industrialize, Britain, no country has developed successfully without protecting domestic industries from foreign predation.
The problem stems from the way economics is taught. For many of the very best students, a course in economics has become almost indistinguishable from a course in the math department, wholly abstracted from reality. A friend of mine has a world-wide reputation in physics. A few years ago, he got interested in economics and looked at some of the advanced textbooks and journals. I warned him. He was still appalled. The proliferation of math, with “theorems” and “lemmas” on almost every page, totally astonished him. “But I haven’t had to prove a theorem for at least 20 years. Physics is judged on how well your theory explains the real world, not on whether you can do clever math – all of us can,” he fumed.
Most students are fed not on esoteric math but on the standard textbooks. But these have, if anything, gone backwards in recent years. Aimed at the mass market of US community college students, they have dumbed down the subject to a terrifying degree.
I have in front of me the 1967 edition of Richard Lipsey’s Introduction to Positive Economics. This, along with Paul Samuelson’s textbook, was the best seller for many years. It is not aimed at geniuses, just ordinary, regular students, “designed to be read as a first book in economics.” Of its 861 pages, only 32 contain any math, and even that is of the simplest possible kind.
Yet it is full to bursting with really interesting examples of real world behavior. Yes, here is the basic model showing how in a free market, price can adjust to bring supply and demand into balance. But here, too, is an immediate counter-example, of great practical importance, discussed at length. Indeed, it has its own separate chapter. What happens if supply can’t be increased quickly, if it takes time to respond to price changes? This is true, for example for most agricultural markets – trees take time to grow, even chickens need five months before they can start to lay eggs.
Lipsey shows, simply and clearly, using only diagrams, how the free market might work very badly in this case. His chapter summary, printed in bold, states: “in the unstable case, the operation of the competitive price system itself does not tend to remove any disequilibrium; it tends rather to accentuate it.” Careful, practical study is needed on a case-by-case basis to see if a free market is likely to lead to stable or unstable behavior. The crude policy advice that markets always work is simply not given house room, even in a textbook for the ordinary first year student.
So why are the textbooks not being re-written, not just to bring back the insights of the word-rich, math-poor texts of the 1960s, but to incorporate the real advances which have been made in economics in recent decades? Until I was drawn into the textbook world, this puzzled me.
A couple of years ago, I was approached by someone from a leading academic publisher. He was, he explained, their very top man across the whole of the sciences. His remit included economics. This sounded interesting. What did he have in mind?
What the commissioning editor had in mind was very exciting. He wanted an entirely new textbook, to incorporate the really interesting advances in the subject over the past 20 years or so.
The editor, who already had a best-selling economics textbook of the standard kind in his stable, understood that at some point in the future all existing textbooks will be redundant. The new generation of textbooks will contain the economics of the twenty-first century, not that of the twentieth (or even the nineteenth!) which the present ones do.
He was anxious that one of his rivals would get there before him, and bring out an innovative textbook which would scoop the pool and be hard to dislodge from its number one slot. So he realized that his company would have to innovate and bring out a completely new textbook. Was I interested? It sounded like a dream. But like most dreams, it was too good to be true.
The editor faced a dilemma, which he articulated clearly. His problem was that the market – in this case the market for textbooks – is already occupied by the incumbents. They might ignore almost all that has gone on in economics in the past 20 years, they might be guilty of dumbing down, but they are there. And their publishers and authors use every trick to make it stay that way. For example, top textbooks routinely have over 10,000 multiple choice questions helpfully provided on a web-linked site. Teachers don’t even have to think about making up the questions, they are all provided.
So we have a situation in which products with inferior qualities – containing lots of old-fashioned economics – are preventing products which are superior from entering the market. The barriers to entry which they have erected are very hard to breach. In simple economics, this shouldn’t happen. Consumers are supposed to have perfect information, so they should choose the new rather than the old. But the real world just doesn’t work like this. Most students are now never told this, and they never get to choose – except by voting with their feet and dropping economics altogether.
And this was exactly the editor’s dilemma. He knew that at some point the market will look completely different, that the new will eventually oust the old. But he had no way of knowing when this would be. In the meantime, any single attempt to enter the market with a new-style economics text would be likely to fail, unable to break the lock on the market which the current textbooks have.
We corresponded on this and talked. Eventually, the editor said he would go ahead on the basis that no more than ten percent of the total material could be the new economics, the other 90 percent would be the old. But I just couldn’t do it, I couldn’t be part of disseminating a wrong-headed view of the world which leads to so much bad policy advice. I didn’t blame the man. He was thoughtful and anxious to do good, but faced commercial imperatives. So the textbook of twenty-first century economics is still waiting to be written.
_Paul Ormerod is a UK-based economist and former Head of the Economic Assessment Unit of The Economist.