September 19, 2015

Economics: ‘a tale told by an idiot, full of sound and fury’?

Comment on Dean Baker on ‘Biggest lesson from Financial Crisis: Wall Street gets what it wants’


You sum up: “The story of the decade of double-digit unemployment from which we were supposedly spared by the bailout depends on Congress sitting on its hands and doing nothing through the worst slump in 70 years. This is a political prediction, not an issue of economics.” (See intro)

Indeed, this is the crucial point: the first thing an economist has to do is to realize whether he deals with politics or economics.

The history of the U.S. economy since around the 1920s could be retold quite realistically as a tumbling from crisis to crisis with idiots, criminals, sociopaths, swindlers, fakers, etc. grabbing for power and money, with Wall St, Fed, and the national institutions as main protagonists.

The first question is, should this history be told by an economist or better by a political scientist? The answer depends on our understanding of economics. There always has been political economics and theoretical economics.

Theoretical economics deals with THE ECONOMY in roughly the same way as physicists deal with NATURE. THE ECONOMY is the world economy as a whole and this is a rather abstract entity. Abstractions have not such a large fan group.

Accordingly, the first difficulty of economics is that most people have a rather small event horizon. If they are at all interested in economic matters, myopic individuals want to learn from the economist not much more than whether the stock/property market goes up or down. Clearly, theoretical economics cannot meet these peoples’ expectations.

The second difficulty of economics is that many economists feel the urge to satisfy the expectations of a vastly more important target group than the buy-low-sell-high crowd. The classicals advertized their core competence unmistakably: “That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science, is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work." (Mill, 1874, V.7)

Note that the classicals’ definition of science departs somewhat from the genuine sciences. Note also that the focus is on ‘my’ concrete nation and not ‘the’ abstract world economy.

The third difficulty of economics is that the format of communication is predetermined by the operational specifics of the entertainment industry, that is, all communication must take the form of an interesting story or a sitcom controversy full of sound and fury. The all-decisive criterion in the realm of entertainment (including economics blogs) is like/dislike and not true/false as it is in science. Because of this, there is an irresistible bias to explain the functioning of the economy as machinations of weird/evil characters. With some inner logic economics then resembles more a psychiatric/criminal investigation than scientific research.

These three difficulties are sufficient to explain why economics never managed to rise above the level of a proto-science. As Schumpeter put it “... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (1994, p. 827) It seems that the passengers, while busily telling their Walrasian, Keynesian, Marxian, Austrian etc. tales, are actually stranded in the middle of nowhere.

What is the biggest lesson for Heterodoxy from the permanent failure of Orthodoxy? Quite simple: either Heterodoxy participates furthermore in political economics with storytelling or it produces the true theory of how THE ECONOMY works.

Note well that already Marx realized that economics is not about human behavior: “To prevent possible misunderstanding, a word. I paint the capitalist and the landlord in no sense couleur de rose. But here individuals are dealt with only in so far as they are the personifications of economic categories, embodiments of particular class-relations and class-interests. My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them.” (Marx, 1906, M.9)

Biggest lesson from the actual economic mess: economics is not about space-time specific individual human defects but about the structural defects of THE ECONOMY (2015).

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.