rethinking economics talk

Rethinking EconomicsMarc Gomez, Kishan Rana

Introduction

Critiques of economics aren’t newMilton Friedman (1999): “…economics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems“

Mark Blaug (1997): "Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing.”

Rethinking EconomicsStudent-led movement in the UK

14 branches

“Demystify, diversify and invigorate” economics

Started with Manchester University Post-Crash Economics Society – founders of whom wrote The Econocracy.

The Econocracy

Noun. A society in which political goals are defined in terms of their effect on the economy, which is believed to be a distinct system with its own logic that requires experts to manage it.

Gives power to those who understand it – but how do they view the world?

Economics profession under criticism, especially after financial crisis. Failed to predict it and arguably contributed to itAccused of producing theories that are irrelevant to the world

But this seems strange, why are economists so prestigious, why does nothing change?

Seems like critics are asking you to believe in a conspiracy theory or saying that economists are dumb

I will try to give a peak into what economists do and what university students learn about. The core problem with economics is quite subtle. If it is not pointed out it is very easy to miss.

Note: Not all critics agree with this

CORE PROBLEM: THE BELIEF THAT ANY

ECONOMIC THEORY HAS TO BE EXPRESSED IN THE FORM OF A

MATHEMATICAL MODEL

If your model makes sense mathematically, then it must be right

A model is a simplified representation of something Not 100% accurate but makes important things clear

A MATHEMATICAL model is similar but it’s on a graph Simplest model: supply and demand

Supply Curve

Demand Curve

Price

Quantity

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Market Price

Total Quantity Produced

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Demand Curve

Price

Quantity

10

20

30

4050

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70

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10 20 30 40 50 60 70 80 90 100

110

120

Supply Curve

Price

Quantity

10

20

30

4050

60

70

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10 20 30 40 50 60 70 80 90 100

110

120

Supply Curve

Demand Curve

Price

Quantity

10

20

30

4050

60

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80

Market Price

Total Quantity Produced

10 20 30 40 50 60 70 80 90 100

110

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Using the model as a tool to answer economics questions WHAT HAPPENS IF THE PRODUCT BECOMES CHEAPER TO PRODUCE? e.g. technological progress – more will be supplied at every price. More people think it’s worth it to supply.

Supply Curve

Demand Curve

Price

Quantity

10

20

30

4050

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80

Market Price

Total Quantity Produced

10 20 30 40 50 60 70 80 90 100

110

120

WHAT IF THE PRODUCT BECOMES MORE POPULAR? More people are willing to buy it at any given price (more is demanded at each price)

Supply Curve

Demand Curve

Price

Quantity

10

20

30

4050

60

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80

Market Price

Total Quantity Produced

10 20 30 40 50 60 70 80 90 100

110

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The model makes a set of simplifying assumptions to reduce the amount of moving parts. Mainly: That the product is homogenous, all business produce the exact same product, same quality, only important factor is price

That no one consumer or business is big enough to single handedly alter price, they are all “price takers”, the price is given by the marketplace as a whole

Consumers are aware of all available suppliers and they can change from one to the other easily

It ignores other issues about the world, like inequality, politics, money and credit, marketing and branding.

Supply Curve

Demand Curve

Price

Quantity

10

20

30

40

50

60

70

80

Market Price

Total Quantity Produced10

20

30

40

50

60

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90

100

110

120

Economists are aware that all of these can contribute to prices and quantities produced but they are treated as ‘noise’. These things can affect prices, but they aren’t the underlying mechanism that drive markets to reach a certain price and quantity. Explain how the economy works in a vacuum, to apply it to the real world . Find the underlying mechanisms, otherwise you just have a lot of case studies

This is an example of a (simple) economic model All economists learn about, and practise, are this sort of thing. Learn and come up with models and try to apply them to the world.

No model = Not real economics 2 anecdotes

The problem with this is that assumptions are made for the sake of mathematical tractability, not because they’re realistic or it somehow makes sense to asume them.

“For the purposes of medelling simplicity, we will asume that…”“It is intuitively plausible that…”

Assumptions made in models taught at univeristy, published in journals or that have won Nobel prizes include: -That people can and do collect all available information about markets, bothhow it is now and how it has been in the past, and instantly make complex calculatons based on this information to predict what the probability of some event occurring in the future is.

-That natural resources are endless-That banks are simply intermediaries between borrowers and savers-People make decisions based on their own independent judgement, are in no way affected by others’ judgement of a situation

-Some models start by saying “asume there is no unemployment” or some other economic state

-That all businesses have a choice to completely replace labour with machines and vice-versa

-And many more!

Example – University of Exeter Lecturer Research published

Models ignore many important issues about the world – politics, inequality, …

To understand what is happening in the world around you, you have look at the things that are making it happen.

SummaryNO NEED TO BELIEVE IN CONSPIRACY THEORIES OR THINK ECONOMISTS ARE DUMB. The discipline has gone astray for other reasons:-Every theory mut be presented as a model for it to count as “real economics”

-Models make simplifying assumptions for the sake of modelling simplicity and ignore many important facts about the world

-These assumptions tend to be unrealistic but tend to be accepted-Conclusions follow from the assumptions-Not clear how to use the models to help with real world problems because the world isn’t how the models describe them to be and the models ignore facts that might help explain the problems

THE UNDERLYING PROBLEM THE BELIEF THAT ECONOMICS IS A

NATURAL SCIENCE, NOT A SOCIAL SCIENCE. REINFORCES THE OVERUSE OF MATHS – MATHS GIVE THE IMPRESSION OF UNBIASEDNESS – IF IT IS PRESENTED IN MATHS IT MUST BE TRUE, NOT

JUST SOMEONE’S OPINION

What can be done? We’ve focused on what is wrong, but not on what can be done about it

No single way of thinking about the economy One thing that can be done: PLURALISM – economics shouldn’t be a textbook subject.

Context is everything- The decision on what to ignore in the abstraction process is affected by the economists’ standpoint

Conclusion Not saying everything goes. Not saying that if you know all the schools of thought then you will have a complete picture of reality.

Conclusion This requires economists to concede that economics is not a natural science.

You can never achieve truth, only clarification of certain things in a certain time.

Make your best guess using all the tolos that you do have.