A sideways look at economics
“In the beginning the Universe economics was created. This has made a lot of people very angry and been widely regarded as a bad move.”
Douglas Adams (almost)
I think the doctored quote above probably reflects many people’s attitudes towards economists and economics in general. Being an economist, I naturally disagree with this interpretation. Here’s my view on what I think economics is, why it’s a good move, and why it makes a lot of people angry!
There is, I would say, no widely agreed upon definition of economics. The definition that I was taught when I first studied the subject at A level went something like this:
“Economics is the study of how to allocate infinite wants among finite resources.”
Lost? Yep, me too. It’s a bit wordy and not all that helpful. Economists are often accused of being too aloof and this definition fits that bill. To break it down a bit, the first part (the “infinite wants”) can be thought of as ‘demand’ and second part (the “finite resources”) can be thought of as ‘supply’.
Asking Google for a definition returns the following:
“The branch of knowledge concerned with the production, consumption, and transfer of wealth.”
I feel like this captures a lot of it, but also sits somewhat uncomfortably with me as it seems quite narrow. First, I think it veers too much into the stereotype of economics being largely about money. It may surprise you to learn that most economists believe that, in the long run, the amount of money in circulation is somewhat irrelevant! (Look up the classical dichotomy[1] if you’re interested.)
A third definition, proposed by Alfred Marshall in the late 19th century went like this:
“Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being. Thus it is on the one hand a study of wealth; and on the other hand, and more important side, a part of the study of man.”
Note how Marshall acknowledges the importance of the “study of wealth” within his definition, but it ultimately plays second fiddle to the importance of the “study of man”. I like this much better.
However, I think (as is so often the case), John Maynard Keynes delivers perhaps the definitive comment on the topic, with the following definition:
“The theory of economics is a method rather than a doctrine, an apparatus of mind, a technique of thinking, which helps its possessor to draw correct conclusions.”
When put like that, to paraphrase Paul Krugman, economics isn’t everything, but it’s pretty much everything. And that’s typically the main reason why people dislike economists — they have an opinion on everything! But if we take Keynes’ definition, I would argue that it’s not necessarily an opinion on everything, but rather an alternative way of thinking about problems in other fields. That’s one reason why Fathom is able to provide insights on finance, geopolitics, the climate transition and innovation — fields that wouldn’t fall under the traditional umbrella of economics.
So now we have the boring, definitional stuff out of the way, let’s have a joke. I assume you’re all aware of the “how many X’s does it take to change a lightbulb” jokes. Applied in the context of economists, one such joke might go something like this:
Q: How many economists does it take to change a lightbulb?
A[2]: Ten — one to change the bulb, and another nine to hold all other things constant.
Ah, the ceteris paribus assumption, an economist’s best friend… Unlike many other fields (and the natural sciences in particular) we can rarely employ lab-based studies to get the answers to our questions. A reliance on so-called ‘natural’ experiments, therefore, means that we can only be fully confident that our conclusions hold in the context in which we’ve tested them. They may have external validity, but not always. We must temper any conclusions accordingly.[3] This frustrates a lot of people — what’s the point of building all those models if they’re so simplified that they only tell part of the picture? Well, in my view, if used well, part of the picture is better than none of it.
Time for another lightbulb joke…
Q: How many economists does it take to change a lightbulb?
A: Don’t be silly! Economists can’t change lightbulbs — they always seem to have something in one hand and something else in the other.
A good economist will know a number of theories and past experiments that will help to answer a question. Unfortunately, most of the time none will answer it perfectly, thanks to the ceteris paribus clause. Hence, economists will often caveat their answer by offering evidence in favour of alternative conclusions, before coming down on one side of the argument. This is infuriating — why can’t they just give you a simple conclusion? John von Neumann (mathematician, physicist, and economist) offered this insight into why the social sciences can be so complex:
“If people do not believe that mathematics is simple, it is only because they do not realise how complicated life is.”
Put another way — there’s often no clear answer. A good economist acknowledges that.
One more joke…
Q: How many economists does it take to change a lightbulb?
A: Two — one to change the bulb, and another to tell them they’re doing it wrong.
[Editor’s note: I see the deputy chief economist has now provided three answers to this particular question. That’s enough lightbulbs — Ed.]
Precisely because of the problem outlined above, economists will often disagree. As a science, it will often take you so far. But when there is uncertainty (which is most of the time) and/or when we get to the world of policymaking (which contains a large value-based element), economists will disagree with each other. In the context of the global financial crisis, Queen Elizabeth II once asked why nobody saw it coming. The answer, of course, is that some people did (Fathom included, incidentally), but most people didn’t. Yes, it may be hard to get a clear answer out of a group of economists, but that should be considered a good thing, not a bad one! Indeed, I would go so far as to say that economics should be praised for the flourishing sub-genre of meta-analysis, whereby economists seek to call out publication bias within the field.
So, to summarise: economics is more of a thought process than a subject. Economists, its practitioners, operate in the real world (in the grey zone, if you like) and rarely have the luxury of testing their ideas in laboratory conditions. That can make economists a pain to deal with (trust me, I am one and I work with others). Nevertheless, it remains a popular field because of the insights it provides and the difficult questions it addresses.[4]
P.S.: One more economics joke, as delivered by Ronald Reagan:
It seems an economist, a chemist and an engineer were stranded on a desert island. And between them they had only a single can of beans, but no can opener. The engineer suggested that he climb a palm tree to a precise height, then throw the beans at a precise distance, at a precise angle. “And when the can hits,” he said, “it will split open.”
“No,” said the chemist. “We’ll leave the can in the sun until the heat causes the beans to expand so much the can will explode.”
“Nonsense,” said the economist. “Using either method we’d lose too many beans. According to my plan, there will be no mess or fuss, and not a single bean will be lost.”
The engineer and the chemist looked at each other, and said, “Well, we’re certainly willing to consider it. What’s your plan?”
And the economist answered, “Well, first assume we have a can opener.”
[1] The classical dichotomy is the idea that real variables (i.e., volumes) and nominal variables (i.e., values) can be thought of separately in the long run. In other words, the level of activity in an economy is independent of the aggregate price level.
[2]] Apologies in advance if somebody has cracked these jokes before — they’re the kind of things that get said at many a drunken gathering of economists.
[3] It is interesting to note that economics consistently scores highly in terms of integrity — for example, as measured by replication rates.
[4] For those wishing to hear more about what professional economists actually do, I’d suggest you read last week’s blog by Juan.
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