ARE NEW ZEALAND ECONOMISTS GOING IN THE RIGHT DIRECTION?

The Secretary of the Treasury appears to have doubts.

 

Pundit: 24 November, 2014.

 

Keywords: History of Ideas, Methodology & Philosophy;

 

In a speech to economics teachers  earlier this month, the Secretary of the Treasury, Gabriel Makhlouf, argued for a different approach to economics from the one which dominates the profession in New Zealand.

 

His complaint was that ‘we have allowed too much of economics, and too many economists, to rest on the laurels of algebraic certainty and not push themselves into the field of the human science that economics actually is, where choices are more difficult to arrive at and certainly more difficult to see.’

 

I put his argument a slightly different way, although in its spirit. Isaac Newton was foundational to modern science; he and his successors have the extraordinary achievement of being able to predict all sorts of physical phenomea – for example where exactly a planet will be many years into the future – using just a few principles. That success has seduced many other disciplines including economics. Adam Smith, born before Newton died, makes more references to him in The Wealth of Nations than to any other thinker. Would it not be wonderful if economics could be reduced to a similar few simple principles?.

 

But has the approach been successful in economics? Contrast that other outstanding British scientist, Charles Darwin. He also set out some simple principles to explain evolution but they are hopeless for predicting with any precision. Cutting across the processes he describes there is accident and contingency. (Otherwise how can you explain you have five, rather than some other number, of toes?) There have been economists greatly influenced by Darwin too, including Alfred Marshall who was a fine mathematician.

 

If you put physics and evolutionary theory on a spectrum then the social sciences are on the other side of biology, even further away from physics., for the world they investigate is even messier than, say, an estuary. While many who tackle social issues are hardly scientists there is a scientific tradition of social theories subject to empirical investigation which are to be rejected when they don’t stack up. It is just a bloody sight harder task to do this than for physics. (Those whose social theories are invulnerable to evidence, and who do not test them rigorously, are ideologists.)

 

What Makhlouf was arguing was that too much of scientific economics today bases itself on physics and not enough sees itself as a social science. He quoted Keynes: ‘the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.’

 

Makhlouf went on to pose a set of questions to the teachers. Among them were

– Are you covering different schools of economic thought in your teaching?

– Are you teaching enough economic history, so that we can learn the lessons from the

past?

– Are you encouraging your students to embrace and respect the perspectives that other disciplines bring to thinking about and solving economic problems?

– How can we better understand the trade-offs between policies that improve incomes and those that improve social inclusion or environmental sustainability or our resilience to economic shocks?

– And, perhaps most importantly, are you challenging yourselves, and your students, to

think beyond the comfortable?

 

My guess is that many economics teachers posed with such questions would say neither ‘yes’ nor ‘no’, but ‘what is he going on about?’

 

Makhlouf is not a ‘heterodox’ economist. The speech is entirely within the core of economic orthodoxy, quoting approvingly many of the economic greats. He emphasises ‘Nobel Prize winners demonstrate diversity of thought among economists, a diversity that needs to be preserved, promoted and enriched. Whether people follow the classical, neo-classical, Austrian, Keynesian, New Keynesian or some other school, preserving this intellectual diversity – and in fact allowing it to pollinate – can only help to improve our understanding of the world we live in.’

 

He affirmed the need for ‘a stable and sustainable macroeconomic framework, sound monetary policy that delivers stable and predictable prices, a prudent fiscal policy and debt that’s under control’, going on ‘I also believe that a stable and well-regulated financial system matters, that properly functioning markets matter, that price signals matter and that incentives matter.’ You can’t get much more orthodox than that.

 

Even so, the Secretary of the Treasury has put up a considerable challenge to New Zealand’s economic profession; to change its balance to be more open to other social sciences, more tolerant of diversity and dissent, more robust in debate, more critical and more sceptical of fashion.

 

As much as I support Makhlouf’s analysis, I do not expect any early redirection of economics teaching and hence of economists’ thinking in New Zealand. To take a simple test, few of our university economics departments offer many courses in economic history or the history of ideas and few teachers of their other courses include a historical context in them. I can see the Treasury grappling with the challenge; I am not sure I see it happening much elsewhere.