Sunday, March 4, 2007

#2 - Positive Economics – a Sorcerer’s Apprentice

Economics is concerned with the production and distribution of goods and services within a society, that is, with the material dimension of society as distinct from its cultural or religious or aesthetic or political or other dimension. An easily overlooked part of this definition is the “as distinct from”. This is very different from “as separate from”. Economics looks at life; and life is whole, fluid, dynamic, fragile. But life is bigger than theory - any theory, indeed all theory. No scientific discipline, nor even all of them combined, can grasp life fully. Yet each can provide some insights from its specific optic.
This presents us with a rather serious problem. The “expert” in our world plays a prominent role. By definition, an expert is someone who knows the cannon of theory in whatever field he or she is “expert” – an economist economics, a sociologist sociology, a lawyer the law, a doctor medicine, etc. etc. etc. Once a “problem” is identified, we like to isolate it, call in the appropriate “expert’, and say, “Fix it.”
Warning, however! Experts are people too. We can hardly them to be immune to the temptations of self-interest and self-aggrandizement. This plus the fact that any real life problem has dimensions beyond the particular cluster of concepts and theories any expert can muster to address it, and we can easily find ourselves with a Sorcerer’s Apprentice situation. The expert tinkers with things only partially understood at best, and may easily destabilize an equilibrium of forces entirely outside his or her understanding or even perception. But you and I – We the People – get left with the consequences.
I find this problem acute in contemporary economics. The rigorous focus on observable economic phenomena, an obsession for quantification and measurement, and an inclination to prefer mathematics as the language of choice for expressing and debating concepts: these propensities have undoubtedly brought much clarity onto economic activity that had hitherto been only sensed intuitively.
There has, however, been a cost. Economic debate, especially discussions on issues of public policy, has drifted either into arcane exchanges between “experts” or the preaching of simplistic platitudes by those with specific agendas. Meanwhile the economic aspects of our lives, about which We the People are expected to make sensible concrete decisions, have become increasingly complex and intertwined both within themselves and with respect to other aspects.
Economics is supposed to provide useful conceptual tools for improving real life, not just “economic life”. If crime is high, if literacy is declining, if domestic violence is endemic, ... these issues have economic dimensions on both the cause side and the effect side, even though economics may not be the principal discipline for understanding them. Similarly, a comparative analysis of labor markets which looks only at employment statistics and turns a blind eye to these other indicators of a society’s health is necessarily seriously flawed. When it comes to real life situations, the ceteris paribus axiom (“all other things being equal”) of which positive economics is so fond, is not simply inappropriate (because it is not true, other things are never the same); it is dangerous. It leads to policy prescriptions which are quite likely NOT to achieve their objectives and also have unintended and unforeseen side effects
Economists have a lot of normative work to do on their own cannon, and some humble pie to eat with respect to other social sciences.

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