Friday, 10 October 2014

Should economists or historians advise governments?

From a review on, historians argue that when politicians swapped adviser type from historian to economist, the result was dreadful...

There is a point to be made - and a point to be conceded. Here's a quick summary of the article:

"According to historians David Armitage and Jo Guldi, authors of a new book called The History Manifesto, historians ceded authority to economists by losing their long view. They stopped studying broad stretches of time, refused to analyze long-term trends over centuries or even millennia. Instead, according to Armitage and Guldi, they gave in to "short-termism," focusing on obscure moments in history that weren't relevant to the public sphere....History, they suggest, helps us understand that there are many possible outcomes any any given situation, but that certain courses of action are more likely to succeed. Unlike economics, whose sole preoccupation in our finance-obsessed era is the near-term profit motive, history offers a way to place our tiny lifespans in a narrative that spans dozens of generations — perhaps even reaching into a future where capitalism is no longer our dominant form of economic organization. After all, economic systems rise and fall just like empires. That's the kind of perspective we need to take, if we hope to prosper for centuries rather than for the next quarter."

There's a lot of good critique herein: it's not just (some) economists who are caught up in short term analysis, but psychologists, sociologists, and historians: many undergraduates from a variety of disciplines note that they do not (and are told not to) study texts from before 1990 - as they are somehow antiquated and have been superseded by recent events (as if innovations in the mobile phone industry has rendered obsolete all human thought prior to that). Could we do philosophy without studying Plato...and what about art history?!

But to claim that economics is to blame for this short-termism is to confuse particular methodologies within economics (and hence the relevant advisers' beliefs and policies) with the logic of economics.

The logic of economics does not change. It was there before people started trading and it was there in the Soviet Union (Lenin's rhetoric notwithstanding), and it will be there forever the future.

The problem is whether economists are applying economic logic at all - or whether they are mere mouth pieces for some political party or government. "Soviet economists" for instance, were not espousing a new kind of economics but ignoring much economic logic in favour of ... wait for it ... a historical theory about humanity's political evolution. Central planning was far removed from the great insights of economics thinkers through the ages. Similarly, regression analysis and econometric modelling (derived, incidentally from the Soviet mentality of central planning through mathematical modelling) is also far removed from economic logic: its aim is to supply political and banking (and if you don't know it, banking is inherently political) interests with answers deemed appropriate for scamming. Ok, a bit critical - back testing on the stock market is useful - but all it does is highlight the waves and troughs of collective action as it occurred in the past: tomorrow is, after all, another day. Economics avoids (or should avoid) quantitative predictions about price movements, never mind gross statistics such as GDP or unemployment. There are too many factors or noise to be precise. Qualitative statements can certainly be made though - in the absence of X, we expect Y to increase. By how much? No one knows or can know.

Many economists today are employed to espouse government policy - or carefully to watch the government advisers for any hints and insights into what political manoeuvres may be in the making. But what both 'teams' are doing is not economics but politics. 

If Ghengis Khan had employed 'economists' to rule his empire, would we have trusted them?

History is critical: it does provide us with the long duree as Braudel says (as reported in the review), and unfortunately, most economists do not read history. Most that I've met don't read at all - that alone encouraged me to read philosophy for my doctorate rather than economics. Most students in the postgraduate department I was in had not read (or even opened, I suspect) Adam Smith's great tome, The Wealth of Nations. And many critics of economics have not read it - they make so many assumptions about poor Smith that's it's not funny: economic illiteracy is rife.

So what about swapping historians for economists? What do historians have to offer? One thing they don't offer is economic logic - but they also come to the table with their own preconceptions of what history is about and accordingly where we may be going (with out any economic logic of course). The UK's Prime Minister, Gordon Brown, was a historian from my alma mater, Edinburgh - and his lack of economic (well, basic financial) logic had him selling  gold as the price fell. But not to place blame on a single historian playing economics - after all, many economists play the markets badly - we must be aware that historians come to the table with their own prejudices about how to read and interpret history. There are schools of thought dominated by certain political philisophies such as the Whig view or he Marxist view and these in turn colour how the past is viewed.

Certainly, history is the study of the past, but what to study and how to interpret it is open-ended and subject to change as viewpoints and ideologies change. Historians want to recreate what it was like but that is to necessarily impose a modern mindset on the past, no matter how much we try to rid ourselves of our current conditioning. 

Economic logic is different. Just like mathematical logic it seeks to avoid imposing political, ethical, or aesthetic judgements on economic activity. It starts with the basic assumption that people want to improve their lives and then the logic pursues what that means. They may want more peace, they may want more money, they may want healthier lives...what value they choose is irrelevant to the logic. How they go about it is.

What most people moan about when they complain about economics are issues such as poverty and injustice. But they are not created by economics! Governments, tragically enough, are usually to blame for injustice and poverty , but that's another story. The economist looks at the situation and explains why some people are poor relative to others, and usually we find out it's because the poor live on poor lands, do not engage in trade, don't have much capital to empower their labour, are engaged in internecine warfare, or just don't like material wealth (economics does not say that people should be wealthy, it's more interested in the logic of wealth creation, or lack of). As humans, we are wont and quick to make normative judgements on all sorts of matters, but that's not what economic logic is about. 

Economics will explain why a minimum wage can create unemployment. People may complain about the logic but the logic does not change if we are rich or poor, in power or out of power. It will explain the tools for wealth creation (free trade, rule of law, sound money, a desire for material improvement...) but it does not judge whether wealth creation is a good thing in itself. It's just that most people for some reason want to be better off and economics can explain how to enrich oneself and one's nation. 

Economics gets the rap a lot. Certainly the profession hasn't made it the most loved subject in the world - the more 'scientific' and mathematical it has become, the more our economies seem to be in disarray . If physicists were failing to launch satellites on a regular basis, we would certainly be challenging them to examine their models more closely. Yet when the US has created credits out of thin air and pretends to be the world's reserve currency, not only are we in for a shock at some point, but we should be examining closely the premises of the model and questioning whether the economists behind the policies are really economists or politicians. You'll find it's the latter. Every time. 

But that's another story too. 

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