The Dismal Science: A Personal Reflection – Part Four

Part 4: The Case For Practice-Led Economics

I started this series of posts with the proposition that Carlyle’s characterisation of economics as the dismal science could be interpreted in two different ways. The negative interpretation is that economics is dismal in its attachment to a rather Panglossian view that “all is best in the best of all possible worlds” with little to be done by way of policy activism by government beyond regulations to protect the competitiveness of markets. From this perspective, the essence of economics is the invisible hand theorem that the price mechanism can ensure a Pareto-optimal general equilibrium provided that markets are free of structural and informational imperfections. In contrast, the more positive interpretation of economics as the dismal science is that economics tries to understand the world in order to provide ways to improve the well-being of people particularly in dismal times. Economics from this more positive perspective is a source of hope that lives can be made better by appropriate interventions by central government and other agencies. I align myself wholeheartedly with the view that economics should be the science of hope in dismal times.

              Much of the debates about the nature of economics and questions about the legitimacy of mainstream (neoclassical) economics can be summarised as the conflict between two fundamentally different conceptions of economics as a subject, what I will call the Robbins conception and the Marshall conception. In An Essay on the Nature and Significance of Economic Science (1931), Lord Robbins took the view that economics is the study of the allocation of scarce resources among competing ends. In so doing, Robbins rejected previous definitions of the subject matter of economics including that of Alfred Marshall, Professor of Economics at Cambridge. In his Principles of Economics (first published in 1890 and arguably the principal economics textbook for the first half of the 20th Century), Marshall had provided a very different definition that “economics is the study of the everyday business of life”.

The Robbins conception of economics captures the essence of the mainstream approach. Economic behaviour is conceptualised as a series of optimising choices by rational economic agents seeking to maximise their well-being (defined as utility for individuals and profits for firms) while operating as a traders in markets regulated by the price mechanism. All of the limitations of mainstream economics flow directly from this conceptualisation of economic behaviour as rational choice – its de-contextualised universality, the emphasis on formal (mathematical) logic as the principal route to knowledge, the reduction of uncertainty to probabilistic risk, and the inherent laissez-faire presupposition against policy activism.

              Mainstream economics ignores the broader context of human economic behaviour and imposes a universal frame of allocative choice in a market system. It adopts a rationalist, axiomatic approach to knowledge in which all economic behaviour is formalised as some form of constrained optimisation amenable to mathematical modelling. The market system is treated as structurally stable with uncertainty reduced to merely a series of random shocks with a well-defined probability distribution. Seemingly sub-optimal market outcomes are modelled as either optimal equilibrium outcomes under conditions of structural and/or informational imperfections or as disequilibrium outcomes with slow speeds of adjustment towards the optimal equilibrium outcome again due to structural and/or informational imperfections. Imperfectionist theories inevitably provide a weak basis for policy activism and tend to favour a more hands-off, laissez-faire approach by central government and other agencies directed more at market reform to remove the imperfections impeding the operation of the market mechanism.

              In aligning myself with a more radical vision of economics as the science of hope in dismal times, I adopt the Marshall conception of economics as the study of the everyday business of life. This summarises the essence of the radical Keynesian approach. Economics is grounded in the reality of everyday human economic behaviour. It is an inherently pragmatist approach of practice-led economics, what I called “impact theory” in Part 3 of this post. It is the “analytics” approach – analysis for practical purpose; analysis to provide practical solutions to real-world problems. It is an approach that open to the possibility that human economic behaviour is complex with often very different modes of activity that are much deeper than just price-based allocative decisions. Formal mathematical modelling and empirical data analysis both have roles in gaining knowledge just as in every other field of scientific endeavour. But there is a recognition that a pervasive feature of human life is uncertainty – we simple do not know the future. We act in anticipation of the future. Our actions are based on our beliefs, our understanding of the world but always with a recognition that our beliefs are partial understandings and the world is continually changing. And our actions are the product of both reasoned judgment and  emotional response to the specific context in which we find ourselves. Life is a process which we can influence but never full control. Structures change, sometimes suddenly and catastrophically leaving us asking “what is going on here?”, “what should we do?”. It is this pragmatist, practice-led vision of economics as the study of the everyday business of life to which this blog seeks to contribute.

Read Other Related Posts

• The Dismal Science – A Personal Reflection Part 1, 6^th Sept 2023
• The Dismal Science – A Personal Reflection Part 2, 18^th Sept 2023
• The Dismal Science – A Personal Reflection Part 3, 25^th Sept 2023