A Feature by R. E. Glass
Several Tinteán readers and others in the Irish community have expressed the need for a ‘plain language’ explanation of President Michael D Higgins’ comments about economic theory in his speech after being conferred with an honorary Doctor of Laws at Melbourne University. Here goes!
It is important to note that Higgins’ remarks were largely confined to Microeconomics (which seeks to explain, for example, what we as individuals do ‘getting and spending’, businesses do in producing and selling goods- everything from bread and milk to motor cars, and why wages vary between occupations), rather than Macro-economics, (which deals with explaining, for example, changes in countries’ GDP, international trade, and the impact of Government budget policy).
Basically, as regards micro-economic theory and its application, Higgins was making three main points:
- Unlike earlier writers on what used to be called ‘political economy’, such as Adam Smith and John Stuart Mill, many modern economists abstract economic theory from its social and cultural context, thus imagining ‘the economy’ as something that exists separately from the rest of society. (Paul Samuelson’s Economics, the standard basic text book for economic students such as myself in Australian universities in the 1960s, is a case in point);
- Unlike Mill and Ricardo, who thought prices of goods should be determined by their ‘cost of production… reflecting the labour used in ..(their) production (which Higgins characterises as an ‘objective theory of value’), modern economists placed the individual consumer at the centre of the price determination process, arguing that ‘there was no inherent value in goods, but only that which results from the relative importance placed on such goods by individuals seeking to satisfy their needs’ , ‘a subjective theory of value’. This ‘marginalist revolution’, reshaped micro-economics from the mid 1930s, allowing the great British economist (Lord) Lionel Robbins to define economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’ (i.e., we can’t afford to buy all we would wish), which I remember as the definition used by Samuelson in his text book;
- That, instancing the case of the British government’s response to the Irish famine as an early case (documented in great detail by in Cecil Woodham-Smith’s The Great Hunger), of ‘economists inclined to hubris, when confronted by the inapplicability of their existing theory to a social reality, demanding that social reality change to reflect theory’.
Worrying current trends are that
1.‘the discipline of economics was not so dominated by a single methodology in the past as it is today’;
- beginning university courses (economics 101) ‘commence teaching of the subject as perfect competition’ (where all markets are characterised by many sellers and many buyers, where knowledge is perfect, where it is easy for anyone to become a producer of all goods), ‘leaving students with a dessicated – and inaccurate – picture of economic life.’ (There are examples of (almost) perfectly competitive markets (e.g., the Victoria Market), but we are all aware that many markets (e.g., for motor vehicles and petrol) are not: try setting up a firm to produce motor cars.
It is important to note that some of Higgins’ ideas have been around for a long time. Lester Thurow, for example, in Dangerous Currents in 1983 explored in detail the territory covered by Higgins, reaching similar conclusions. As Thurow writes in his last paragraph, the ‘beautiful sailing ship -the equilibrium price auction model (essentially that described in points 1 and 2 above) – is torn apart and sinking in a riptide’, requiring economics to find a new raft which ‘won’t match the beauty or mathematical elegance of the (current) sailing ship’ but will have ‘one undeniable virtue – it floats’. More recently (2008) Richard Thaler, winner of the 2017 Nobel Prize for Economics, and Cass R. Sunstein, in the highly readable Nudge, have documented the reality that individuals do not make decisions in the manner required by standard economic theory. And as Higgins notes, leading economic thinkers such as Amartya Sen and Joseph Stiglitz, even whilst accepting the underlying assumptions of neoclassical economics, ‘have en passant systematically undermined some of the claims once advanced by some fundamentalists, such as, for example, the assumption of a narrow rationality on the part of individuals, and assumption of market efficiency’.
Higgins’ comments are relevant in the Australian context. Nearly everything that comes out of the Productivity Commission, for example, reflects their hubristic belief that the ‘price-auction model’ is applicable to all human activities, and that no other analytical framework is relevant. On the link between theory and reality, one relevant recent example is the application by international agencies such as the IMF and the World Bank of the theories about budget management developed in advanced capitalist western countries (often with mixed success) to the problems faced by countries such as Indonesia (on which see Robert Garran’s 1998 book Tigers Tamed, especially Chapter 8).
I have been trying to imagine what would have happened if President Higgins’ talk had been given to a gathering of economists. I’m confident that they would have found it well-informed and challenging, though like him I doubt that the current approach to policy will change any time soon.
Economist and formerly a Public Policy Analyst