Friday, December 16, 2005


This by the way is an occasionally extended essay. I don't have time to do this regularly.

I'm a amateur Economist. For a while I was a professional, but found that didn't suit me. Too political. My father was a scientist and for somebody with that background it was shocking. Results were changed or suppressed when they didn't suit the party line. Unfortunately that is the nature of the subject. It affects us all vitally, too much to be left to mere empiricism!

But to me there is a more basic problem with economics as the profession has developed. By moving away from the original more widely defined Political Economy of the early founders of the discipline (Adam Smith, Ricardo usw.), it seems to have forgotten what the question was that it started with. I think this is why you get the strong feeling with modern Economics that the cart is driving the horse.

I always like the reality check of getting the big picture by going right back to first principles.

I'm professionally a programmer now. If I look at old code I have written (that probably works perfectly well by the way) the reaction is "OH MY GOD - DID I REALLY WRITE THAT CRAP? ". Every now and then I go back and work over old code to make it more modern and robust. Well I think Economics is a bit like that. It has built a wonderfully complex ediface but it badly needs to review its foundations. For various reasons, I think the world Economy is rapidly approaching a crisis, and I'm not convinced that Economic Theory is in a good state to cope.

One obvious weak link even in pure narrowly defined economics is how it treats assets. Of course there are quite complex asset allocation models, but they are not integrated into a dynamic view of the economy as whole. As a consequence, asset inflations and the following deflationary busts (for instance the great depression, Japan in the 1990s) are not well described by conventional economics. The Austrian school (Schumpeter, Von Mises et al) and their followers crow that this was an essential part of their analysis. But their analysis was mainly descriptive, not mathematically modelled and to me not very convincing. But Schumpeter none the less, always had a fascination for me, because he made the business cycle an essential part of his view of the world rather than an aberation. And asset prices play NO part in classical, neo-classical or keynesian growth models. Clearly something very important is missing here. This is particularly relevant today because of the widespread concern about asset price bubbles. But these bubbles are not a well understood phenomenon.

Even more serious issues arise when one looks at the scope of economics. Look at what economic statistics we see widely quoted. The emphasis is all on totals or their corrollary averages. But nobody is average, averages hide a lot. And what has happened to resources and the environment, is that accounted for? What about the interactions between people, has their been a net plus or minus effect (for instance traffic congestion, accidental damage etc). What about the time people have for non-economic activities - has that gone up or down? How much of economic activity is really productive and not just really a cost of doing something else? Do our economic statistics tell us much about these things? I think you know the answer. And economics really is to blame - it should be measuring these things. Why isn't it? (Not pointing any fingers but ask Milton Friedmann).

I want to develop these themes further, but think I need to retire first to have time to think about them and maybe find some answers. I have some ideas but need to research them more and verify them more.

Anybody that stumbles across this is welcome to post and give me feedback and ideas. Is this interesting? Trolls and spam will be mercilessly removed if I come across it.