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The core idea

25 September 2014 By Edward Hadas

Something may finally be changing in the study of economics. A new textbook, half of which has now been published online, is a small step in the right direction.

The book is called the “The Economy,” and it is produced by a group of economists known as Coreecon. They are supported by the Institute for New Economic Thinking, which is largely funded by speculator-turned-philanthropist George Soros. The text is available for free – which itself is a fine example of non-conventional economic thinking.

The voluntary effort is commendable, and the many students who complain that academic economics describes an imaginary world should be grateful. Still, the limits of “The Economy” show just how far the reformers still have to go.

To be fair, the authors were constrained. Most professors still do not see any large problems in the way that economics is taught. An overly heterodox approach would have prevented the book from achieving its primary goal of being adopted in normal academic economics programmes.

The intellectual conservatism, which is shared by the many political liberals in the discipline, is frustrating. Faulty assumptions and a dubious reliance on excessively abstract and unrealistic models too often lead to inaccurate observations, poor policies and worse forecasts. As a discipline, economics should be reconsidered from the roots.

The available portion of the Coreecon book, which deals with microeconomics, does not go that far but it offers a real improvement over the standard fare. Rather than simply assume the existence of markets, with governments in the background, there is a discussion of economic history. There is even a nod to the history of economic thinking. Also, some attention is paid to concepts such as institutions and environmental responsibility, which economics courses usually leave for optional study much later.

However, the approach is still far more conventional than innovative. The profession’s standard narrow vision of the world – numerical, monetary and materialistic – is only occasionally questioned.

The basic problem shows up at the end of the first chapter, when the authors provide a definition of the field. They write: “Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time.”

That is a big improvement over the offering of Lionel Robbins, the man who more or less founded the London School of Economics. He characterised the discipline as “the relationship between given ends and scarce means.” Robbins’ words are paraphrased in many texts, but they could hardly be less helpful.

Robbins does not mention history, although economics inevitably studies a changing world. He does not mention the actual subject matter – labour, production, consumption, distribution. He assumes the ends are given, but in reality neither the actual nor the correct goals of economic activity are clear. And he assumes scarcity, while modern economies often suffer from too much unused labour. They may also have too much production and consumption to serve the good of society and the environment.

The Coreecon definition is better, but still misses much of what is essential to economic activity and its study. Economics cannot merely deal with how people do things, because descriptions of human behaviour make no sense without discussions of purpose. Economics should also be a study of why people behave as they do in producing their livelihoods.

The definition also limits the discipline to descriptions, as if economics were a physical science which makes no judgments of how things should be. That is unrealistic. Economists inevitably judge whether behaviour and organisations are more or less just, more or less efficient, and more or less helpful to some social goal. The desire to evaluate is not unscientific. Yet there is little point in studying the economy without wanting to make it better.

The application of a more realistic definition, however, would probably make the book unusable in most universities. For example, the two chapters dedicated to supply and demand in “The Economy” would not survive. And no introductory course would pass muster without the indifference curves that this approach generates.

The book follows the standard practice of assuming that at any moment there are knowable quantities called supply and demand which are balanced by a price. The question of what constitutes both sides of this equation – of why people want or are willing to make just this much – is simply abstracted away. Supply and demand are, in Robbins’ words, given.

This sleight of hand effectively erases most of what is interesting in the organisation of the economy. It ignores the stabilising influence of institutions and the complex interactions of wages, prices, taxes, interest rates, regulations and customs.

Worse than that, it hides an ideological judgment, by assuming that the standard economic arrangement is a market which pits perfectly self-interested buyers against equally self-interested sellers. That assumption sounds unrealistic. Even if it is correct, there is no reason to accept it without much reflection and study.

To be fair, there is an effort to think more broadly in many of the other chapters. And admirably, the organisers see this as a work in progress. Well, there is progress to be made.


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