Blimey. If you believe Jonathan Aldred’s book, we economists have an awful lot to answer for: Volkswagen cheating on emissions tests; American governments imposing democracy on other countries; loss of confidence in politics and politicians; the belief that it’s moral to be immoral; lack of action on climate change; the ‘fashionable dismissal of almost any role for the state’; the idea that it’s fine to have a market in human kidneys. All of this, it seems, is down to the idiocy of economists and the influence wielded by them.
But hang on a minute. As Aldred himself points out, there is no legal market in human kidneys anywhere on earth other than in Iran. And I don’t believe Iran is the exception because of the influence of economists on that country’s government. As for the fashion for dismissing the role of the state in the economy, what fashion? There are some on the very extremes who might believe that the state should not intervene in the economy, but even in these days of extreme politics it is not a view that can possibly be called popular, mainstream or even really acceptable in polite company. As for the other claims, and many more made here, most come with little real evidence attached. A line is simply drawn from the ideas of particular well-known and influential economists to a series of dreadful outcomes.
This is a shame, because the erecting and immediate destruction of a series of straw men rather detracts from what is for the most part an entertaining, wide-ranging and often challenging argument. Aldred writes exceptionally well and there is much here to agree with. The book contains some of the clearest expositions that I have seen of seminal writings on politics and economics – whether it be Kenneth Arrow on voting systems, Ronald Coase on the role of markets or John Nash on game theory. It’s impossible to do justice to the sheer range of issues tackled.
The reasons why risk models failed to predict the financial crisis of 2008 are well known now: their architects modelled risk in completely the wrong way, essentially assuming away big shocks and the existence of ‘black swans’. Nevertheless, Aldred effectively brings the issues to life as he flits between discussions of the risks of nuclear war and earthquakes and explaining the differences between various forms of uncertainty. You can’t treat financial crises like human height or IQ, he explains, because there are limits to the latter. The probability of someone being nine feet tall or having an IQ of three hundred is genuinely minute – an instance of each is perhaps a once in a several million years event. That’s not true of big financial crises. Yet those making financial risk assessments treated them as though it were. That’s why the CFO of Goldman Sachs made the absurd claim in 2007 that dramatic moves in the market over several successive days should not happen once in even several billion years. The underlying concepts of risk were just wrong.
There is plenty more here to think about. We in the economics profession focus a lot on financial incentives – for instance, how to use taxes, benefits or performance-related pay to influence behaviour. Aldred takes us beyond the usual arguments for why the use of such incentives often backfires (for example, paying blood donors leads the quantity and quality of blood donations to fall). He challenges the very ethical basis of using financial incentives, arguing that if they are predictably effective then they undermine people’s freedom and exert control in an unethical way. I’m not sure I agree, but it got me thinking, which is as much as you can ask for from a book. Aldred is certainly right to say that people often regard income from different sources differently, valuing income they earn more than income from benefits.
His concerns about the ethical foundations of behavioural or so-called ‘nudge’ economics are well founded. Behavioural economics is based on the idea that by changing the default option or the framing of a question you can alter people’s behaviour in ways deemed appropriate. In the hands of ‘mendacious regulators and politicians with darker motives’ it is certainly a dangerous tool. Aldred’s conclusion: ‘Why not just compel people…?’ I don’t think that this is intended to be ironic.
Then there is his discussion of the fashionable belief in the importance of independent central banks and independent fiscal watchdogs. As a natural supporter of such institutions, I sympathise with his contention that ‘if politicians themselves have come to believe they should not be trusted to make decisions … no wonder voters come to believe these things too’. Our assumptions about behaviour and motivations are not neutral or above politics. Rather, they shape the political environment and affect how politicians behave. Again, though, Aldred pins a remarkable amount of the blame for our lack of trust in politicians on economists, and particularly public-choice economists, who have pointed out that politicians and bureaucrats have their own agendas and may not work for the greater good. Nevertheless, his general point that ideas have consequences and purveyors of ideas should be careful about how they are translated and implemented is well made.
Aldred’s plea for more humility among economists (he quotes Keynes’s wish that they be ‘thought of as humble, competent people, on a level with dentists’) strikes a chord, as do his complaints about the lack of ethical codes among economists, the lack of replicability of much empirical analysis and the lack of interdisciplinary working. There is much that is good about modern empirical economics, but there is also much that is infuriating about a lot of what goes on in university economics departments. Economists are beginning to look at themselves critically, but they need to do so much more.
The trouble is, I’m not convinced that this is the book that will persuade them. Economists like evidence, and while Aldred is long on entertaining narrative he is short on convincing proof. The claim that orthodox economists are reluctant ‘to talk about inequality’ is odd indeed. Maybe all the ones I know are unorthodox, but in my experience they rarely speak of anything else. Aldred’s claim that economists somehow promote the idea that free-riding is morally desirable is not at all in tune with reality. It is recognised as a problem and much time is spent on clever wheezes to try to prevent it. We haven’t overfished the sea or created climate change because of economics. Indeed, economists are at the forefront of efforts to right these wrongs. Throughout the book, one is given the sense that economics requires us to believe that governments are always wrong and should be as small as possible, leaving the market to let rip. Some ideas do lead that way, and they can be disproportionately influential. They are often simple to grasp and have, for sure, been misused. But they are not shared by the vast majority of economists, especially those working on public policy. The economic arguments for public intervention, for regulation and for intervening in markets are well known, well embedded in government thinking and often effective.
Despite all that, I do think that students of economics and practising economists should read this book and try to keep an open mind as they do so. Some of it will rightly make them angry (both with Aldred and with some of the things done in the name of economics). Some of it they will correctly dismiss. But some of it should make them reflect, and it should lead them to take greater care in the language they use and to challenge long-held assumptions. The general reader coming to these issues for the first time will, though, leave with an unnecessarily partial and even more jaundiced view of the profession than it deserves.