Economics: The User's Guide

BLOOMSBURY PRESS

Contents

Life, The Universe and Everything

WHAT IS ECONOMICS?

What is economics?

A reader who is not familiar with the subject might reckon that it is the study of the economy. After all, chemistry is the study of chemicals, biology is the study of living things, and sociology is the study of society, so economics must be the study of the economy.

But according to some of the most popular economics books of our time, economics is much more than that. According to them, economics is about the Ultimate Question – of 'Life, the Universe and Everything' – as in The Hitchhiker's Guide to the Galaxy, the cult comedy science fiction by Douglas Adams, which was made into a movie in 2005, with Martin 'The Hobbit' Freeman in the leading role.

According to Tim Harford, the Financial Times journalist and the author of the successful book The Undercover Economist, economics is about Life – he has named his second book The Logic of Life.

No economist has yet claimed that economics can explain the Universe. The Universe remains, for now, the turf of physicists, whom most economists have for centuries been looking up to as their role models, in their desire to make their subject a true science. But some economists have come close – they have claimed that economics is about 'the world'. For example, the subtitle of the second volume in Robert Frank's popular Economic Naturalist series is How Economics Helps You Make Sense of Your World.

Then there is the Everything bit. The subtitle of Logic of Life is Uncovering the New Economics of Everything. According to its subtitle, Freakonomics by Steven Levitt and Stephen Dubner – probably the best-known economics book of our time – is an exploration of the Hidden Side of Everything. Robert Frank agrees, even though he is far more modest in his claim. In the subtitle of his first Economic Naturalist book, he only said Why Economics Explains Almost Everything (emphasis added).

So, there we go. Economics is (almost) about Life, the Universe and Everything.

When you think about it, this is some claim coming from a subject that has spectacularly failed in what most non-economists think is its main job – that is, explaining the economy.

In the run-up to the 2008 financial crisis, the majority of the economics profession was preaching to the world that markets are rarely wrong and that modern economics has found ways to iron out those few wrinkles that markets may have; Robert Lucas, the 1995 winner of Nobel Prize in Economics, had declared in 2003 that the 'problem of depression prevention has been solved'. So most economists were caught completely by surprise by the 2008 global financial crisis. Not only that, they have not been able to come up with decent solutions to the ongoing aftermaths of that crisis.

Given all this, economics seems to suffer from a serious case of megalomania – how can a subject that cannot even manage to explain its own area very well claim to explain (almost) everything?

Economics Is the Study of Rational Human Choice ...

You may think I am being unfair. Aren't all these books aimed at the mass market, where competition for readership is fierce, and therefore publishers and authors are tempted to hype things up? Surely, you would think, serious academic discourses would not make such a grand claim that the subject is about 'everything'.

These titles are hyped up. But the point is that they are hyped up in a particular way. The hypes could have been something along the line of 'how economics explains everything about the economy', but they are instead along the lines of 'how economics can explain not just the economy but everything else as well'.

The hypes are of this particular variety is because of the way in which the currently dominant school of economics, that is, the so-called Neoclassical school, defines economics. The standard Neoclassical definition of economics, the variants of which are still used, is given in the 1932 book by Lionel Robbins, An Essay on the Nature and Significance of Economic Science. In the book, Robbins defined economics as 'the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses'.

In this view, economics is defined by its theoretical approach, rather than its subject matter. Economics is a study of rational choice, that is, choice made on the basis of deliberate, systematic calculation of the maximum extent to which the ends can be met by using the inevitably scarce means. The subject matter of the calculation can be anything – marriage, having children, crime or drug addiction, as Gary Becker, the famous Chicago economist and the winner of 1992 Nobel Prize in Economics, has written about – and not just 'economic' issues, as non-economists would define them, such as jobs, money or international trade. When Becker titled his 1976 book The Economic Approach to Human Behaviour, he was really declaring without the hype that economics is about everything.

This trend of applying the so-called economic approach to everything, called by its critics 'economics imperialism', has reached its apex recently in books like Freakonomics. Little of Freakonomics is actually about economic issues as most people would define them. It talks about Japanese sumo wrestlers, American schoolteachers, Chicago drug gangs, participants in the TV quiz show The Weakest Link, real estate agents and the Ku Klux Klan.

Most people would think (and the authors also admit) that none of these people, except real estate agents and drug gangs, have anything to do with economics. But, from the point of view of most economists today, how Japanese sumo wrestlers collude to help each other out or how American schoolteachers fabricate their pupils' marks to get better job assessments are as legitimate subjects of economics as whether Greece should stay in the Eurozone, how Samsung and Apple fight it out in the smartphone market or how we can reduce youth unemployment in Spain...