Does economics even look at the real world?
I keep asking myself these questions — and I hold a PhD that says I should know the answers!
When public policy is guided by economic analysis, the environment is under threat, and the economy is in a hole, not knowing the answer to these questions creates a big problem.
Unfortunately there is no one "economics," not in the sense that there is a mathematics (2+2 does = 4, and does not = 5), or physics, or biology, or …
Two examples of the weakness of economic analysis have hit me over the head recently. One is a matter of interest to environmentalists. But the other offers wonderful insight into the "logical processes" of mainstream economists, so I’ll start there. (Note those quotes — please.)
On December 17, The New York Times ran “Finding Good News in Falling Prices,” which discussed "sticky wages" — the observed fact that wages overall do not seem to fall in recessions. Quoting the piece:
Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.
Traditional economic theory doesn’t do a good job of explaining this.
The last sentence is entrancing — or, perhaps, terrifying. Why can’t traditional theory explain this observation about wages during recession? Let’s start with the supposed fact itself. Just ask yourself whether you ever heard of union "give-backs" when companies were in trouble. (Today’s Washington Post carried a piece about the auto bailout and workers’ pay and job cuts with the headline UAW’s “Sacrifices Look to Some Like Surrender.”) Obviously the "fact" is not always true — and many of the basic assumptions of economics includes similar falsehoods.
Ignore that for a moment (if you can). Now, consider the claim of economics to be an empirically-based, scientific discipline. How good is a theory that does not explain something as fundamental as what people get paid over time, or that cannot determine how different combinations of the characteristics of employer and workplaces and the state of the national economy determine wage trends?
Hey, wages are paid — we can observe the funds involved. What about clear air, clean water, a stable climate, or just a nice view? We don’t buy those in a market, the way workers’ time is bought in labor markets. So how can economics price those environmental phenomena if it can’t even explain and predict wages? There is something lacking in the "traditional theory" and we cannot simply trust its findings.
I’ll be addressing that theory, some of its weaknesses, and some alternatives in future posts, but let’s get back to the environment — or rather, to the terrestrial ecology in which we live.
That’s not unnecessary repetition. Not in light of the comment I got a while back from a professor of "environmental economics" in response to my praise for some material in an academic journal called Ecological Economics.
She loudly exclaimed, "They’re the enemy!"
If those publishing ecological economics are the enemies of those claiming to be environmental economists, then we do not have one "economics." Something serious is afoot.
And you wondered why you couldn’t understand economics? You thought it was your problem. But what if the problem lies in the economics?
Don’t worry if two analyses don’t seem to be consistent. Accept that they are not, and look for the assumptions that lead them in different directions.
(The devil is not in the details, but in the assumptions … but finding those devils requires digging into the details.)
When we make policy decisions without looking at which economics is guiding us, we have a problem. We make inconsistent decisions, we make foolish decisions, and, perhaps worst, we defer decisions because the results confuse us so much we can’t decide which way to turn.
So, please join me in some explorations of the logic of economics, and the assumptions of different schools of economists, in my posts here at Grist. I’ll try to generate something useful at least once a week.
In the meanwhile, if you have the appetite — and the stomach — for it, you can do your own exploring at ClimateChangeEcon.net, starting for now with some "Legislators’ Tools" I assembled to help state legislators cut through assumptions underlying some of the economics they have to read.