What has economics done for us?

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“The Age of Chivalry is gone,” the political philosopher Edmund Burke wrote, “that of sophisters, economists, and calculators has succeeded.”

Once upon a time, a person’s fate was largely settled by the social circumstances of their birth, today each of us is very much an economic being who must produce things of market value if we are to survive and thrive. As economist Paul Samuelson put it, “All your life, from cradle to grave and beyond—you will run up against the brutal truths of economics”.

As a discipline, how has economics done?

For a supposedly empirical science, it has been plagued by ideological divisions, fads and fashions. As British economist Ronald Coase argued, the biggest problem in economics is that theories and models have been constructed on assumptions which practitioners have not been bothered to examine and admit. He coined the term “blackboard economics”, in which everything works perfectly in theory, not so much in reality.

Another serious allegation is that economics has ignored the lessons of history. University economics students rarely read books or articles more than 30 years old, and instead have textbooks presenting the current orthodoxy. Yet if there is anything that the financial crisis of 2007-08 told us, it is that economic and financial history matters. Each generation believes that some fundamental change has occurred in the economy such that manias, panics and crashes won’t happen again – and yet they do.

At an event at the London School of Economics in the wake of the crisis, the Queen asked, “Why didn’t anyone see this coming?” The fact that only about a dozen economists did (according to Australian economist Steve Keen, who counted them) tells us that economics is far from being an objective science that can make reliable predictions – as, for example, meteorologists increasingly do.

John Maynard Keynes noted that because it involves so much psychology and expectations, and has outcomes that affect lives in a deep and lasting way, economics is a moral science. People’s decisions can’t be reduced to mathematical equations, even if it would be more convenient if they were. French political economist Thomas Piketty criticises the discipline’s attempt to put itself above other social sciences. Its obsession with mathematics, he writes in Capital in the Twenty-First Century, “is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.” Ha-Joon Chang, a Cambridge University economist, goes as far as to say that “Good economic policy does not require good economists”. The East Asian economic miracle, including the rise of his native South Korea, was implemented mostly by lawyers, politicians and engineers, he notes.

Even so, the ‘Great Enrichment’ of the last 250 years, in which the world became much, much richer than it had been for the preceding two thousand years, is thanks in part to economic thinkers such as Adam Smith, and his belief that it is people and businesses, not armies or governments, that make countries rich, and David Ricardo, whose counterintuitive insights into comparative advantage in trade became one of the great laws of economics. These classical economists, Ludwig von Mises argues, were crucial in creating the conditions for modern wealth-creation, in that they attacked “age-old laws, customs, and prejudices upon technological improvement and freed the genius of reformers and innovators from the straitjackets of the guilds, government tutelage, and social pressure of various kinds”.

Not only did the laws of economics provided a counterweight to the conceit of those in power, but the industrial revolution would not have happened without a laissez-faire economy working its magic. Today, when economists get it right, through emphasising simple ideas such as the benefits of markets and trade over defensive self-sufficiency, their ideas can and will continue to raise the welfare of billions.

Beyond the achievement of personal or national security, what is economics ultimately for? Keynes, who was a lover and supporter of the arts, thought it was so we could enjoy the good things in life. This was only possible with a stable, growing economy in which damaging cycles of boom and bust were ironed out. This often seems an impossible task, but economists, Keynes said, are the “trustees, not of civilisation, but of the possibility of civilisation.”

Tom Butler-Bowdon is the author of 50 Economics Classics: Your Shortcut to the Most Important Ideas on Capitalism, Finance, and the Global Economy, released this month by Nicholas Brealey Publishing.