Economic Thought, what there is to know

Economic Thought, what there is to know

Economics has not reached its final form. In reality uncertainty is what the subject feeds on. It’s time to question the uncertainty of economics by looking at the subject from its political economy roots rather than as a concrete science.

Everyone has met someone who, after a few a pints at the local pub, decides that they’re the fountain of all knowledge on: the price of milk, the sustainability of the welfare state and the solution to the Greek crisis. These economic problems are not a new phenomenon! So maybe solving them relies on us looking back at a history of economic thought. Economics has not reached its final form. In reality uncertainty is what the subject feeds on. So these lines of enquiry, although seemingly archaic in nature, may actually hold the solutions to our modern economic problems.

So taking one area, welfare economics, should we just accept that Adam Smith’s (1723-1790) ‘invisible hand’ is guiding individual actions towards the unintended creation of social benefits? This would suggest we are all inherently self-interested and leaves no room for government intervention, let alone the value of charity. But where is the feel good factor in being selfish? At the moment I would suggest that for many Greek families struggling to pay rent and afford the next family meal, Smith’s thinking would not fair well. Maybe they would feel more comfortably in the knowledge of Jeremy Bentham’s (1748-1832) ‘pannonmion’. Despite this we have Smith to thank for our ability to debate economics in the first place. Before him the subject was considered within politics and philosophy and so his views on the economy, specifically the free market in his book The Wealth of Nations has left us with the foundations to debate economic issues concerning free markets and privatisation.

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David Ricardo’s (1772-1823) theory of comparative advantage (based on the premise that countries should specialise in producing only the products where they are the most internationally competitive and import all others) also helps our understanding. The governments of Saudi Arabia and New Zealand and associated oil and lamb exports have much to thank Ricardo for. However should countries in Africa and South America also thank him for the risk involved due to extreme weather of specialising in one cash crop? But then the views of Thomas Malthus (1766-1834) may be unwelcome to those in sub Saharan Africa facing starvation with his pessimistic view that population will eventually outstrip food supply.

Is it right that we even take market forces as given? David Ricardo and Karl Marx (1818-1883) argued that labour should be the only factor that determines the value of a commodity. Yet modern economics has built upon and immortalised the Marshallian scissors metaphor – this analogy takes its name from the economist Alfred Marshall (1842-1924) – whereby one blade represents demand and the other supply. His analogy compared the price determining properties of supply and demand curves with the cutting properties of blades of scissors. His analysis has since been built on to include how a change in taste, income, technology and factor prices can have an effect on the economy. Despite this is it time we stop simplifying firms and economies into two lines on a graph?

Marx’s well-documented theories in Das Kapital simplified as communism being inevitable in the process of evolution that begins with feudalism and passes through capitalism and socialism also give us an understanding of the way economies in the long run operate. Maybe its time to return to Marx in addition to work by Thorstein Veblen (1857-1929) on institutional economics and incorporate religion, political affiliation and class into economic analysis once more (something ‘modern’ economics has moved away from).

Lastly, speaking of the long run we turn to Joseph Schumpeter’s (1883-1950) ‘creative destruction’ to understand how the economy is in a constant, cyclical state of productivity and collapse. Also his thinking on entrepreneurship could help pave the way towards creativity and employment.

It’s time to question the uncertainty of economics by looking at the subject from its political economy roots rather than as a concrete science, whose complicated algorithms, based on assumptions, only serve to elevate the subject out or reach of non-economists. Economic thought is a useful tool to examine the problems we face on a daily basis and also to reflect and add a little bit of common sense and logic into the problems that society must start to deal with. It’s clear that economic thought is vast and the more we delve into it, the more we may find that our most pressing issues have already been solved!

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