Paul Samuelson was quite clearly a brilliant man and one of
the most influential economists of the twentieth century. His magnum opus, Foundations of Economic Analysis
published in 1947, was one of the first rigorous mathematical treatments of important
economic concepts. But for all its undoubted brilliance, I have long thought
that Samuelson's work was one of the worst things to happen to economics.
This is not to denigrate his work. Samuelson produced some original insight in fields as diverse as consumer theory, welfare economics, public finance and international trade issues. Rather the problem is that he spawned a number of imitators who, captivated by the elegance of his work, attempted to replicate his mathematics rather than his economic insights with the result that academic economics became ever more algebraically rigorous. As Lo and Mueller (2010, here) have pointed out, whilst economics has become much more rigorous and "has led to a number of important breakthroughs ... ‘physics envy’ has also created a false sense of mathematical precision".
This level of abstraction was part of the reason why the severity of the market crash of 2008 came as such a surprise. As Goldman Sachs' CFO commented in the Financial Times in August 2007 "We are seeing things that were 25-standard deviation moves, several days in a row." Andy Haldane, the Bank of England's chief economist, later pointed out: "Assuming a normal distribution, a 7.26-sigma daily loss would be expected to occur once every 13.7 billion or so years. That is roughly the estimated age of the universe. A 25-sigma event would be expected to occur once every 6x10124 lives of the universe. That is quite a lot of human histories." In simple terms, the risk models used at the time were using the wrong statistical distribution to model risk and making firm conclusions based upon it.
It is thus no surprise that attempts have been made to reclaim the centre ground of economics. A recently-published book entitled Econocracy: The Perils of Leaving Economics to the Experts (here), attempts to redress the balance. As the authors note: “Politics and policymaking are conducted in the language of economics and economic logic shapes how political issues are thought about and addressed. The result is that the majority of citizens, who cannot speak this language, are locked out of politics while political decisions are increasingly devolved to experts.”
A letter in the Financial Times (here) recently made a similar point, arguing that "the folly of mainstream economists is their pretence to emulate the natural sciences, presuming to be value free." The author, Yeomin Yoon of Seton Hall University in New Jersey, noted that current practice increasingly deviates from the teachings of Alfred Marshall, who argued: “(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3 … I think you should do all you can to prevent people from using mathematics in cases in which the English language is as short as the mathematical.” Given that Marshall was no mean mathematician himself that is a pretty powerful argument.
Whilst it is easy to be critical of academic economics for creating a level of abstraction that so many people feel unable to relate to, and as a consequence feel able to ignore (as we saw during the Brexit discussions), the future may not be so bleak. Macroeconomics may be operating in an intellectual cul-de-sac (said the macroeconomist) but matters are not helped by the fact that too many people outside the profession expect economists to be able to predict the future with an unreasonable degree of accuracy. Rather than the study of abstract macroeconomic quantities with highly politicised connotations, the roots of economics lie in the study of how people make decisions. As a result, the discipline of microeconomics is thriving. The new and exciting field is behavioural economics where experimentation rather than algebra is used to tease out some of the newest ideas in economic thinking.
Economics is a discipline which has traditionally borrowed ideas from other areas. For a long time, perhaps, it borrowed too much from mathematics and the physical sciences, but by going back to its roots as a social science and borrowing ideas from psychology, the revolution which so many people are calling for may actually already be happening.
This is not to denigrate his work. Samuelson produced some original insight in fields as diverse as consumer theory, welfare economics, public finance and international trade issues. Rather the problem is that he spawned a number of imitators who, captivated by the elegance of his work, attempted to replicate his mathematics rather than his economic insights with the result that academic economics became ever more algebraically rigorous. As Lo and Mueller (2010, here) have pointed out, whilst economics has become much more rigorous and "has led to a number of important breakthroughs ... ‘physics envy’ has also created a false sense of mathematical precision".
This level of abstraction was part of the reason why the severity of the market crash of 2008 came as such a surprise. As Goldman Sachs' CFO commented in the Financial Times in August 2007 "We are seeing things that were 25-standard deviation moves, several days in a row." Andy Haldane, the Bank of England's chief economist, later pointed out: "Assuming a normal distribution, a 7.26-sigma daily loss would be expected to occur once every 13.7 billion or so years. That is roughly the estimated age of the universe. A 25-sigma event would be expected to occur once every 6x10124 lives of the universe. That is quite a lot of human histories." In simple terms, the risk models used at the time were using the wrong statistical distribution to model risk and making firm conclusions based upon it.
It is thus no surprise that attempts have been made to reclaim the centre ground of economics. A recently-published book entitled Econocracy: The Perils of Leaving Economics to the Experts (here), attempts to redress the balance. As the authors note: “Politics and policymaking are conducted in the language of economics and economic logic shapes how political issues are thought about and addressed. The result is that the majority of citizens, who cannot speak this language, are locked out of politics while political decisions are increasingly devolved to experts.”
A letter in the Financial Times (here) recently made a similar point, arguing that "the folly of mainstream economists is their pretence to emulate the natural sciences, presuming to be value free." The author, Yeomin Yoon of Seton Hall University in New Jersey, noted that current practice increasingly deviates from the teachings of Alfred Marshall, who argued: “(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3 … I think you should do all you can to prevent people from using mathematics in cases in which the English language is as short as the mathematical.” Given that Marshall was no mean mathematician himself that is a pretty powerful argument.
Whilst it is easy to be critical of academic economics for creating a level of abstraction that so many people feel unable to relate to, and as a consequence feel able to ignore (as we saw during the Brexit discussions), the future may not be so bleak. Macroeconomics may be operating in an intellectual cul-de-sac (said the macroeconomist) but matters are not helped by the fact that too many people outside the profession expect economists to be able to predict the future with an unreasonable degree of accuracy. Rather than the study of abstract macroeconomic quantities with highly politicised connotations, the roots of economics lie in the study of how people make decisions. As a result, the discipline of microeconomics is thriving. The new and exciting field is behavioural economics where experimentation rather than algebra is used to tease out some of the newest ideas in economic thinking.
Economics is a discipline which has traditionally borrowed ideas from other areas. For a long time, perhaps, it borrowed too much from mathematics and the physical sciences, but by going back to its roots as a social science and borrowing ideas from psychology, the revolution which so many people are calling for may actually already be happening.
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