Intelligent economics

Adam Smith, who founded the discipline of modern economics, did not label his subject “economics” but “political economy”. The distinction is important, because Smith, and all the classical economists from David Ricardo to Karl Marx and even John Maynard Keynes, saw politics as inseparable from economics. (The term “politics” is used here in its widest sense of how a society organises its power relations.) This is the underlying theme of Ormerod’s seminal work. “The importance to Smith of the overall set of values in which the economy operates is generally ignored by his followers in the late twentieth century. His economics, based upon individual self-interest, is remembered, but his moral framework is not,” Ormerod notes, adding, “from an economics that took account of specific institutional, social, political and historical factors...a theory was articulated which was believed to hold in all economies at all times.”

This view, Ormerod argues, is entirely mistaken. There are no universal laws in economics, save trivial ones. Lloyd Best has made the same point, asserting that there is no theory of Caribbean economics: though, being Best, he makes the point with a lot more words. This, in fact, is a main reason why Ormerod’s book is important: he deals with many of the core concepts in economics in a clear and succinct manner. Indeed, one of his arguments is that the complexity of economics is, to a great extent, mere obfuscation. “Even to intelligent members of the public, economics is often intimidating. Its practitioners pronounce with great confidence in the media, and have erected around the discipline a barrier of jargon and mathematics which makes the subject difficult for the non-initiated,” he writes. “Yet orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been obtained which will stand the test of time, but they are few indeed, and the whole basis of conventional economics is deeply flawed.”

The main concept that Ormerod takes issue with is that of competitive equilibrium: simply put, the assertion that the market’s invisible hand is perfectly equipped to deal with supply and demand. But Ormerod shows that the theory has little to do with reality. “The advice to follow pure free-trade market policies seems in any event to be contrary to lessons of virtually the whole of economic history since the Industrial Revolution. With the possible exception of the first wave of industrialisation in Britain, every country which has moved into the strong, sustained growth which distinguishes industrial, or post-industrial, societies from every other society in human history, has done so in outright violation of pure, free-market principles.” This does not mean that Ormerod is advocating socialist or even protectionist policies.  “Markets and profits are crucial, but the pure free-market model itself is deeply flawed,” he says. Instead, his argument is that social cohesion must be the basis for successful economic policies.
The measures by which any particular society achieves such cohesion depend entirely on the traits of that society. (Japan uses its service sector, Britain its public sector, to cater to the less skilled and qualified.)

Unemployment is the second main issue which Ormerod uses to show where economics has  gone astray. Conventional theory predicts that economic growth leads to more employment. But the data say otherwise. Examining growth and employment statistics in different Western economies, Ormerod concluded, “Contrary to received wisdom, both of policy-makers and of macroeconomic models, there is little connection over time between the rate of growth and either the growth in employment or the level of unemployment.” He emphasises that this does not mean economic growth is not a legitimate goal, only that it is irrelevant to reducing unemployment. Ormerod’s comparison of economic theory with hard data suggests that predictability in economics is virtually nil. “...economic forecasts are the subject of open derision.

Throughout the Western world, their accuracy is appalling. Within the past twelve months alone, as this book is being written, forecasters have failed to predict the Japanese recession, the strength of the American recovery, the depth of collapse in the German economy, and the turmoil in the European ERM,” he points out. (He also cites an experiment in which it was proven that professional investment advice in the stock market gives returns no greater than investments made at random.) What this means is that short-term policy measures are, by and large, useless. An economy can only be analysed over the long term and, even then, predictability may remain trivial. Ormerod notes that “the course of an economy over decades can be altered by a single set of decisions made at a particular point in time” and “the behaviour of an economy as a whole cannot be deduced from the single aggregation of its component parts”.

It is for this reason that a long view is crucial to success. In terms of a company, Ormerod notes that successful corporations are those which have the classic goals of long-term profit and long-term growth. In the case of a country, he looks at Singapore, where the government decided that management and use of information technology was the most crucial component for economic success, and constantly upgraded the skills of its workforce, linked salary increases of public sector workers to overall performance of economy, invested heavily in education and export promotion, and protected its domestic market. Ormerod’s professional message is that the discipline of economics has to be reoriented so that its theories come more closely in line with empirical realities. But it is his related political message which is of more immediate import: “Economic policy is far too important to be left to economists,” he says.