Transcription
A number of years ago, I came up with an acronym. The acronym was crap. And it stands for completely rubbish approximations to the truth. And economics is using that acronym, completely crap. I'm sorry to tell you that because every day people talk to you about economics on the radio, on the television, in any news media you look at, on social media, and most of what they're talking is also total crap. And there's good reason for me saying this.
The vast majority of economics as taught today, as believed by politicians and economists today, and as repeated in the media, is rubbish because it's all based upon false assumptions which are profoundly harmful. And I think I've got a duty to tell you that fundamentally the economics that we are taught and which is used to justify the idea that markets are the best way to allocate resources in our society is based upon a series of falsehoods.
The biggest of those falsehoods is that the world is certain. We know everything. We don't change our minds. We are able to tell the future and there is no doubt about what will happen at this moment. If we go into the marketplace, whatever the marketplace might be, we can obtain information on all the products and services that are available to us and the prices and match those against our needs and come up with an optimal outcome. And I can assure you this assumption which economists have to make so that their maths works is total and utter rubbish. You know that, I know that, everybody on earth knows that. But despite that, economists build their economic models on the basis of this fantasy.
Unsurprisingly, those models don't work and we end up with a crap economy built on the basis of this crap assumption which is in turn fueling crap politics which believes that this is true and the outcome is total crap. In other words, we have something which only vaguely approximates to something useful when we know we could have something better. And we've known that we could have something better for a very long time.
The idea that there is uncertainty in the world has existed for over a century now. His greatest early proponent was probably Lord Kanes, John Maynard Kanes, as he was for most of his life, who was in my opinion the greatest economist of the 20th century. And he wrote about this in the 1920s based upon the work of some others, I should say, who came shortly before him. But what he pointed out was that the world is uncertain. And the difference between a certain world and an uncertain world is absolutely enormous.
In a certain world, you know what all the outcomes to a decision that you might make are. In other words, if you go out tonight, you know the full range of possibilities of the things that might happen. Do you? Have you ever? Of course you haven't. You simply cannot predict everything on something as simple as what might happen if you go out tonight. There is uncertainty, things that we simply don't know. The unknown unknowns that Donald Realmsfeld once talked about and those uncertainties cannot have a mathematical probability attached to them because we simply don't know whether they exist or whether they might happen.
And so what that means is that all our economics is wrong because it excludes the possibility that the unknown might actually occur. It also doesn't allow for the fact that we're irrational, we're inconsistent, and that we actually do not behave as what an economist will call, slightly jokingly, homoeconomicus, the rational human being who doesn't of course exist.
Once you can decide that something like the human being is something other than they actually are rational when they aren't, you can make lots of other absurd assumptions as well. For example, you can assume that the state is a constraint on human behavior and shouldn't really be allowed to undertake any activity because everything it does is harmful to our well-being because it stops us making rational choices. But the fact is that we don't make rational choices and we might make some extremely bad choices based upon the information that we have which the state can compensate for. And therefore having a state is actually a good thing even though neoliberal economics tells us it isn't. And every single mainstream political party in the UK and I stress mainstream believes that as a result the size of government should be shrunk. That assumption is wrong because the basis on which that conclusion is reached is wrong.
And there are other quite absurd examples inside macroeconomics of things that are assumed but which actually aren't true. For example, macroeconomics takes no consideration of the existence of companies. It doesn't assume that they exist or have power or influence our behavior. It assumes that this singular person, homoeconomicus, this rational human being is the entity that drives the economy when clearly it doesn't. So we have again an economic model that is not based in any shape or form on reality either about government or about the way in which markets work.
There is therefore a profound theoretical blind spot inside economics and the result is well quite staggeringly important. For example, the whole of the economics of austerity was based upon the false models I've just explained. It presumed that there would be certain forms of behavior if the government tried to shrink the size of the state which were quite contrary to what actually happened. And again, inflation theory is totally wrong because it assumes in the way that the Bank of England pursue it that unemployment and inequality don't matter. And yet there's ample evidence from talking to real people and asking them what their priorities are that they are much more concerned about the risk of being unemployed and the risk of inequality within the economy than they are about inflation. So once more the priorities of economics are simply wrong because it hasn't taken into consideration the realities of who we really are.
We don't make our decisions on the basis of certainty because we can't because we know it doesn't exist. We make our decisions on the basis of values. That is our ethics. What we think is important, how we think we should behave, what our moral judgments are, and so on. We also use huristics or as they're more commonly called rules of thumb. Those things that let us turn very complex data into something that we can understand. For example, we can look at all the variety of products available in a supermarket and there might be 30 or 40 products in front of us, all looking broadly similar, but we will use what is called a horistic to decide which one we want. We might decide that a high price means it's a good quality product. Or we might decide that we had that particular one before and we liked it and therefore we'll ignore the rest. It doesn't matter what it is. The point is we've reduced the difficulty of decision-making to some form of rule in this situation which we can use to overcome the complexity which markets present us with. It may not be rational but we do it because it works and this is entirely different from the assumption that an economist makes.
And finally we use maxims to guide our behavior and these are rules of good conduct. There are a couple of examples that might help here. One of these could be do no harm. Another one could be love your neighbor as yourself. These things provide us with an interpretation of our values that lets us translate them into behavior in reality. This is how we really decide and this is what we do in the face of uncertainty. We have to form models that let us manage so that in the face of data which is overwhelming, we can come up with actual decisions that we can live and work with. And that's what we do. But that is not in any way reflected in the economics that we are taught or which guides politics or which guides the thinking of the UK Treasury.
Now in that case why do I still talk about economics? Why don't I just abandon that whole idea of economics and talk about something else? Well, to some degree I do of course abandon discussion of economics because I talk about political economy which is different from economics in the sense that it allows for the existence of power relationships and how they allocate resources within the economy. So for example, I do allow for the existence of large companies in the way that I think and in the way that economists don't. But also what I want to do is reclaim economics, the power of management of our decision-making over the economy so that it might serve our best interests rather than harming them as it does now. That is my goal. And understanding that economics is crap is the first point that we need to reach on the journey to creating a better economics. When what we have is a completely rubbish approximation to the truth. Having something that much better approximates the human behavior is what we need if we're going to get the economics that we desire to make the world work.