Why the free market is a dead fish
Alasdair Palmer
THE DEATH OF ECONOMICS by Paul Ormerod Faber, £14.99, pp. 230 Charles II, one of the shrewdest individuals ever to rule England, took a keen interest in science. He once sum- moned the fellows of the newly-constituted Royal Society and asked them to explain why a dead fish weighed more than one alive. The assembled scientists offered several ingenious and plausible theories. Charles II then pointed out that it did not. The scientists were not amused, but the King was in stitches. In The Death of Economics, the distin- guished economist Paul Ormerod argues that economics is a lot like the problem of the dead fish: the subject consists in elabo- rating a theoretical structure on the basis of an entirely bogus assumption. Unfortu- nately, due to the absence of someone with the good sense of Charles II, the economists have gone on and on refining their explanations of the non-existent phenomenon, until it has reached the point where thousands of highly intelligent people, deploying dizzying degrees of mathematical sophistication, are engaged in the equivalent of proving why a dead fish weighs more than a live one. The economists' dead fish hypothesis, in Ormerod's view, is the perfectly competi- tive free market. This is the cornerstone of current economic orthodoxy and the basis for many (though not all) economists' con- tention that any government intervention in the economy is a Bad Thing — with the crucial exception of converting tax revenues into salaries for professional economists. Ormerod makes some pertinent observations on the sheer weird- ness of the assumptions needed for the 'proofs' of the efficiency of the perfectly competitive market to work. Surprisingly, he leaves out one of the weirdest (against, it must be admitted, some very severe competition): the assumption of mutual unconcern, or independent utility func- tions.
In English, that translates as the claim that your level of well-being makes absolutely no difference to mine. How did an idea which is so completely false become the basis of so much economic theory? Everyone recognises that people can feel worse off merely because other people are doing worse than they are, and even more because they are doing better. Envy is an enormously potent economic force, as well as a basic emotional one, and it seems incredible that any 'science' pur- porting to explain and predict human behaviour should deny it. Benevolence is not unimportant either. Anyone who has children will know that the continuation of the human race depends on it. But recog- nising either of those emotions destroys the beautiful mathematical proofs of the per- fect efficiency of the free market. Not sur- prisingly, the inventors of the proofs prefer to keep their models and ignore the reality staring them, and sometimes kicking them, in the face.
Ormerod deftly points out the enor- mously surprising — and surprisingly enor- mous — influence that orthodox analytical economics continues to have. It has noth- ing to do with the predictive power of the models, as Ormerod also rightly stresses, and as everyone who has watched the repeated failure of economists to get the future right will have noticed. It derives from different, less rational, sources. One is the cultural prestige of mathematical sciences. Late in the 19th century, economists made their discipline look like physics, which was a very shrewd move. It gave the subject (he sacred aura of science, and also ensured it was incomprehensible to the uninitiated. Physics is also incompre- hensible, but it has achieved most of this century's genuine marvels, from the atom bomb to super-computers. Economics has the incomprehensibility without the achievements, but no one dares let on, partly because they don't want to look as though they aren't clever enough to under- stand it. It has also suited a lot of people to have it announced that it has been mathe- matically proved that transferring resources from rich people to poor ones is 'ineffi- cient'.
Ormerod's book is coolly and clearly written, and in English, as opposed to the kind of impenetrable technical esperanto now used by most economists. It ought to be read by every educated person. It may not convince many economists that they have been wasting their lives, but it ought at least to help dispel some of the mystique which surrounds the subject. For the fact is, economists don't have any special insight into how the economy works. When they pretend they do, the results — from the Irish potato famine to monetarism and the ERM — are almost invariably disastrous. That is not surprising, when you consider how complicated the system is. An econo- my is a slightly more intricate and less determinate system than a pin-ball machine. Yet the trajectory of a pin-ball after bumping 20 posts in a few seconds is unpredictable — literally. The calculations are so complicated they couldn't be com- pleted accurately before the heat death of the universe.
The implications of Ormerod's arguments are deeply disquieting, though he does not himself draw them out fully. Governments are principally involved in the conduct of the economy. They have to have economic policies and their prestige, even their survival, depends on their success. Yet they really have no idea what they are doing, or how to produce the effects they mean to. So what are they doing? Ormerod implies the question, but doesn't answer it. If economics is the con-trick of the 20th century, it is one which has taken everyone in. Like the courtiers in the story of the emperor's new clothes, it is a deception we dare not expose. I am not sure that even Ormerod dares to expose it fully. He has some sharp words for the hubris of the doctrinaire orthodoxy, but his muted enthusiasm for an economy controlled not by individuals but by 'society' — it occasionally sounds omi- nously like the state — has no surer foun- dation. On what theoretical basis is 'society' supposed to make its choices? Ormerod sometimes sounds like a courtier who, rather than admit that the emperor has no clothes, would really rather pretend he's merely wearing a different set.
But then Ormerod is, at bottom, an economist. It is one reason why the title of his important and ingenious book is a mis- nomer — which is just as well for The Death of Economics, since most of the book consists of a contribution to the subject. Still, it raises the interesting question of what one would have to do to kill off economics. Ormerod optimistically implies it could be done with one clear exposure of the fraudulent claims of the subject, but the task will be a lot more difficult than that, not least because of those thousands of influential and highly paid economists — an academico-economic complex — whose power, money and position depend on the con-trick. There is probably only one really efficient way to kill off economics: kill off all economists. It might be a little difficult, but as an economist will tell you, with the right incentives it could be done. Perhaps it is time to construct a few mathematical models for that outcome. But they should spare Ormerod. He at least does not think that a dead fish weighs more than a live one.
Previous page
