Decisions
Robert Skidelsky
The Price of a Free Lunch: The Perverse Relationship between Economists and Politicians Alex Rubner (Wildwood House £6.50) Alex Rubner has written a very entertaining book, which will probably confirm the belief, deeply held by many noneconomists, that economics is a highly sophisticated form of charlatanry. He makes great play with the inaccuracy of economic forecasting, the choicest example being a quotation from Wilfrid Beckerman in 1965: 'The expansion of the world's oil reserves and the improvement in methods of exploitation and production make a rise in oil prices unlikely in the foreseeable future.' He has great fun with impracticable, and even perverse, advice economists have frequently given governments.
However, the conclusion that economists are little better than witchdoctors is unjustified. Unlike witchdoctors, economists have rational grounds for believing that certain actions or events will produce certain effects. Why then do economic outcomes so often turn out to be quite contrary to expectations? The explanation is simple enough. Economic theory is concerned with the logic of choice between alternative uses of limited resources. Given the assumption that human decision-makers will strive to maximise their satisfactions under such conditions of restraint, it is possible to estimate how they will allocate their resources (of time, energy, money) between different objects of striving, and also to show how the alteration of restraints will alter their behaviour.
But there are several snags. Rubner Points out two of them. Human behaviour, he claims, is too volatile and capricious to lend itself to efficient generalisation. More cogently, he argues that the bias of economists is to assume that decision-makers, private and public, try to maximise economic welfare (their own or their firms', or their countries'), Whereas in fact they strive to realise many other kinds of goods. So economic science achieves rigour at the expense of reality. As one economist, confronted With the failure of his forecasts, remarked: 'It is not the model which is at fault; it is the American economy which IS wrong.'
None of this is exactly new. Nor does Rubner attempt to estimate the quantitative dimensions of the problem: how much potential GNP is actually lost through deviations from the path of economic reason? What he does is to present numerous examples of economic lunacy, many of them taken, as he says, 'from the rich portfolio of iniquitous' policies of successive British governments'. These examples fall into two classes. The first consists of economic decision-making which is genuinely capricious: such as siting a factory somewhere to 'please the wife'. Much more important is the second class which consists of economic decisions made for political, bureaucratic, or career reasons. These are, on the whole, examples of systematic behaviour, which may be irrational (from the economic point of view), but not unpredictable. One weakness of the book is its failure to distinguish between behaviour which is, in principle, predictable, and behaviour which is not.'
Few would quarrel with Rubner's general proposition that the less directly subject the economic decision-maker is to market forces the more economically irrational his decisions are likely to be, since he is more able to make others (including future generations) pay the price of his lunch. This applies particularly to corporate executives, politicians, voters. The growth in the size of corporations is commonly explained by reference to 'economies of scale'. But Rubner draws on his experience as 'economic counsellor to large corporations in several continents' to show how corporations expand beyond the needs of 'economies of scale' because of their executives' 'selfish craving for personal (non-material) satisfactions to be derived from a big company becoming bigger': falling asset yields are a problem for their successors. Great size, he argues, maximises not efficient allocation, but corporate in-fighting; while multinationals, far from being centres of uncontrolled power, are particularly vulnerable to interferences (including nationalisation with minimal compensation) at the hands of nationalist politicians. Like the dinosaurs, argues Rubner, they are doomed to extinction.
The political process is a particularly blatant promoter of economic unreason. This is not to say that modern society doesh't require a large range of services and investments which only the state can efficiently provide. But economists who urge greater state intervention have, until recently, been remarkably inattentive to how economic decisions are actually taken in , the political market-place. Politicians seek to maximise short-run political support by making voters happy. But it is wrong to see voter-preference as a special kind of rational consumer choice, because voters are not subject to a direct budget constraint: people vote for public goods but are not conscious of having to pay for them. Politicians are: but they, too, can get their free lunch (Power) by charging its price to their successors. Rubner shows how Macmillan built 300,000 houses a year, and his stepping stone to the premiership, by slashing allocations for the maintenance of existing housing stock, thereby conceivably destroying more houses through avoidable decay than he built new ones.
• Economists doubtless have good reasons for their frustrations. Keynes hoped that they might become as useful as dentists. So they can, and should, but only by taking systematic account of systematic political distortions. The economist is inescapably linked to the non-economist in much the same way as the Unlucky Expert was linked to Mrs Guggenheim in S.J. Simon's classic Why You Lose at Bridge. The unlucky Expert always bid his hands impeccably, but generally lost the game, because his partner couldn't understand what was going on, and anyway had much worse ideas of her own; from which Simon sagaciously concluded that when one is playing with Mrs Guggenheim one must aim not for the best possible result, but for the best result possible. This does not mean that the game need be played on Mrs Guggenheim's level: she and the expert together can and should do better than two 'Mrs Guggenheims. And who knows, she might even learn something. But the best possible result will not be reached, nor should it be aimed at. To try to do so is inevitably to discover the secret of bad luck.
Previous page
