What is economics? Why is it important to define clearly what is economics?
Economics as Phenomenon
Historically, economics originated from the consideration by philosophers of human activities as social phenomenon, to be studied like physics as natural phenomenon (Mirowski, 1989). The assumption is: there are natural laws of economics equivalent to the natural laws of physics. Economics, when considered as knowledge from discoveries about social phenomenon of humans, did not require precise definition; it only required a scoping of human activities under study.
For example, Marshall (1890, p.1) defines economics as "a study of mankind in the ordinary business of life", particularly "connected with the attainment and with the use of the material requisites of wellbeing". The view of economics as social phenomenon persists to today and explains many other misconceptions in economics, which will be subjects for future posts on this blog.
Economics as Purpose
Economic knowledge has two senses: a collection of knowledge of individual economists and a consensual knowledge of most economists.
To most people, consensual economic knowledge has a purpose in the same way that knowledge of natural sciences has a purpose. Consensual economic knowledge is used by business and government to make and justify decisions on how money is spent and how resources are allocated for production and consumption. The accepted knowledge used in this practical way, is the economic paradigm regarded as core knowledge captured in basic economics textbooks.
There is a wider knowledge of individual economists, outside orthodox economics, known collectively as heterodox economics or pluralism, which is a varied collection of alternative, and often conflicting, ideas. By definition, heterodox economics has little practical relevance in the real world because it is rarely used by consensus, or only some of it is used by a relatively small minority of people. Most rules, laws or economic policies which affect our lives in a democratic society are derived from the economic paradigm of the orthodoxy.
Most criticisms of orthodox economics by the heterodoxy are concentrated on the “unrealistic” assumptions or the lack of sophistication of its models, thus largely missing the point of purpose (Friedman, 1952). Orthodox economics serves a useful purpose which heterodox economics does not. The key question is not whether orthodox economics is objectively more “right”, or not, compared to its alternatives, but rather whether orthodox economics is sufficiently useful or fit-for-purpose.
Not Fit- for-Purpose
The economic knowledge which is actually used is orthodox economics or the economic paradigm, which is often referred to simply as “economics” on this blog. It is this economics which policy makers have found deficient in the recent global financial crisis, when President Trichet of the European Central Bank lamented (2010):
“Macro models failed to predict the crisis and seemed incapable of explaining what was happening to the economy in a convincing manner. As a policy-maker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”
Hence economics has failed to be useful, according to public expectations, where it is needed most. The failure to anticipate, understand or ameliorate the global financial crisis is one of the most significant failures of economics. For this failure, the whole economic profession, including all economists in education, business and government, have to take collective blame. But particular blame should go to academic economists, because they are responsible collectively for propagating, through textbooks, the unscientific knowledge which has led to erroneous decisions and policies, the consequences of which will continue adversely to affect our lives for years to come.
Economics has been so narrowly defined by academics that it is not fit-for-purpose. The global financial crisis is merely one dramatic example of how economics is not fit-for-purpose, because orthodox economics assumes endogenous crises do not exist and therefore it has little knowledge of them (Sy, 2012). For example, the orthodox assumption of efficient markets denies the existence of asset bubbles. Without a theoretical concept of asset bubbles, Greenspan (2002) pleaded that “it was very difficult to definitively identify a bubble until after the fact--that is, when its bursting confirmed its existence”.
Importantly, the current economic paradigm either neglects many important economic issues or treats them in an inconsistent or incoherent manner, because they are assumed, without justification, to be non-existent or unimportant. A lack of attention to these issues will become apparent only when new crises strike the economy in unexpected ways. Surely it is desirable to have an economic paradigm which is capable of evaluating economic issues, real or apparent, in a coherent and scientific manner, without simply dismissing them out-of-hand.
In other words, the consensual core knowledge of economics or the economic paradigm is not fit-for-purpose, because it is unscientific and has an unacceptably narrow scope.
Definition of Economics
It is therefore important to redefine economics in a way which is fit-for-purpose in meeting expectations of its use and is capable of accommodating a broad range of economic concepts, with minimal preconceived limitations. We suggest the following definition:
Economics is the knowledge obtained from the study of how human needs and wants are met in an uncertain world of finite resources.
The key words in this definition are “human”, “uncertain” and "finite", which make economics both challenging and interesting. The precise meanings of these words are critical to the new concept of economics proposed here. Economics is knowledge of humans, for human use, and developed by humans. The implication that economics is essentially about humans is both radical and profound compared to the existing mechanistic conception of economics.
Humans are in the process of evolving biologically and socially in their knowledge and consciousness and in their needs and wants. In particular, humans invent new products and technologies and create new economic institutions to satisfy and manage new and changing needs and wants. Marshall (1890) stated in the first sentence of his textbook, “Economic conditions are constantly changing, and each generation looks at its own problems in its own way”.
Many economic innovations are motivated by human needs to manage uncertainty and limited resources, without which economics may be trivially simple and uninteresting. Human innovations themselves create uncertainty, from which the consequences of change are unpredictable. The essence of economics as a phenomenon is both dynamic and uncertain, and the purpose of economics is to develop the knowledge of, for, and by humans to manage their environment with limited resources. Many significant economic problems would not exist if resources were infinite.
Importantly, humans, unlike unthinking objects of physics, have the capacity to use the developed knowledge to change the economic phenomenon they study and of which they are a part.
Scope of Economics
In future posts we will explain why much of economics, both orthodox and heterodox, is not economics at all, according to our definition. The greatest economic instability and stagnation since the Great Depression have not brought forth, in the past five years, any genuinely new ideas. The reason is that the origin and possible endogenous cause of the crisis (Sy, 2012) are defined as outside the scope of the economic paradigm itself, which is a synthesis of neoclassical and Keynesian economics; both parts have this and other serious limitations.
The fond hope is that the economic paradigm, with the ignorance of its own destabilizing impact, will survive as being adequate when economic “normalization” eventually occurs. The longer “normalization” takes to occur, the more inadequate the economic paradigm will appear and the greater the damage will have been done by unscientific government interventions.
A new economic paradigm with a broadened scope is required to be “fit-for-purpose” in addressing the urgent economic problems of our age. Many of the problems are man-made disasters which are important to understand and address because they are, by definition, preventable or solvable. It suffices here to list a few examples:
- The recent economic crisis was caused by failures in both the market and government, and it is ongoing.
- The economic ignorance of money is bringing the global monetary system to the edge of collapse.
- There is a need to study the balance between economic growth and finite resources, fairness and income inequality, regulation and innovation, technology and employment, etc.
The purpose of economics is to address these issues; they are substantially man-made and they should not be defined out of existence by the economic paradigm, as is currently the case. The objective of this blog is to lay the foundation for a scientific economic paradigm fit for the purpose of economics, as the world expects.
In summary our ultimate goal is to create a scientific economic paradigm for our new definition of economics with a new set of objectives, assumptions and methods, which will be tested constantly against experience. Hopefully, the new economic knowledge will be useful and fit-for-purpose in addressing human needs and wants in an uncertain world of finite resources.