Economics lately, since the ‘Great Recession’, has been getting a lot of beating. So it’s not unusual nowadays to see titles such as “Is Economics Dead?” or “The Death of Economics.”
I am not one to join in this Economics-bashing. Yes, there are lots of problems – much sterile mathematical theory in Economics, an over-reliance on equilibrium models, and a tendency to treat people as ‘homo economicuses’ (yes, I know it should be something like homines oeconomici, but we are not purists here). On the other hand, Economics was the first social science to become thoroughly mathematized. Also, in the last decade or two Economics has been reinventing itself. One only needs to point to Behavioral Economics and to Evolutionary Economics (in fact, I am going to an Evolutionary Economics conference in September – stay tuned for a report to appear on this blog).
These developments are mostly taking place within the academic science, however, and have not yet impressed themselves on popular consciousness. For example, Freakonomics, probably the most popular recent book about Economics, stays resolutely within the classical paradigm.
A standard approach that treats people as homines oeconomici perhaps can be useful in asking some questions, but the realm of application is a very limited one.
For example, Freakonomics promises to answer such questions as:
Which is more dangerous, a gun or a swimming pool? What do schoolteachers and sumo wrestlers have in common? Why do drug dealers still live with their moms? (from the blurb on the Amazon)
My response is, who cares? Is this really the “hidden side of everything”? Why don’t you explain to me why some nations are rich and some are poor? And, even more pressingly, why some rich nations suddenly become poorer, and vice versa? How can we get out of the economic doldrums we have been stuck in for the last few years? For that matter, how can Japan, or southern Europe (which are in much worse shape) get out from the hole they are currently in? Freakonomics does not even attempt to answer such questions – because if you are stuck with the traditional approach, you can’t.
Understanding economic growth is, of course, the Holy Grail of Economics. Except you can’t do it with a purely economic approach – this has become quite clear in the last few years. You need other social sciences and, perhaps, even biological ones (especially if some current claims that there is a genetic component to economic development are true, something I am rather skeptical of). I would argue that you need something like Cliodynamics to answer this question. In particular, because evidence accumulates that modern economic development has deep historical roots.
There is no question that today there is a staggering degree of variation in economic performance and effectiveness of governance among nations. Understanding the causes of these disparities is one of the greatest intellectual puzzles in the social sciences, and one of the most pressing problems for economic policy.
We have pretty good idea of who are the winners and who are the losers (and I am not just talking about GDP per capita; human quality of life is a much more multidimensional quantity than that). But why are some nations wealthy, happy, and politically stable, while others are poor, miserable, and in the state of constant civil war? That is very much in dispute.
In answering this question, at first economists emphasized capital accumulation and technological progress; then, personal incentives and specific policies. In more recent years, the attention has moved to the institutional framework. Daron Acemoglu and James Robinson, for example, have been arguing that economic growth can only be made possible by developing inclusive institutions enabling broad sections of the population to participate in economic and political activities (see a review of their book, Why Nations Fail, by Tom Currie in the last issue of Cliodynamics).
Others think that there is a direct effect of geography on economic growth, focusing on such mechanisms as disease burdens. For example, Jeffrey Sachs and co-authors have pointed to a striking correlation between malaria and poverty. Another ‘geographic determinist’ (unlike most, I don’t think that this is a pejorative term), Jared Diamond, thinks that biogeographic conditions affect current wealth indirectly. The more time has elapsed since the agricultural revolution in a region, the wealthier the region is likely to be.
On the other hand, economists, such as Enrico Spolaore and Romain Wacziarg, make a strong case that it is not the geographic region that is of key importance. Rather, it is the ancestral composition of current populations. An even more extreme idea is the one by Oded Galor and Quamrul Ashraf, who recently concluded that countries with intermediate levels of genetic diversity, such as the United States, have the most productive economies (see this News Feature in Nature).
So we have lots of explanations of why some nations are rich and others poor. They invoke a variety of factors: economic, sociological, geographical, and even genetic. How do we decide which of the competing theories is true?