Vil­lains by the num­bers

The Weekend Australian - Review - - Rear View -

ECONOMISTS are not idolised at the best of times, which th­ese aren’t. Just about the only film I can think of that deals with the dis­ci­pline is the biopic about John Nash, A Beau­ti­ful Mind . But the movie had more to do with Nash’s strug­gle with schizophre­nia and his work in maths than its eco­nomic ap­pli­ca­tion.

There are end­less nov­els about bad­dies in busi­ness ( out­side Ayn Rand en­trepreneurs are in­vari­ably evil). Steven Mill­hauser won a Pulitzer prize a decade back for a novel that pil­lo­ried peo­ple keen on a quid. In Martin Dressler he took the quintessen­tially Amer­i­can self-help story and showed how the pur­suit of self­ful­fil­ment by mak­ing money was ul­ti­mately a waste of time.

Books that at­tack fi­nan­cial whizzes roll around with ev­ery re­ces­sion. ‘‘ Spec­u­la­tion — my! The whole at­mos­phere’s full of money,’’ Colonel Sell­ers says in Mark Twain’s The Gilded Age, a novel of the years be­fore the 1870s crash that re­ver­ber­ated in Europe and the US un­til the end of the cen­tury. For cu­pid­ity and cor­rup­tion, noth­ing we have seen on Wall Street comes close to ri­valling the way back then a class of spec­u­la­tors with politi­cians in their ca­pa­cious pock­ets robbed a gen­er­a­tion blind as the US and Euro­pean economies in­dus­tri­alised.

Per­haps the best ex­am­ple of 19th-cen­tury moral­ity is Tom Wolfe’s The Bon­fire of the Van­i­ties ( 1987), the tale of Sher­man McCoy, a bond trader brought low by his greed and ar­ro­gance ( plus the op­por­tunism of oth­ers). How fa­mil­iar does Wolfe’s de­scrip­tion of a com­plex deal based on French bonds sound to­day? ‘‘ The only real prob­lem was the com­plex­ity of the whole thing,’’ says Sher­man. ‘‘ It took big, so­phis­ti­cated in­vestors to un­der­stand it. Big, so­phis­ti­cated trust­ing in­vestors; no new­comer could talk any­body into putting mil­lions into the Gis­card. You had to have a track record. You had to have tal­ent — ge­nius! — mas­tery of the uni­verse!’’

Two decades on, the bond traders who were beaten by the crash of ’ 87 rein­vented them­selves as fi­nan­cial en­gi­neers sell­ing pack­ages of mortgages and bet­ting on their value.

None of this has any­thing to do with eco­nomics but as well as greedy cap­i­tal­ists and fi­nan­cial frauds the pro­fes­sion that pro­vides the in­tel­lec­tual un­der­pin­nings for the profit mo­tive it­self is un­der at­tack. Thomas Le­gen­dre’s novel The Burn­ing ( 2006) is the first in a genre we will see more of: the anti-eco­nomics rant.

Le­gen­dre’s is not an es­pe­cially en­gag­ing story but ev­ery­body who as­sumes the world fi­nan­cial cri­sis is the fault of economists will love it. It will cer­tainly ap­peal to peo­ple who con­fuse eco­nomics with ethics, blame economists for ev­ery­thing from pol­lu­tion to poverty and ar­gue that the dis­ci­pline’s foun­da­tion idea, that in­di­vid­u­als act ra­tio­nally in their own in­ter­est is wrong.

This at­tack is se­ri­ous stuff; without economists so­ci­ety would seize up. Eco­nomics ex­plains ev­ery­thing, from how na­tions dis­trib­ute re­sources to how in­di­vid­u­als live their lives.

As Diane Coyle puts it in her ex­cel­lent over­view, The Soul­ful Sci­ence ( 2008), eco­nomics to­day is ‘‘ not the study of com­pet­i­tive mar­kets but rather an un­der­stand­ing of so­ci­ety as the ag­gre­ga­tion of mil­lions of in­di­vid­ual de­ci­sions’’.

This idea con­tra­dicts the emerg­ing or­tho­doxy that main­stream eco­nomics is im­moral be­cause it as­sumes all hu­man in­ter­course is a form of mar­ket-based ex­change and that, rather than ra­tio­nal, peo­ple are too com­pas­sion­ate or cretinous to act in their own eco­nomic in­ter­est.

This is, of course, all non­sense. As icon­o­clasts such as Steven Lands­burg point out, much of the es­tab­lished wis­dom on the way so­ci­ety works is wrong pre­cisely be­cause it ig­nores eco­nomics. In More Sex is Safer Sex ( 2007) Lands­burg claims: ‘‘ If sex­ual con­ser­va­tives could ef­fec­tively ad­ver­tise their his­to­ries, HIV-con­scious suit­ors would com­pete to lav­ish them with at­ten­tion. But that doesn’t hap­pen be­cause con­ser­va­tives are hard to iden­tify. In­suf­fi­ciently re­warded for re­lax­ing their stan­dards, they re­lax their stan­dards in­suf­fi­ciently.’’

Show­ing off, to be sure, but Lands­burg demon­strates what eco­nomics can do as a dis­ci­pline when it is in­de­pen­dent of ide­ol­ogy.

But while eco­nomics is not op­tional, the rea­sons it gets poor press are as much of its prac­ti­tion­ers mak­ing as they are the work of peo­ple who ar­gue eco­nomics is re­spon­si­ble for poverty and global warm­ing.

In Le­gen­dre’s novel, good econ­o­mist Lo­gan’s PhD is a tex­tual anal­y­sis of Adam Smith and he is ob­sessed with the work of Ni­cholas Ge­orges­cuRoe­gen, who started as a neo­clas­si­cal econ­o­mist be­fore de­cid­ing that cap­i­tal­ism was en­vi­ron­men­tally un­sus­tain­able. As Le­gen­dre puts it in the first of Lo­gan’s big set speeches: ‘‘ Tech­nol­ogy has been the in­stru­ment of en­vi­ron­men­tal degra­da­tion rather than its saviour. When is this process go­ing to mag­i­cally re­verse it­self?’’

In con­trast, Deck, the bad econ­o­mist, is in­ter­ested in in­tel­lec­tual ab­strac­tions of the neo­clas­si­cal kind that have noth­ing to do with the way peo­ple live.

Le­gen­dre demon­strates the arid­ity of aca­demic eco­nomics in de­scrib­ing Deck’s re­search: ‘‘ He had wanted to show that point-of-sale ATM trans­ac­tions, when iso­lated from other ex­pen­di­tures, would re­sult in step-shaped con­sump­tion func­tions with a se­ries of zero-slope or nearly hor­i­zon­tal plateaus bridg­ing the tra­di­tional up­ward-slop­ing sec­tions.’’

Deck dis­misses Lo­gan’s re­search be­cause he ‘‘ couldn’t work with em­pir­i­cal data. Throw some real fig­ures at the guy and he’d duck ev­ery time’’. The ar­gu­ment is ob­vi­ous: con­ven­tional eco­nomics is non­sense, while economists who fo­cus on pro­tect­ing the en­vi­ron­ment do the im­por­tant work.

There is no doubt­ing maths makes most eco­nomics ar­cane to the point of in­com­pre­hen­si­bil­ity for most of us; any es­say for economists by economists al­ways in­cludes for­mu­las that only adepts un­der­stand. But this does not mean the dis­ci­pline, in ideas or in­tent, some­how deals hu­man­ity out of the equa­tion.

In a re­cent speech, Pro­duc­tiv­ity Com­mis­sion boss Gary Banks ar­gued for ev­i­dence-based pol­icy, sug­gest­ing hard data, and lots of it, must be the ba­sis of gov­ern­ment strate­gies. But he warned the study of eco­nomics is turn­ing into a niche dis­ci­pline in uni­ver­si­ties.

He is en­tirely right. In­for­ma­tion is use­less without in­ter­pre­ta­tion, and that re­quires statis­ti­cians and math­e­mat­i­cally lit­er­ate economists: skills that are out of fash­ion in a world that as­sumes eco­nomics is a di­a­bolic dis­ci­pline es­poused by the ex­treme cap­i­tal­ists the Prime Min­is­ter warns us against.

This is the way it is in Le­gen­dre’s world, where the bad­dies do the maths and vir­tu­ous peo­ple be­lieve eco­nomics is sub­or­di­nate to en­vi­ron­men­tal ac­tivism. It isn’t just greed that isn’t good any more — we are mov­ing into a world where eco­nomics is out of place be­cause peo­ple con­fuse a dis­ci­pline that ex­plains the way so­ci­ety works with the in­com­pe­tence and avarice of a bunch of bankers.

match­etts@ theaus­tralian. com. au

Il­lus­tra­tion: Jon Kudelka

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