Doubting Thomas: Why skepticism of economics is crucial

I remember third-year economics. The lecturer played some sort of Wheel of Fortune game where he had students answer questions correctly for the chance to guess a letter. It was around the time we were learning about how markets would reach general equilibrium if left alone. The eventual phrase spelled out “Don’t screw with our markets.”

“It’s beautiful,” said the lecturer as he delivered the mathematical proof.

“Why can’t the arts students just see this!” exclaimed the girl in the row in front of me.

Classical Economics has some beautiful theories.

John “beauty is truth” Keats may well have been a free-marketeer. But beautiful theories are a trap.

The human brain has a wide range of biases, the most risky of which is a conclusion bias. We are inclined to latch on to an answer as soon as possible, which then goes on to frame our subsequent information gathering and processing.

Of course, a beautiful unifying theory will be very tempting for us. Succumbing to that temptation explains a lot, from biblical literalists, to libertarians and communists.

But the real world is very messy, and the project of the entire enlightenment is to get us engaged with that complexity and put aside our tendency to simplify.

I’ve written about this problem before: I Haven’t Decided Yet.

Some of the most intuitively appealing theories in history (e.g. from each according to his abilities, to each according to his needs) have proved unworkable.

The point I’m driving at is well encapsulated by the parable of the fox and the hedgehog. An ancient Greek Poem turned into an essay by Isaiah Berlin, the Fox vs Hedgehog debate has been given a new life by statistical guru and seer Nate Silver.

It classifies people into two groups, foxes – who rely on lots of little scraps of knowledge, and hedgehogs, who know one big thing. Nate Silver shows that in making predictions, having one big belief can be a block to seeing the future well, and being a fox is the better approach.

(Of course, that itself is a simplification, and a truly foxy approach will accept there are times when a big simple truth is just that: big, simple and true.)

I raise this issue now because I see two big examples where a simple, hedgehoggy application of economics seems to be taking sway.

1. Our federal government. A political fox willing to try anything to get into power, Tony Abbott turned into a policy hedgehog after occupying the Prime Minister’s Office. His latest budget is the repetition of one simple trick: apply market forces. From higher education to GP visits, via cuts to social security payments, the Budget tries to fix Australia by allowing the power of markets to seep in.

It’s not nuanced but it is no doubt deeply satisfying to those elements of the base for whom the solution to the world’s problems is obvious.

2. Piketty. A French economist working on inequality, Mr Piketty has made an enormous splash in 2014. His very long book entitled Capital in the 21st Century considers a lot of evidence and distills it to one simple equation: r>g. That posits that the growth in inequality is due to a mathematical problem – the return on capital (r) is higher than the rate of growth (g). Existing stocks of wealth grow more than the paycheques of workers and so the world grows more unequal.

I do not claim to be smart enough to prove that r<g, or that applying market forces to government services will always undermine them. But I hope to be smart enough to watch the debates unfold while remembering that a simple answer pleases a simple mind.