Rethinking economics with Angus Deaton

Editor

Mainstream economics has placed efficiency before ethics and human wellbeing

It is no secret that mainstream economics is grounded in unreality and has virtually no predictive power. A recent book by Prof Angus Deaton expounds on this theme [1]. Deaton is a UK-US recipient of the annual economics prize provided by the Swedish central bank. Lars Syll has extracted the following details from Deaton’s writings and also has provided comments about their implications [2]:
Angus Deaton: “Like many others, I have recently found myself changing my mind, a discomfiting process for someone who has been a practicing economist for more than half a century. I will come to some of the substantive topics, but I start with some general failings. I do not include the corruption allegations that have become common in some debates. Even so, economists, who have prospered mightily over the past half century, might fairly be accused of having a vested interest in capitalism as it currently operates. I should also say that I am writing about a (perhaps nebulous) mainstream, and that there are many non-mainstream economists.”

How should economics change?
“Power: Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages, in choosing the direction of technical change, and in influencing politics to change the rules of the game. Without an analysis of power, it is difficult to understand inequality or much else in modern capitalism.

“Philosophy and ethics: In contrast to economists from Adam Smith and Karl Marx through John Maynard Keynes, Friedrich Hayek, and even Milton Friedman, many economists have largely stopped thinking about ethics and about what constitutes human wellbeing. We are technocrats who focus on efficiency. We get little training about the ends of economics, on the meaning of wellbeing welfare economics has long since vanished from the curriculum – or on what philosophers say about equality. When pressed, we usually fall back on an income-based utilitarianism. We often equate wellbeing with money or consumption, missing much of what really matters to people. In current economic thinking, individuals matter much more than relationships between people in families or in communities.

“Efficiency is important, but we valorise it over other ends. Many subscribe to Lionel Robbins’ definition of economics as the allocation of scarce resources among competing ends or to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution – frequently though not inevitably – our recommendations become little more than a license for plunder. Keynes wrote that the problem of economics is to reconcile economic efficiency, social justice, and individual liberty. We are good at the first, and the libertarian streak in economics constantly pushes the last, but social justice can be an afterthought. After economists on the left bought into the Chicago School’s deference to markets – “we are all Friedmanites now” – social justice became subservient to markets, and a concern with distribution was overruled by attention to the average, often nonsensically described as the ‘national interest’.
“Empirical methods: The credibility revolution in econometrics was an understandable reaction to identification of causal mechanisms by assertion, often controversial and sometimes incredible. But the currently approved methods, randomized controlled trials, differences in differences, or regression discontinuity designs, have the effect of focusing attention on local effects, and away from potentially important but slow-acting mechanisms that operate with long and variable time lags. Historians, who understand about contingency and about multiple and multi-directional causality, often do a better job than economists of identifying important mechanisms that are plausible, interesting, and worth thinking about, even if they do not meet the inferential standards of contemporary applied economics.

“Humility: We are often too sure that we are right. Economics has powerful tools that can provide clear-cut answers, but that require assumptions that are not valid under all circumstances. It would be good to recognize that there are almost always competing accounts and learn how to choose between them …

“Economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did. The philosophers, historians and sociologists would likely benefit too.”

1. Angus Deaton, Economics in America, Princeton University Press (3 Oct 2023)
2. Lars P. Syll blogsite, 14 Mar 2024 https://larspsyll.wordpress.com/2024/03/14/angus-deaton-rethinking-economics/