x Abu Dhabi, UAEThursday 27 July 2017

Economics is a basic human endeavour

After the global financial crisis, allusions to conditions beyond our control abound and provide a convenient set of metaphors for those behind the crisis

Weather terms such as 'perfect storm' and 'financial tsunami' have been used to describe the economic downturn. Paulo Vecina / The National
Weather terms such as 'perfect storm' and 'financial tsunami' have been used to describe the economic downturn. Paulo Vecina / The National

After being "rocked by the waves" of the "financial tsunami" and cutting through the "economic fog", the country is seeing the "dawn" of a new more transparent age and "green shoots" are emerging. We have successfully "weathered" the "perfect storm".

So might read one upbeat version of the past two years in the economy using some of the multitude of metaphors that creep into the language of everyday business life. After something goes terribly wrong, it is left to language to explain what happened and why. All too often, however, the choice of words can have major ramifications on how well we respond to a crisis. The comparisons of what has happened in the economy with weather phenomena such as storms and tsunamis create the image that we are all in the same boat, navigating a treacherous and wholly natural set of disasters. At any moment, dark clouds could form on the horizon or a white squall could throw us into the drink.

This explanation allows us to avoid the questions: how and why did we get here? If the wild fluctuations of the markets are merely weather phenomena, then there is little we can do but bring aboard a few life jackets ? and hope. The bankers who took big risks and lost fortunes prefer this way of looking at the past several years because it exonerates them from any wrongdoing. But who cares about them in the scheme of things? The bigger loss is that of the chance to take a closer look at the system itself and its problems.

If the system we have allows for such enormous failures, which require equally large bailouts from taxpayers, then some serious engineering could be in order. But the hard work might not focus solely on new regulations and oversight; it could be about the very values we cherish in an economy. Trite phrases such as "self-interest promotes the greater good" prevent consideration of the ideas that back them up. Perhaps self-interest does create efficiency in the creation and distribution of goods but there are a few greater values to take into account, such as balance and fulfilment.

Do two businessmen who become partners in a new project not gain something more than that provided by the basic venture itself? The closer we look at the discipline, the hazier the purpose becomes. The men we look back on as the founders of economics, such as Adam Smith and Jeremy Bentham in the 1700s, did not write about the field in the way we think of today. In fact, the supply and demand graph that is the basis of any introductory economics course today was only popularised by Alfred Marshall, starting in 1890. Some sources say the idea can be traced back as early as the 14th century to the Islamic scholar Ibn Taymiyyah.

Until the late 1800s, the study of economics was known as the study of political economy, a phrase that evokes the man-made nature of the production, buying and selling of goods. Philip Mirowski, a professor specialising in economics at the University of Notre Dame, Indiana, has devoted his career to the history of economic thought. In an essay in the next Hedgehog Review, a journal published three times a year by the Institute for Advanced Studies in Culture at the University of Virginia, he writes of the way that people lazily fell back upon metaphors relating to religion and biology to explain the crisis.

Among those hackneyed and confusing phrases was "toxic assets", which portrayed the crisis as "not so different from an outbreak of e-coli in your spinach: dangerous, to be sure, but not a system pathology". "The beauty of the metaphor was it elided all the hard work of explaining ABSs, CDOs, CDSs, SIVs and nearly everything else that actually caused the crisis," he writes. "The assets were toxic; we didn't need to know how or why; we didn't need to stop to think that the financial system intentionally produced them and therefore the entire metaphor was wonky at base."

This is not a diatribe against metaphors in general. The process of connecting two objects or ideas through an analogy is at the core of human understanding. Despite the inherent intellectual comfort in the idea that the vagaries of economics are beyond our control, they are issues emerging from something man-made - based on history, sociology, psychology and philosophy. Before college undergraduates walk into their introductory economics classes, there are several assumptions they must make. One is that all actors in an economy are driven by the pursuit of the maximum amount of goods to obtain the maximum satisfaction. It's a simplification that has obvious impacts on the way we look at people; what hope is there for a world of automatons?

As Professor Deirdre McCloskey at the University of Illinois at Chicago wrote in a recent essay, the issue is that economists by and large refuse to acknowledge the role of language in their field. It's a symptom of an unwillingness to expand the subject outside of its increasingly mathematical formulation. "I do not claim that we economists have already figured out how language and the economy intermesh," she wrote. "The scientific task still remains to be done, yielding a humanistic economics, that is, an economics acknowledging humans as talking, singing, storytelling, ethical creatures."

One step toward creating a culture that questions the "givens" would be to require all economic students to take a class about the history of economic thought. They might find that the grandfather of greed-is-good capitalism, Adam Smith, also penned these words: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it."

bhope@thenational.ae