Coase on the problem of modern economics

Posted on November 24, 2012 by Sinclair Davidson

Ronald Coase in the HBR:

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.

Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates.

(HT: Organizations and Markets)

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21 Responses to Coase on the problem of modern economics

  1. Skuter
    #649028, posted on November 24, 2012 at 2:15 pm

    Coase is one of the true giants of the profession. The fact that he is still actively writing at the age of 102 is amazing. I dips me lid to him!

  2. Scapula
    #649032, posted on November 24, 2012 at 2:23 pm

    I can see how you might argue that economics has lost its relation to economic reality, but I can’t see how that fact by itself means that ‘government is increasingly seen at the ultimate solution to tough economic problems’

    Its not as if government is full of economists trained in anything other than what other economists are trained in.

  3. Jim Rose
    #649041, posted on November 24, 2012 at 2:46 pm

    posner and coase has a very public spate in 1993 in JEP and JITE abou the same issues as discussed in 2012.

  4. Skuter
    #649063, posted on November 24, 2012 at 3:24 pm

    The rot set in with the Samuelson-isation of the profession. Economists stopped working on an intuitive basis and wholeheartedly embraced mathematical formalism. A good grounding in mathematics certainly helps an economist, but it has almost become an end in itself rather than a tool for enlightenment. The other thing is that ‘the social planner’ is the starting point for many models and the state is readily substitutable for markets, which is of course absurd.

  5. Jim Rose
    #649084, posted on November 24, 2012 at 3:57 pm

    In my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics.

    Ronald Coase (1988).

  7. Bruce
    #649109, posted on November 24, 2012 at 4:36 pm

    Economics thus becomes a convenient instrument the state uses to manage the economy

    One of the newly minted members of the Chinese Politburo Standing Committee is the economist Zhang Dejiang. He studied economics at the Kim Il Sung University in North Korea. No doubt he will be keen to test his practical economic management on the most capitalist country in the world, China.

  8. Jim Rose
    #649112, posted on November 24, 2012 at 4:39 pm

    Coase liked to quote this quote of Alfred Marshall in his writings on Marshall:

    (1) Use mathematics as a shorthand language, rather than an engine of inquiry.
    (2) Keep to them till you have done.
    (3) Translate into English.
    (4) Then illustrate by examples that are important in real life.
    (5) Burn the mathematics.
    (6) If you can’t succeed in (4), burn (3).
    This last I did often

  9. Robin
    #649614, posted on November 25, 2012 at 8:47 am

    I got a first hand taste of this last year when I watched an entrepreneurial brother and a business prof brother have a conversation on business. The prof thinks the models are the economy and has always had salaried jobs. Doesn’t understand how brother the entrepreneur ended up with a beach house. After all he was always the better student. And describing how a business could actually grow didn’t seem to interest him at all.

    Then the prof said that the US economy would improve with more Keynesian aggregate demand. I bit my tongue and poured myself a glass of wine instead. Later I asked the prof what he thought of the Austrians. He said he had no interest in their work because it was “every man for himself.”

    Sad because he trains students who think they now know Business and how Economies work.

    I don’t get the lack of interest in the real world. Coase said it well.

  10. Rodney
    #649651, posted on November 25, 2012 at 9:40 am

    Macroeconomics does not matter any more. All macroeconomic theory has become more and more irrelevant as Western economies become more and more regulated.

    Take Spain: 53% youth unemployment, public service as large as it was in 2009, and no 130 in the world for ease setting up a new business. Throw in extreme labour laws.

    Menetry and fiscal policy are irrelevant.

  11. Jim Rose
    #649687, posted on November 25, 2012 at 10:23 am

    Robin, Economists at Business schools take great interest in how the world works.

    The economics of business finance such as by Fama dates from the 1960s. The massive index-link investments funds industry that includes Vanguard is based on the efficient market hypothesis they you can’t beat the market.

    Ed Lazear invented personnel economics because his MBA labour economics students were falling asleep in his classes.

    Luke Froeb stopped his MBA students from falling asleep by reframing market failure as a business opportunity. There was profit to be had from being first to fill the gap in the market or from being maker of the missing market.

  12. Robin
    #649694, posted on November 25, 2012 at 10:36 am

    Maybe some places Jim but I am shocked at what I am also hearing from students. Most of my eldest’s peers are now Juniors and they know I adore economics and figuring out what makes a business work or not. Those majoring in eco at big name schools or Industrial Engineering are all studying models that are not connected with reality. Or even good history.

    One was telling me what he had learned in his classes while I was making dinner. I just said “You do know that is not the kind of analysis any successful businessman would use, don’t you?”

    “But I will have my degree” was the reply.

    We have so many worthless degrees now all over the world.

    Don’t you think economics is in danger at many universities of becoming like an education degree? Individuals are credentialed but most of what they have been taught isn’t so. And most of what matters, they were never taught.

    I still am astounded that a PhD with a specialty in production and supply management would have no interest in nailing down the chance to discuss the real variables and choke points. A real life lab chance and the models are a better fit to how profs want to see the world?

    Then the students are more hobbled than enriched by the interaction unless the point is really to help them read and write analytically at all.

  13. Sinclair Davidson
    #649695, posted on November 25, 2012 at 10:37 am

    Robin, Economists at Business schools take great interest in how the world works.

    Most students don’t get exposed to Business Finance.

  14. Sinclair Davidson
    #649697, posted on November 25, 2012 at 10:40 am

    Robin – your view of what is wrong with (many) academic economists is exactly correct.

  15. entropy
    #649699, posted on November 25, 2012 at 10:42 am

    My economics lecturer for my post grad used to explain the flaws as she saw it for economic models. She was from a business background.
    She left a few years after I graduated, the rumour being that she had lied about her qualifications…..

  16. Jim Rose
    #649708, posted on November 25, 2012 at 11:02 am

    Sinclair, my impression of public policy making in canberra was that the quality of policy could be greatly improved by knowing the first six weeks on micro 101.

    I admit that this great contribution of economics to practical affairs was from a very low base.

  17. Sinclair Davidson
    #649714, posted on November 25, 2012 at 11:10 am

    public policy making in canberra was that the quality of policy could be greatly improved by knowing the first six weeks on micro 101.

    Yes – although many at Treasury have at least honors in economics.

  18. Jim Rose
    #649738, posted on November 25, 2012 at 11:36 am

    Sinclair, it is surprising how quickly they forget. careerism gives that a boast.

    the maxim of edwin cannon that coase and arnold plant liked to popularise was the first to go: the competitive market system runs itself.

  20. johno
    #649826, posted on November 25, 2012 at 1:36 pm

    Don’t you think economics is in danger at many universities of becoming like an education degree? Individuals are credentialed but most of what they have been taught isn’t so. And most of what matters, they were never taught.

    Economics is NOT in danger of becoming like education degrees where what is taught isn’t so and what is so isn’t taught. Economics, as taught in Australian universities, reach that point a long time ago!!

  21. Mother Hubbard's Dog
    #652545, posted on November 27, 2012 at 7:24 pm

    Economics and climate science seem to have a lot in common. All about the models rather than the real world. If the real world doesn’t agree with the models, the real world must be wrong.

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