The Secretary of the Treasury appears to have doubts.

In a speech to economics teachers  earlier this month, the Secretary of the Treasury, Gabriel Makhlouf, argued for a different approach to economics from the one which dominates the profession in New Zealand.

His complaint was that ‘we have allowed too much of economics, and too many economists, to rest on the laurels of algebraic certainty and not push themselves into the field of the human science that economics actually is, where choices are more difficult to arrive at and certainly more difficult to see.’

I put his argument a slightly different way, although in its spirit. Isaac Newton was foundational to modern science; he and his successors have the extraordinary achievement of being able to predict all sorts of physical phenomea – for example where exactly a planet will be many years into the future – using just a few principles. That success has seduced many other disciplines including economics. Adam Smith, born before Newton died, makes more references to him in The Wealth of Nations than to any other thinker. Would it not be wonderful if economics could be reduced to a similar few simple principles?.

But has the approach been successful in economics? Contrast that other outstanding British scientist, Charles Darwin. He also set out some simple principles to explain evolution but they are hopeless for predicting with any precision. Cutting across the processes he describes there is accident and contingency. (Otherwise how can you explain you have five, rather than some other number, of toes?) There have been economists greatly influenced by Darwin too, including Alfred Marshall who was a fine mathematician.

If you put physics and evolutionary theory on a spectrum then the social sciences are on the other side of biology, even further away from physics., for the world they investigate is even messier than, say, an estuary. While many who tackle social issues are hardly scientists there is a scientific tradition of social theories subject to empirical investigation which are to be rejected when they don’t stack up. It is just a bloody sight harder task to do this than for physics. (Those whose social theories are invulnerable to evidence, and who do not test them rigorously, are ideologists.)

What Makhlouf was arguing was that too much of scientific economics today bases itself on physics and not enough sees itself as a social science. He quoted Keynes: ‘the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.’

Makhlouf went on to pose a set of questions to the teachers. Among them were
- Are you covering different schools of economic thought in your teaching?
- Are you teaching enough economic history, so that we can learn the lessons from the
- Are you encouraging your students to embrace and respect the perspectives that other disciplines bring to thinking about and solving economic problems?
- How can we better understand the trade-offs between policies that improve incomes and those that improve social inclusion or environmental sustainability or our resilience to economic shocks?
- And, perhaps most importantly, are you challenging yourselves, and your students, to
think beyond the comfortable?

My guess is that many economics teachers posed with such questions would say neither ‘yes’ nor ‘no’, but ‘what is he going on about?’

Makhlouf is not a ‘heterodox’ economist. The speech is entirely within the core of economic orthodoxy, quoting approvingly many of the economic greats. He emphasises ‘Nobel Prize winners demonstrate diversity of thought among economists, a diversity that needs to be preserved, promoted and enriched. Whether people follow the classical, neo-classical, Austrian, Keynesian, New Keynesian or some other school, preserving this intellectual diversity – and in fact allowing it to pollinate – can only help to improve our understanding of the world we live in.’

He affirmed the need for ‘a stable and sustainable macroeconomic framework, sound monetary policy that delivers stable and predictable prices, a prudent fiscal policy and debt that’s under control’, going on ‘I also believe that a stable and well-regulated financial system matters, that properly functioning markets matter, that price signals matter and that incentives matter.’ You can’t get much more orthodox than that.

Even so, the Secretary of the Treasury has put up a considerable challenge to New Zealand’s economic profession; to change its balance to be more open to other social sciences, more tolerant of diversity and dissent, more robust in debate, more critical and more sceptical of fashion.

As much as I support Makhlouf’s analysis, I do not expect any early redirection of economics teaching and hence of economists’ thinking in New Zealand. To take a simple test, few of our university economics departments offer many courses in economic history or the history of ideas and few teachers of their other courses include a historical context in them. I can see the Treasury grappling with the challenge; I am not sure I see it happening much elsewhere.

Comments (15)

by John Hurley on November 24, 2014
John Hurley

Those whose social theories are invulnerable to evidence, and who do not test them rigorously, are ideologists


Recently a Vice Chancellor said he was "sad" some people didn't believe immigration was beneficial.  Keynes said "when the facts change I change my position".


by John Hurley on November 24, 2014
John Hurley

What about the  notion that the human economy is a subset of the worlds ecosystem and viewing an economy as an ecosystem?

by SDCLFC on November 24, 2014

As a science I always thought Economics was only ever good at predicting the past.

by Katharine Moody on November 24, 2014
Katharine Moody

I'm not so sure it should be referred to as 'economic history' that needs to be taught, perhaps a better term would be the philosophy of political economy needs to be taught - as that provides better recognition that economics is a branch of moral philosophy.

It seems the biggest failure of the profession at the moment is that it seems not to understand that the purpose of economic analyses is as a tool to assist in the answering of moral questions. We seem to have morphed in to thinking of humanity as a collection of as rational beings, rather than as a collective of moral beings.

And Makhlouf's speech in this particular passage:

Whether people follow the classical, neo-classical, Austrian, Keynesian, New Keynesian or some other school 

.. seems to me very deficient in not specifically mentioning the Marxian school - given it is predicated on an analysis of the crisis in capitalism .. which (for me as an outside observer) is the predominant problem in economics which faces us today, and for which the profession (it seems to me) has abjectly failed to address/propose workable answers for.

But then I'm not an economist - perhaps I'm just an alarmist and the world isn't really faced with a crisis in capitalism because extend and pretend is working.

Economics is to me the most social of the humanities/social sciences - and the Science Wars (I thought) settled the notion that social sciences cannot and should not try and mimic, or compete with, or even compare themselves to, the physical/natural sciences .. the best text on the subject (for me anyway) being Bent Flyvbjerg's (2001) Making Social Science Matter: Why Social Inquiry Fails and How It Can Succeed Again.

Perhaps it should become a standard economics textbook? 

by Charlie on November 25, 2014

Worry not Katherine!

Capitalism is doing just fine thanks. It's even been adopted by most former Marxist states and their wealth and health has grown accordingly.

It's Marxism that's had the crisis, way back in the 1980's....but a few people didn't take note...






by mikesh on November 25, 2014

".. seems to me very deficient in not specifically mentioning the Marxian school -"


I think Marx is considered part of the Classical School.

by Katharine Moody on November 25, 2014
Katharine Moody

Here's a better summary of what is wrong with present-day economics education;

When Makhlouf starts putting forward this kind of intelligent analysis, we can then decide he's serious about a re-think. 


by Brian Easton on November 28, 2014
Brian Easton

Mikesh is quite correct. Marx is one of the greats in the classical school of economics – roughly Adam Smith to Karl Marx and John Stuart Mill. Katharine Moody is reminding us, I think, that the classical school were political economists with a perspective which was not confined narrowly to the economy but how it interacted with all social phenomenon. Their approach is quite different from those imperial economists who try to subjugate all of society into a narrow economics framework.

I was struck when studying Marx, how he was excited by the latest developments in economic thought. It is to be regretted that he did not live to see the neoclassical revolution and subsequent developments; it is even sadder how so many of his followers have ignored what came after, in a way he never would have. He would not have walked out of an economics class, but  sat there following the lecture, mastered the new ideas, engaged with them and followed up with a stunning and enlightening critique.

Most sciences are not always very good at prediction, SDCLFC, even physics. Think of the Heisenberg uncertainty principle or chaotic models. I am very admiring of the (expensive) effort by CERN to identify the Higgs boson. I cant help noticing that its mass did not conform to the range predicted by either of the two competing models. Prediction failure is a critical element of science, for it drives the seeking of better models – hence science progresses.

by Katharine Moody on November 28, 2014
Katharine Moody

He would not have walked out of an economics class, but  sat there following the lecture, mastered the new ideas, engaged with them and followed up with a stunning and enlightening critique.

I think that's exactly what the chap in the Harvard Political Review did above. Well I found it stunning and enlightening anyway :-)!


by Brian Easton on November 29, 2014
Brian Easton

I did not think he connected at all with where the economic issues, Katherine, sliding between differences in economics  where our top economists are in deep dispute.  It really was a Sunday School version of what is going on. 

by Katharine Moody on November 29, 2014
Katharine Moody

Sunday school? I'd have thought that this statement which quotes Mankwi:

The problem lies in the fact that this orthodoxy is taught to prospective economics students not as one of several competing theories, but as the only theory, a positive science that can be used to “formulate theories with mathematical precision, collect huge data sets on individual and aggregate behavior, and exploit the most sophisticated statistical techniques to reach empirical judgments that are free of bias and ideology…”[1] Orthodox economists, beyond their key differences (such as whether they belong to the new classical or new Keynesian school, like Mankiw),[2] tend to share this contention.

.. is generally what Gabriel Makhlouf's above speech to economics teachers was all about .. that is, move beyond the orthodoxy of (as Gabriel puts it) "algebraic certainty" and accept/teach that economics is not a positive but a normative science. Or have I confused what Makhlouf was saying? Sorry, I really should read his whole speech, as I'm just going by your summary.

by Brian Easton on December 01, 2014
Brian Easton

I don’t understand your concern Katherine. Don’t you want economics to be a science? Do you just want it to be a collection of opinions unconstrained by the evidence, rather like the article you cite?

The view that orthodox economics is a single view – a mainstream – is a nonsense. Like every other science there are strong differences which are vigorously debated. When (if) they are resolved, the science moves on. It is easy to point to one (perhaps polluted) rivulet and claim it is the mainstream, ignoring all the others.

More fundamentally, I invite you to judge the article in Marxists terms. There is not really a ‘thesis’ because the writer so poorly describes the state of economics. It has an antithesis I suppose, but it is not a very good one merely saying that the thesis (no matter how misleadingly described) is wrong. Not surprisingly, there is no synthesis. Hardly a tribute to rigorous thinking. Karl would have been appalled.

by Katharine Moody on December 02, 2014
Katharine Moody

Sorry, Brian, I'm likely not putting my case/concern very clearly - and I shouldn't have strayed off topic with the Mankwi class walk out. I've now read Makhlouf's speech and I think he and I share the same concern about economics education: that being that "economics is essentially a moral science and not a natural science".  Makhlouf quotes Keynes in this regard - and goes on later to say when discussing the tools of the trade:

But we also need to make sure that we all understand what these tools represent.  Problems arise when the simple models developed to think systematically about the economic problems and the relative effectiveness of alternative solutions to them, are confused with the reality we are trying to address.  That risks confusing a moral science for a natural one.

When you say, "Like every other science there are strong differences which are vigorously debated. When (if) they are resolved, the science moves on", implies (to me) a 'normal science' view of economics in the Kuhnian sense. I just don't see the 'purpose' of economics in this light. It is, to me, a moral/normative versus a natural science - and I think present education (and hence professional outputs) are grounded in only one 'school' of moral philosophy, consequentialism.

Take for example, Makhlouf's statement, "Economics helps us identify and analyse relevant trade-offs in making these [moral/social] choices". The notion of 'trade offs' in moral philosophy is a consequentialist approach. I find in environmental considerations (my area of interest) all of the input sought/received from the economics discipline is based on this moral framework, but of course there are other ethical approaches.

So I guess my main point/question is whether moral philosophy is taught as part of the economics curriculum? If not, this might explain why the present 'toolkit' isn't developed enough to solve the "problems [that] arise when the simple models developed to think systematically about the economic problems and the relative effectiveness of alternative solutions to them, are confused with the reality we are trying to address", as Makhlouf puts it.



by Brian Easton on December 06, 2014
Brian Easton

I think, Katherine, that one needs to be careful about what is meant by ‘moral science’ in contrast to ‘natural science’. The term goes back to the time of Thomas Hobbes and was introduced to argue that studying the human condition was not exactly the same as studying physical events. This was before David Hume clarified the distinction between ‘is’ and ‘ought’. Today the term used in this context means the social sciences, although in other contexts it can mean ethics (i.e. moral knowledge).

Almost certainly an economics training of any integrity would distinguish ‘positive economics’ (how the economy works) from ‘normative economics’ (what should be done). You will notice that Mankiw used the term ‘positive economics’; he was using it in this sense, not Auguste Comte’s one.

In principle economists are taught to avoid value judgements; in practice many unconsciously or accidentally sneak them into their pronouncements. I worry this approach may cause problems if we take distributional economics seriously (in a post-Piketty world). I am a follower of Gunnar Myrdal: you cant avoid value judgments, so be explicit and be minimal as far as that is possible.

Of course may economists supplement their economics with other discipliners. I did some philosophy at university and read a little for leisure. One of New Zealand’s most senior economists has an undergraduate degree in philosophy. There is a division of the discipline called the ‘philosophy of economics’. And a standard dictionary of philosophy is likely to include mention of contributions from economists such as Friedrich Hayek, Hume, John Manyard Keynes (whose father was an philosopher), Karl Marx, John Stuart Mill, Amartya Sen and Adam Smith.

Most economists typically do not have enough philosophy training – but that is because there is so much to learn. A similar criticism could be made of not knowing enough accounting, anthropology, biological sciences, business studies, demography, education, environmental studies, geography, geology, healthcare studies, history, law, mathematics, languages, literature, philosophy, physical sciences, political studies, psychology, sociology, statistics ... and economics. After all the subject is about the desperate problems we face when we have scarce resources.

In the end no economist can do it all. But the profession needs economists with a rich diversity of backgrounds as well as each having a solid grounding in the core of economics. That is what, in my opinion, Makhlouf was saying.

by Katharine Moody on December 10, 2014
Katharine Moody

It doesn't help when our Finance Minister uses derogatory name calling about the discipline/profession;

Finance Minister Bill English disputed the report's finding .. based on decade-old data from a "bunch of econometricians doing their magic".

Seems to me he's really just resisting an analysis which challenges his ideological position. And hence the problem with economics as a science to the untrained eye is that its politicisation is so complete that public trust has been shattered.   


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