Human curiosity about wealth, poverty and national differences will keep the subject alive despite the fads of its practitioners

Attacks on economics are as old as the subject itself. The 18th century British political orator and Tory father figure, Edmund Burke remarked “The age of chivalry has gone: the age of economists, sophists and calculators has arrived.” Yet Burke was a close friend and admirer of Adam Smith, often regarded as the founder of political economy, with whom he claimed to agree instinctively almost every subject.

In the 19th century, the art critic and cultural commentator John Ruskin wrote a book entitled Unto This Last, an attack on the political economy which found an eager response among the cultural elite of his time.

Towards the end of the 20th century Margaret Thatcher intervened in the popular television programme Yes Minister to say that all government economists should, without exception be sacked. This was probably the most popular thing she ever said. Yet she herself claimed to be a faithful follower of Friedrich Hayek, the Austrian-born political economist.

More parochially, when I was asking someone in my office what she might like for a Christmas present, a colleague ironically interjected: “an economics textbook”.

Yet the subject is not so easily banished. If all economists were put painlessly to sleep, human curiosity about matters such as the wealth of nations, booms and slumps, or why some people are rich and others are poor would remain; and the profession would re-emerge, with all its squabbles and disagreements.

If the critique is to get beyond the level of bar room sneers it must say more precisely what is wrong with today’mainstream economics.

It helps to look at that rarely discussed subject: the economics of economics. The main academic market is clearly is for learned papers. The contribution of such papers to understanding is elusive and intangible. More important in practice is “professional competence“. This is something rather different, involving the sophistication of the statistical and mathematical methods and references to previous writing. The attitude of the economic establishment to those who use a different idiom reminds me of 17th century scientists who dismissed work because they were not written in Latin.

How about business? Many companies directly producing goods and services have disbanded their economics departments. Postgraduates who want to talk to me about economic events and policy come far more often from departments of government, contemporary history than from economics.

There also exists in central banks and government a market for the academic type of paper, although it is doubtful if they are ever the key to policy decisions. There may here be a clue to the increased demand for economists in the financial world. This is partly a matter of public relations. Some City analysts are said have been told that they must try get onto television or radio at least once a week.

Their genuine in-house however is to attempt to forecast the movement of interest rates, which involves predicting the decisions of central banks. They are often paid more for doing this than the economists in the central banks themselves: hence the difficulty of retaining good economists in official positions.

There is also a market at a semi-popular level. While people delight in ridiculing economists for their disagreements they are also entertained by original, provocative and controversial viewpoints. The key to understanding many pronouncements is that they belong at least as much to the entertainment as to the information industry.

But anxieties go rather deeper. A group of dissenters, originally emanating from Austria, see the role of the market rather differently from the “neoclassical“ mainstream .To bring about an equilibrium or an optimum but to act as a signaling device to enable information scattered among millions of people to be diffused and to act as an incentive to action.

This view is expounded by David Simpson in a highly readable new book (Rethinking Economic Behaviour: How the Economy Really Works, Macmillan, £45). I was particularly interested in his exposition as I have been asked to write the entry on Hayek for the New Dictionary of National Biography.

As economic adviser to Standard Life Assurance, David Simpson has had long experience of communicating with the business world. His book should be readily accessible to a thoughtful businessman with a smattering of undergraduate economics. He has also himself been an economics professor and has contributed to the mainstream he is criticising in a book entitled General Equilibrium Analysis. He is also remarkable in being one of the very few Scottish Nationalists who believe in competitive markets rather than state handouts.

The burden of his complaint is that mainstream highbrow economics, based on general equilibrium analysis, is seen as the solution of a system of simultaneous equations which regards technology, tastes, and knowledge as either given or determined from outside. He takes the Hayek argument forward by linking it to the complexity analysis developed by present day applied mathematicians. Both schools see the economy as a complex adaptive system which never approaches a stable or optimal equilibrium, but is characterised by self-organisation and evolution.

Simpson is as dismissive of monetarist targets as he is of social democrat planners. Nor has he any time for the management consultants and other fashionable types who have attempted to take over from the economists.

Mainstream economists, who are forced by their pupils to read Simpson, will have a ready answer. This is that they already take into account search costs and uncertainty - for instance by saying that businessmen and consumers will acquire new knowledge up to that point where prospective returns are equal to the costs of such search.

No book is perfect. Simpson is too quick to dismiss the kind of analysis which abstracts from most of the features of the real world to concentrate on two or three key variables. This was a technique practiced by Ricardo, one of the founders of classical economics, and practiced for a long time by Hayek himself. Indeed without some explanation along these lines of the theory of international trade, the circular flow of income and the role of real exchange rates, it is not possible to give a convincing answer to the anti-globalisation protesters.

The problem about process economics is that after describing the coordinating functions of the market mechanism and perhaps also demonstrating the near impossibility of forecasts in non-linear systems, it does not provide a further research programme. Economists who are studying specific problems differ in their flare, factual knowledge and l techniques, rather than their headline allegiances. A stranger would not realise that Stephen Littlechild, the well known utility regulator who devised the RPI minus X formula,regards himself as an “Ausrian. Nor would they know this from Simpson’s own work on the economics of Scottish independence.

The Achilles heel of books such as Simpson’s is that they provide no basis for fiscal, monetary of exchange rate policy. There is much to be said for the author’s suggestion that fiscal policy should concentrate on accumulating a substantial budget surplus in normal times so that governments can borrow heavily in recessions. Unfortunately he does not attempt to reconcile this advice with references to the benefits of “curative recessions“; and he provides virtually no guidance on monetary policy.

It is no use just rejecting “macroeconomics“. Unless a country is on some automatic system such as a very pure gold standard, central bankers have to make decisions; and unless the critics enter the field we will still be left with individual hunches rationalised by econometric forecasts.

The underlying ideas of neo-classical economics are not all that different from those of the Austrian variety. What has gone wrong with economics is the overemphasis on techniques at the expense of the underlying ideas. The field ought to nourish a thousand flowers.

My own fallible guess is that there will be a bifurcation. Theorising about the general workings of the economy will become a branch of social science, unashamedly devoted to understanding the human world rather than providing a box of tricks for politicians and businessmen. On the other hand there will be a series of quantitative techniques, some but not all of them derived from traditional economics, to perform specific sectoral or industrywide analyses as some of the best economic consultants do at present.

Postcript: Forecasts

It seems almost impossible to disabuse people of the idea that economics, like other would-be sciences, should prophesy the future. This overlooks the fact that scientific predictions are conditional. They assert that certain changes, such as an increase to a certain point in a temperature of water will, granted other conditions, lead to boiling. They cannot tell us whether the required conditions will be fulfilled.

Historical prophesies are unconditional scientific predictions. Karl Popper, the philosopher of science, pointed out that success for long-term prophesies can be fulfilled only for systems that are “well isolated, stationary and recurrent”. This happens to be true approximately of the solar system. They are not even typical of the physical world and certainly not of a rapidly changing society of human beings.

The criticism is not avoided by a catching, subjective ranges of error to forecasts, as the Bank of England does in its famous “Rivers of Blood” colour chart of likely inflation. Indeed Simpson regards comparisons of econometric forecasters to witch doctors as unfair to witch doctors. He quite legitimately quotes from the admission of mainstream government advisers that their forecasting has not improved over the last few decades despite the intensive work put into them.