Economics

Economics is about maximising returns in situations of scarcity. How can consumers maximise their utility given their income and wealth? How can businesses maximise their profits given their revenues and costs? How can economies maximise their GDP given their resources?  

There are debates about what to maximise – for example, whether GDP growth alone should be targeted. How we achieve maximisation: Do we theorise about how people behave or do we observe their actual behaviour or perhaps a bit of both? Even if agreement can be found on methodological approaches, there is often fierce disagreement about policy implications. As the old joke goes if you ask two economists a question you will get three different answers.

Economics is contested and not a single body of thought. Behavioural economists have challenged the rationality assumption central to mainstream microeconomics. Keynesians reject the efficient market hypothesis that underpins much of macroeconomics. These are fundamentally different perspectives on how markets function, leading to quite different policy prescriptions.

It is important that economists are open about these differences and the limitations implied by these differences. Too often economists, envious of the precision and mathematical rigour of physics, have presented conclusions with too much certainty and too little humility. In scarifying doubt and complexity for simplistic assumptions and equations they have actually undermined the practical utility of economics. While these assumptions and equations sought to make economics the most robust and “hardest” of the social sciences, clinging to them now threatens to convert economics into more of a religion than a science.

We should be guided not by theory that hardens into dogma but by evidence. This is not to say that we do not need theory to make sense of a complex world but that our theorising should adapt to new evidence. Big data means that evidence on how people behave and how markets function or don’t function and how public services work or don’t work is becoming ever richer. Economists will only be able to exploit this richness if we are driven by evidence.

In addition to big data, another trend is that questions of scarcity are becoming more acute. Demographic change means that the demands upon public services are going to continue to increase. For example, an older society will spend more on health and social care. Such societies will have to increase their return on public spending if they want to even maintain current levels of service provision. The present debate on the fiscal deficit is a harbinger of a long-term trend in which resources for all kinds of public spending will be scarcer. Equally, the depletion of fossil fuels and climate change mean that precious natural and environment resources will also become scarcer, which poses questions of economic and social organisation that are only going to become more pressing.

The central task of economists is to provide robust and practical tools for responding to the questions posed by scarcity. The work which I am presently undertaking for Action for Children, for example, seeks a greater return from a fixed (and, therefore, scarce) public spend on children’s services. Previously, I have managed a project on the economics of industrial symbiosis, which is a form of resource efficiency, allowing more to be achieved from a finite stock of natural resources.

The relevance of economics to our lives is increasing as challenges of scarcity become sharper. Big data should extend the capacity of economics to meet these challenges. A misguided fidelity to discredited theory should not be allowed to prevent economics delivering upon this potential.