Contemporary mainstream economics is highly theoretical and mathematical.When considering a problem, energy deregulation for instance, the firststep of today’s mainstreamer is to build a theoretical model of what oughtto happen.
Although theoretical economists generally do test their models, as calledfor by the scientific method, contrary to the tenets of science the corepropositions of theoretical economics are sacrosanct. Science says thatthat theory has to be subservient to observation but in contemporaryeconomics if the data don’t support the theory, there has got to besomething wrong with the data because questioning the basic propositionsis taboo.
Here is an example. In the real world unionized workers who have theirconditions determined by collective bargaining earn more than those whoare unorganized. Estimates vary from industry to industry and over timebut, pick out any two workers with the same education, training and workexperience doing the same job and the unionized person will be earningsomewhere between 10-25% more than the unorganized one.
Conventional economic theory predicts that unorganized workers, beingpurely economic animals, will want those extra bucks and so will unionize.That will go on until there is equilibrium when non-union and unionworkers earn the same amount.
But in the real world that prediction fails.
Instead of organizing with a view towards improving their economic lot,over the past two decades Canadian workers apparently have been walkingaway from rather than towards higher wages.
In a recent study Chris andCraig Riddell of UBC found that, despite the remuneration differential infavour of the organized, collective bargaining coverage in the privatesector fell from 30% in 1983 to 22% in 1998.
This contrary real world behaviour has not caused a crisis in theoreticaleconomics. An example from another field illustrates why. During themiddle ages the theory of Ptolemy, which was based on the proposition thatthe sun and all of the planets circled the earth, predicted accuratelymore often than not where each planet would be at any point in time. Whenit went wrong, its practitioners always found special circumstances tojustify the deviation.
The same thing happens with modern day conventional economics. Whenabstraction fails, economists go into the real world to find out what’sactually going on. Drawing on the work of various practical sorts, theRiddells suspect that the culprits causing the labour market to behave ina manner unanticipated by the core concepts of supply, demand and priceare employer opposition and ineffective laws, sociological or politicalnotions that do not fit well into their abstract world.
Employees fearthat if they make a move to unionize, employers will impose costs on themsufficiently large to offset their expected wage gain and the law,apparently, is ineffective in setting their minds to rest.
Abstracteconomists are sometimes able to identify proxies for such notions andthereby fit them in their models but the model-builders have nothingwhatsoever to say about worker psychology or the politics of labourpolicy.
What are the lessons to be learned from this little exercise? There aremany but I will point out only a few.
First of all we ought to be wary of the policy prescriptions flowingprimarily from theoretical economics. With regard to issues such as energyderegulation we ought not to allow ourselves to be wowed by eleganttheoretical arguments unless they are backed up by lots of real worldexperience carefully assessed.
Unfortunately, much of the so-calledneo-liberal agenda that has been driving economic policy for two decadessprings from pure theory not well grounded in the nitty gritty of the realworld.
We should also be concerned about the evolution of economic education.When I was a student in the 1960s and 1970s a variety of approaches toeconomic issues were on offer in most universities. Today theoreticaleconomics dominates.
The guy who sits in his office and formulates themost elegant and mathematically imposing way of thinking about an issuewins. The guy who visits union offices and corporate boardrooms and talkswith people about what they are doing and why will have a hard time evenfinding work.
In France, a student movement protesting this narrowing of options hascaused a major public debate. With a real flair for marketing they havecalled themselves the Post-Autistic Economics Movement. We ought tosupport a similar debate here. As things now stand, tomorrow’s policymakers and advisers are having their heads filled with unchallenged dogmawhose consequences can and frequently do go wrong.
We ought, also, to support the idea that economic policy makers have aresponsibility to consider the ethical dimensions of the actions they takeand that students ought to be taught to consider the morality of economicpolicy alternatives. Theoretical economics, however, is norm-less.
Ifindeed the contrarian behaviour of Canadian workers is due to fear of whattheir employers might do to them, we ought to be morally outraged.Conventional theoretical economics, however, provides no guidance on suchissues. Intimidation, death threats, price increases are no more thandifferent kinds of costs.
There is a place in the world for these abstract guys but it should not beat the top of the hill. They definitely should not be granted a monopolyin the classroom or at the right hand of our economic managers.