Or What Economists Do

What the heck do economists do is a question that does not baffle many people because they “know” what economists do. I know it did not baffle me. I was not taught economics in high school, and had an entirely forgettable few lectures ostensibly on economics sometime during my undergraduate in engineering. Given this ignorance, I had a vague notion that economics had something to do with money. I think I conflated economists with finance people and accountants. But I was not baffled because I was too ignorant.

Later, while reading popular non-fiction works related to ecology and economics, I slowly got introduced to the writings of economists. It started dawning on me that fundamentally economists study human behavior. Money is important but not central to the study of economics, I realized. Economists come in all different shapes and sizes and they provide various functions in an economy, just as doctors come in a wide variety of types and provide a range of functions in the theory and practice of medicine.

There are doctors who do pediatry, and there are doctors who do general practice, and there are surgeons, and there are cardiologists, and so on. Then there are institutions which have something to do with medicine such as hospitals, which employ doctors but they also employ accountants and administrators. Every one who works in the medical industry is not a medical doctor.

I think confusing economists with financial people and accountants is like mixing up doctors, pharmacists, and hospital administrators. Some economists work for banks and financial institutions, and so on. But that is not all that economists do by a very long shot. Also, some study aggregate national-level statistics of course (employment rate, inflation, GDP) and that is what is reported in the popular press. Perhaps this can explain the popular misconception regarding what economists do.

So the question is what exactly do economists do. The short and trivial answer is economists do economics. And the circularity involved in defining economics as what economists do does not help at all. Paul Samuelson’s definition of economics in his famous textbook Economics is a good place to start understanding what economics is.

Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses–to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. Economics analyzes the costs and the benefits of improving patterns of resource use.

Studying people exercising choice is what makes economics a study of behavior. Behavior – both human and non-human – has to do with rewards and punishments, gains and losses, in other words incentives. To some, the broadest generalizations that a study of economics leads to are, first, incentives matter, and second, markets work. The rest of economics is an elaboration and detailed arguments about those two generalizations. Recalls to mind what Ernest Rutherford had said about physics: “All science is either physics or stamp collecting.” That is, physics is central and the other bits of science are just a collection of facts that are peripheral and mere detail that one should not be overly concerned with.

Economics is all about codified common sense. I think that is what draws me to economics: I like common sense and I am appalled at the lack of common sense I see around the world. Setting aside the question of why common sense is called such when it is so uncommon, one may ask why economics is difficult if what it concerns itself with is apparently so commonsensical. I think it is difficult because its simplicity is deceptive.

To most bright people, the lessons of economics appear obvious and trivially true. The mathematician Stanislaw Ulam once asked Samuelson if there was anything in economics that was both non-obvious and true. Samuelson took several years to arrive at the answer that it was the theory of “comparative advantage.” He said, “That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.” [Reference]

I have argued that the most important concept that underlies the lessons of economics is the notion of “opportunity costs” and that that is a fundamental feature of the universe which follows from the nature of time. Using the notion of opportunity cost, you can even support the central idea of comparative advantage and consequently the idea that trade is beneficial and thus support the idea that markets work and incentives matter, and so on.

Among the social sciences, economics appears to have great explanatory power, and holds the analogous position as physics does among the hard sciences. Economics has an explanation of pretty much any social phenomena. Once you know to how to reason economically, it all becomes obvious.

By reasoning economically, I mean two different things. First, the parsimony of the explanation. That is, what are the least restrictive set of assumptions one can make and yet derive a system which has explanatory and predictive power. Second, the reasoning based on a sound understanding of the basic principles of economics.

There is a very good reason to study economics: so that we can understand why the system is the way it is, and what it ought to be. We call the former positive analysis and the latter normative. The “is-ought” gap can be bridged only if one understands the nature of the economics universe. Otherwise one can end up meddling in a system one does not fully comprehend and behave like the monkey who tried to save a fish from drowning by putting it up on a tree.

Gautama, the Buddha, had enunciated the general truth that suffering arises from ignorance. A particular instance of that principle is that the suffering arising from the present state of our economy arises from the ignorance of those who have so far directed it. And as long as ignorant monkeys rule, we the fish will be constantly in danger of being saved from drowning.

Related post: How to Study Economics.