Customer Reviews

The Death of Economics

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Opinions of this book are likely to break down along the lines of defenders versus critics of mainstream academic economics. However, even those sympathetic to the charges of irrelevance and arrogance levelled at mainstream economics will have to concede that this is an unimpressive contributions to the "economics-in-crisis" literature. There are two reasons for this. First, although the author does have an alternative approach to economics in mind (of the evolutionary/multiple-equilibria variety), he does not consistently criticize the mainstream in terms of this approach, so his critique lacks focus. Second, the presentation is just badly organized; Ormerod toggles between methodological and substantive criticisms in a way that suggests he does not appreciate the difference between the two.

Better introductions to the ideas of those who criticize mainstream economic practice can be found in Mark Blaug's recent piece on "Disturbing Currents in Modern Economics" in the May/June 1998 issue of Challenge, or J. Cassidy's "The Decline of Economics" in the New Yorker, December 2 1996. These articles make many of the same points as Ormerod, in a fraction of the space. For a more a detailed critique that is still accessible to an educated general readership (albeit with some perseverence), nothing matches the collection of essays edited by Alfred Eichner in the early 1980s, Why Economics is Not Yet a Science -- although that book, unfortunately, is out of print.

"...there appear to be so many violations of the condition under which competitive equilibrium exists that it is hard to see why the concept survives, except for the vested interests of the economics profession and the link between prevailing ideology and the conclusions which the theory of general equilibrium provides." Ormerod, Pg. 66

In this book Ormerod, an economist, presents us with a scorching critique of orthodox, or neo-classical, economic theory. He criticizes the idea of `equilibrium', widely believed by academic economists but found nowhere even approximately in real economic data. He argues that, in reality price levels are never determined by the matching of supply to demand. Real markets are always far from equilibrium, so that there are no clearing prices for assets or commodities. Said otherwise, the `graphs' in Samuelson's famous textbook do not represent real data but are merely cartoons invented for inexperienced or uncritical students. Traders know that equilibrium does not prevail. Traders generally do not use orthodox economic theory in decision making.

Ormerod's summary of the neo-classical theory (which theory led to the emphasis in the west over the past 15 years to implement free market solutions regardless of circumstances) is concise and clear:

1. A free market competitive equilibrium is efficient, demand equals supply, no resources (including people) stand idle or unused. That is, Adam smith's invisible hand leads to the best of all possible worlds.

2. In equilibrium no person or unit can be made better off by altering resources without making someone else worse off (Pareto optimum). That is, redistribution of wealth will make things worse. Indeed, this is the religion of the far right in America, and elsewhere: In this phlosophy governments simply should not intervene at all (Greenspan and the Fed are unnecessary).

As is well-known, general equilbrium theory is based on the assumption of perfectly rational agents who foresee the future perfectly and all conform to the same picture of the future (pg. 89). Ormerod's message is that nothing could be further from economic reality than this picture.

Ormerod does a nice job, via presentation of empirical data, of demolishing the notion (beloved of governments) of the Phillips Curve, the idea that there is a simple relationship between unemployment and inflation (ch. 6). He shows that there is no such relationship in the data. He also argues that Adam Smith was interested in empirics and did not advocate a completely unregulated free market devoid of all moral principles, but that economic theorizing was `highjacked' late in the last century by theorists who ignored empiricism altogether and instead tried merely to take over the physicists' notion of equilibrium, but without any idea of dynamics and nonequilibrium. Mirowski makes a similar argument about the lifting of the idea of static equilibrium from physics. Ormerod lambasts the tendency of academics to prove empirically meaningless theoems, to treat economics as a branch of mathematics rather than an empirical science. Also criticized is the hokey assertion by orthodox economists that the failure of real markets to be in equilibrium is due to governmental and other constraints, that a truly unregulated free market would approach equilibrium (i.e., the problem of unemployment is supposed to be solved by complete deregulation). The disaster of Russia is given by Ormerod as a good counterexample. The next examples of such disasters may be the entry of former E. block countries into the (price levels of) the European Union.

The text propagates some common misconceptions about deterministic dynamics, in particular about detreministic chaos. Here are a few examples: the author asserts that the behavior of a chaotic machine cannot be predicted accurately in the long run (true in nature, completely false mathematically). Analogs of phase plots (Poincare sections) are misinterpreted as showing evidence for stable cycles (elliptic points). Certainly, in contrast with what the author expects, there are no elliptic points indicated in the data that he shows (ch. 7). The search for unstable cycles would require data of high decimal precision and cannot be decided on the basis of merely staring at a scatter plot. `Linear' is confused with `mechanistic', as if chaotic and/or complex could not be mechanistic. Scientifically, we do not really know how to distinguish `mechanistic' from `organic'. Perhaps there is no real boundary in nature. These are, in context, relatively minor criticisms of a book that does a good job of emphasizing the flaws in neo-classical economic theory when compared with economic reality.

Paul Ormerod's book correctly points out that the results of general competitive analysis,general equilibrium theory and neoclassical macroeconomic theory revolves around the concept of one single,unique, optimal,stable point of equilibrium that is presented mathematically as a fixed point based on any one of close to a hundred or so fixed point theorems that have been published in various math and economics journals since the early 1940's.This is identical to the claim that economies are always operating on the boundaries of their dynamic and static production possibilities curves(the stochastic equivalent is that ,on average,the mean position of every economy in the long run,operating without any government interference in the market,is on both boundaries ,combined with small deviations around the mean.These small deviations are interpreted as minor short run cases of recession and inflation that are self correcting through adjusting the mix of product inventories.)Ormerod shows, correctly,that such a theory,based on a misinterpretation and misapplication of the law of large numbers and the central limit theorem,is not supported by any empirical evidence.In fact, this approach is based on the fallacy of conditional a priorism(long runism).Ormerod then proposes to construct an alternative approach based on the existence of multiple equilibria.This is correct,but is redundant since Keynes already constructed such a theory in 1936 in his General Theory.Keynes's theory is based on the theory of effective demand.There are many unemployment equilibriums possible,but only one full employment equilibrium.The mathematical modeling for his theory was provided by Keynes in chapters 20 and 21 of the GT.Any competent mathematician should be able to derive Keynes's result,which is that w/p=mpl/(mpc+mpi),where mpl is the marginal product of labor,w/p is the real wage,and mpc and mpi are the marginal propensities to spend on consumption goods and investment goods,respectively.Multiple equilibria are specified as long as mpc+mpi <1.This result holds for both the short run and the long run.Involuntary unemployment is the result in either case.Only in the very special case of the mpc+mpi =1 will any of the various neoclassical theories be operational.Nevertheless,I still recommend this book for purchase since the discussion of multiple equilibria is more broad based than in the GT.Ormerod's deficiencies regarding Keynes's analysis in the GT can be traced back to his training in the economics department at Cambridge University,where"...Lord Kahn,revered as the closest collaborator of Keynes and ...credited in the oral tradition of Cambridge as having had the original insights which led to Keynes's theories".(Ormerod,p.116).There is no support for this claim,a claim that has misled literally hundreds of thousands of economists worldwide since the late 1930's.

Ormerod has written an excellent critique of neoclassical economic theory (what's known to the public simply and misleadingly as "Economics"). Despite the title, Ormerod isn't dancing on the grave of his discipline. On the contrary, he wants to reform it and offers many sensible and intriguing suggestions along those lines. (Some readers may feel a more radical approach is merited but within the bounds of capitalism, Ormerod's prescriptions are hard to fault.) Unfortunately, the Queen of the Pseudosciences has survived over a hundred years of both philosophical criticism and empirical falsification. Ormerod's cogent, humane effort will be ignored by those who "know better" -- that is, by the very people who need to heed it most.

If you learn philosophy you are taught always to question assumptions, the premises that provide the foundation for your conclusions. Paul Ormerod does this to the economics discipline. The more precious economic axioms of "rational economic man", "market equilibrium" and linearity are all subject to his pointed dissection. This is not a book that so much constructs an argument, as demolishes another. I found it as refreshing and liberating as that old nursery rhyme, "The Emperor's New Clothes" - those who suspect the stroud covering economics is a myth of their own making are not alone. I particularly liked his analogy comparing economists to alchemists, both blinded by their beliefs, and more enamoured with the ideal than the empirical evidence. Die hard economists will not like this book.

Though this book is from 1997, it is still timely. What I enjoyed most was the discussion on economic forecasting: the most accurate way to forecast is to predict that the future will be like the past. This gets progressively more accurate as the time being predicted gets closer to the time the prediction is made (next month's forecast is better than next year's forecast). Pretty much anybody can make economic predictions this way that are as good as the experts'. No economic model has been shown to give better results than this. The weakness of this approach, of course, is that when external shocks occur in an economy, such "forecasting" is completely useless. But such external shocks are very common. This section alone is worth the price of the book.

If the book has a flaw, I would consider that it is overly optimistic about the future of the economy. In my opinion, the problem with mainstream economics is not only that it is unable to make meaningful forecasts; often it cannot accurately report what the economy is really doing NOW. In this respect economic forecasts are in a far worse position than weather forecasting; we can, after all, agree pretty reliably on whether or not it is raining now. Economics has not come this far. Economic growth is generally measured by GDP, but this is a highly flawed measure; it does not count any effects of population growth, or decline in living standards, or costs of pollution, or depletion of natural resources. The book could use a mention of the Index of Sustainable Economic Welfare (ISEW) or other more accurate economic measures.

Ormerod is correct that the Sherman Act is central to improvements in economic science. This is the subject of my own research in economics, so I will not discuss it further here.

Ormerod's comments on inflation and unemployment are very good. However, I think he misses that both inflation and unemployment are very peculiar concepts. Inflation measures are essentially rigged to disguise many real changes in living standards, as well as changes in the cost of consumer goods vs. the cost of housing or services. Unemployment depends greatly on what is perceived as the minimal standard of living in a particular country for a particular person. If a job does not pay enough to meet that minimal standard of living, the person must keep looking; but what is considered a minimal standard of living can vary enormously by country, by social class, etc. Minimal standards of living are also often highly regulated, by such things as zoning and building codes.

Overall, though, a fascinating book guaranteed to make you think.

The author writes about something economists know but refuse to acknowledge namely, the futility of applying math to represent human behavior...It is simply not possible! These economists will never accept it because it would mean sending them all to the unemployed line...

The great omission is not to have mentioned the Austrian school of economics and their great contributions. Not even when he discusses the Marginalists... Astonishing unless his knowledge of economics is not as thorough as expected

Crucial reading for the concerned citizen. The book ought to be read by every educated person, concerning that it is very timely especially now with the crisis.

Given all of the existing reviews I have little to add really.

Mind you, given all of the verbiage going around about the global economic crisis and the differing views which pervade the media, I find it particularly interesting that some of the reviews propagate the view that economics is not in crisis. It reminds me of Thomas Kuhn's proposition The Structure of Scientific Revolutionsabout those engaged in solving puzzles just before a paradigm shift.

In this time, given the failure of much economic theory to predict the crisis, it is surely right to look at alternative prospectuses. Ormerod provides a well written book accessible to the educated general reader which provides insight into some of the deficencies of formal economics and some possible alternatives.

Many of the existing reviews seem to be written by those who have already taken a position in the debate. The trouble is the debate has moved far beyond the boundaries of academia and is of particular interest to those who have lost jobs and homes.

The study of how to allocate scare resources should interest loads of people. In fact, most people who haven't studied economics in college seem fasinated by the idea. However, because of the way most Economics are taught in College, most people who have studied Economics want nothing to do with it. I know many intelligent people who hated Economics in college and have steared clear of economics every sense. This is a is the sorry state of Economics that has to die as Paul so clearly writes about in his book. I don't think, however, that the orginal intention of economics, the study of how to allocate scarce resources will ever die. His book, about its death really gives me hope that Economics will come alive again someday once we rid economics of all the ego driven, engineering models, that bore people to death of economics.