Mainstream economics needs to get a firm grip on reality

Economists believe that without a wider acceptance of the place of history and culture, the profession is digging its own grave
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Economics prides itself on being the "hard" social science. Economists boast that it is based on numbers and mathematical analysis, and gets to grips with reality in a way in which the "soft" social sciences such as sociology and political science can not.

It is odd, then, that economics cannot easily accommodate some pretty basic features of reality, such as the fact that there are two different types of people, women and men. Or perhaps this is not so surprising, given the fact that economists regard words like bigger, firmer and higher as unqualified terms of praise. For it turns out to be a pretty macho sort of subject all round.

Take the numbers of women and men in the profession itself. A survey carried out by the Royal Economics Society, whose results were presented at its annual conference this week, found that females are in a minority. Just over a quarter of undergraduate and post-graduate students of the subject are women. They make up less than a fifth of the total number of academic economics staff in our universities, and the female-male ratio falls sharply the higher up the promotional ladder you look.

According to Professor Denise Osborn of the University of Manchester, who chaired the RES working party: "The more prestigious the economics department, the lower the proportion of women at senior level."

The ratio of women economists to men is also less than a fifth in the government economic service and about one in seven in economics jobs in business (mainly the City).

Does this imbalance matter any more than it does elsewhere in our unequal society? The answer is yes, according to Tony Lawson, a Cambridge economist and author of abook critical of the subject'sphilosophical foundation.*

"Surely it is only a group of men who could have produced and persisted with the absurdity that is mainstream economics?" he says. He charges that economics misinterprets the nature of reality, misunderstands the way we find out about reality and uses inappropriate methods for its exploration.

Take the nature of reality first. Economics is based on "rational agents" - individuals or companies - maximising their own individual well-being according to fixed rules. They act by themselves in their own interest. This is what allows the construction of precise mathematical models of behaviour. It permits economists to predict that if event X happens then event Y will follow because every agent is behaving in a well-defined way.

Dr Lawson points out that this does not allow economists to explain why men and women, say, or employers and employees, might behave differently. Economics can only assume they have different preferences; it cannot explain them. Based on building up from individual agents and their preferences, it cannot handle the fact that a lot of people's economic choices are based on their social positions - that they are a worker rather than a boss, a student and not a teacher, female not male.

If you accept this argument that mainstream economics completely misrepresents reality, it follows that the notion that an economist just has to collect and interpret objective data falls by the wayside too. Economists tend to venerate statistics as admittedly imperfect snapshots of the reality out there they try to model. The mainstream does not accept that the very information collected, and the resources put into it, is part of what their social science should be analysing.

Take a matter of particular interest to us female agents, housework. This is a big part of reality. Although it is usually unpaid, insurance companies estimate the value of work in the home for life assurance purposes at around pounds 20,000 a year. Yet there are no economic statistics on the amount of housework carried out in the UK. Economists do not incorporate it in their theories of labour supply or consumer spending, although it plays a part in wives' - and husbands' - decisions whether to work and for how many hours, and in family income and spending.

The UK's admirable Office for National Statistics is starting work on collecting data on how people use their time, which will include housework. But this is an innovation certainly not driven by the economics profession.

The final implication of Dr Lawson's criticism is that economics uses the wrong methodology. Thinking of economic phenomena as the result of individual actions by atomistic agents, researchers focus on questions like: what underlying factors explain the growth and distribution of incomes over time? They might assemble data on incomes, educational qualifications, national GDP growth and so on. But the more interesting question might be: why are the incomes of the skilled rising relative to the unskilled? Or, perhaps, why do men earn more than women on average?

There is a parallel with biology, where the interesting question is not why one type of corn has a yield of so much, but why it is greater than a different breed's yield.

Mainstream economists are wedded to their methodology, feeling that to accept that economic outcomes depend on gender or culture or the path of history would undermine the subject's authority. And I think economists are right to argue that their approach does give the subject an intellectual discipline and respect for facts that is not as widespread in the "soft" social sciences. But more and more practitioners, including most of the minority of women, believe that without a wider acceptance of the place of history and culture, the profession is digging its own grave.

It is clear, for example, that national economic performance depends on what the US academic Robert Putnam has called social capital - on having a stable legal framework and trusted institutions. This is why, according to his study, southern Italy has performed so much worse than the north despite receiving bucketloads of subsidy. It is why aid to developing countries has such a mixed record. It might help explain the UK's comparative economic decline. Economists consign its study to the sociologists, but in doing so undermine their own ability to explain.

In a damning paper in the Journal of Economic Perspectives in 1987, David Colander and Arjo Klamer reported an analysis of the process of educating and training economists in US universities. Most graduate students, they found, had chosen the subject because they were interested in matters of public policy and wanted to understand economic phenomena. The authors reported: "Graduate economics education is succeeding in narrowing students' interests."

Perhaps the birth of feminist economics and the profession's new women's committee marks the beginning of the end for the subject's reliance on analysing the "rational economic agent". The male diehards will no doubt mutter that irrationality is just typical of women.

* Economics and Reality, Routledge, pounds 16.99.

The battle of the sexes

Academic economics staff, 1995

Females Males Females as %

Professor 16 359 4.3

Reader/snr lecturer 67 619 9.8

Lecturer 299 1142 20.7

Researcher 171 264 39.3

Other 47 190 19.8

Total 600 2574 18.9

Social sciences

exc. economics 2578 3673 41.2

Source: Higher Education Statistics Agency