Everybody knows the answer to this. Economics is about economic forecasting. Since much of economic forecasting is wrong, economics must be wrong. Or, economics is about the stock market and money. Since the stock market and money are by definition tasteless and immoral, economics must be tasteless and immoral too. Or, economics is about shifting a load of curves here and there in order to pass an exam, to be forgotten about once one is exited the exam room.
Getting a sound answer to this question is increasingly important as many other subjects touch on Economics. For example, much of human geography is concerned about economic questions: Cities, prosperity between countries, inequality. Much of management is also about economic questions, and if anything seems less abstract and more relevant: managing R&D projects, accounting, business strategy.
This is so ingrained there are now two famous jokes that everyone knows about economics. The first is that a physicist, a chemist, and an economist are stranded on a desert island with a can of food but no can opener. The physicist and the chemist devise a clever mechanism for opening the can: the economist says “assume we have a can opener". The second is that a £50 note is lying on the street. “Did you see that?” says the non-economist. “No need to look” says the economist, “if it was really there someone would have picked it up”.
This is typically ignored when you start an economics course. You are told that the great benefit of economics is it helps you think about the big questions in the world. But many students , when they come out of an economics class, often jettison everything they've learned, regarding it as too abstract, and worth understanding just for the purpose of passing in the exam. So it's worth asking again; what is economics about, really?
Let me suggest the study of economics can be summarised as asking a really good question: Is there a better alternative? That may not sound like something very profound, and economics is undoubtedly broader than this (the study of econometrics and associated statistical techniques for example), but as a pithy summary I think this carries the essence of economics and why it is actually very helpful in helping you think about the world.
Why is this a good question? It’s worth stating first off that it’s a broad-based question. That “better alternative” might be within the context of a market like a stock market for example. Or it might be in the context of a non-market transaction like a business hierarchy. Or a school or even a household.
Let’s take an example. Geography has much to say about countries. International business, a important subdivision of business studies and business strategy, has much to say about the arrangement and conduct of business across borders. International relations, has much to say about the political and economic arrangements between nations.
In a 1997 article in the Quarterly Journal of Economics, the economists Alberto Alesina and Enrico Spolaore asked a different question: what’s the optimal number of countries? Using an economic model, they argued the democracies would produce too many countries, that is, there would be too many nations, relative to a socially optimal benchmark. Now whether you agree or disagree with their analysis is beside the point. My only point is that this is a nice example of the question that economists ask when they see a particular arrangement, in this case, a set of countries; is there a better alternative?
Likewise, the Canadian economist Robert Mundell asked in the 1960s how many nations should share currencies? This was viewed as an absurdity at the time but of course turned out to be an incredibly important question when it came to the design of the euro ( and indeed many have argued the design of the euro is flawed precisely because the designers ignored the principles that Mundell enunciated over half a century ago).
The next issue then is to ask whether economists have a comparative advantage in asking and answering this question? Surely other subjects have not only asked this question but perhaps answered it better? What do economists have to offer?
Herein I believe lies the true power of economics as a way of thinking relative to other subjects. I think that economists have two very important comparative advantages.
The first is that economics defines and understands very clearly the definition of “better”. What are called, perhaps rather unapproachably, the fundamental theorems of welfare economics, describe the exact conditions under which a particular economic arrangement tends towards the most efficient allocation of resources. That is to say, that economics has a precise statement under which Adam Smith’s description of the “invisible hand”, namely interactions in markets , lead to the “best” outcome. That means that in economics we are able to precisely compare a certain economic arrangement (the number of countries, the price of sugary food, the trade arrangements of a
country, your employment contract) with the “best” arrangement. In turn, we can therefore answer precisely the question “Is there a better alternative?”.
The second source of comparative advantage comes from the observation by Smith that the natural propensity of humans is “to truck and barter”. Economists understand is that if there is a better alternative, unless there is some blockage, human beings are probably going to try to get towards it. Neither dogs nor human beings can fly naturally. But human beings created a machine to help them fly because they saw a better alternative to walking. The incentive to trade, means this is a good question to ask and an understanding that incentive makes economists in a good position to answer it.
Asking the question also provides a couple of helpful insights. First, when presented with some fact of social interaction many subjects would explain it by social norms. Where you shop, what newspapers you read, what phone you buy might be plausibly explained, at first pass, by what your parents did or peer groups do. Economics tends to regard this as a last resort. If there is a cheaper shop, a livelier newspaper, a zippier phone, the question of “is there a better alternative” and understand why people don’t get to that improvement is the first question to ask.
Of course, the relentless pursuit of even a very good question can get the Economist into hot water. When presented with the public provision of a service (say health or education in many countries), the “is there a better alternative” question makes you ask if, for example, a private providers could do it much better. Economists are, as said, well placed to ask this question because we have a strong theory about the optimality of a market economy. But one has to remember that markets are in practice underpinned by a whole series of non-market factors such as trust. Indeed there is a literature which suggests that financial incentives might drive out these non-market incentives.
Finally, the describing of economics in this way helps understand the two famous jokes set out above. The point of the “assume a can opener” story, is that economists start by thinking about the the best outcome, as a way of reasoning whether the current situation can be made better. The point about the money on the street is to ask why human beings , with the Smithian propensity to track and barter, would not reach a better outcome. It does not say they would reach a better outcome, but it forces the analyst to set out exactly why not.
