£conomics for Humans by Julie Nelson

Bookshelf: Ethics and efficiency

This book argues that traditional economic thinking, which regards the economy as a machine, is harmful and misleading.

by Paul Ormerod, World Business
Last Updated: 23 Jul 2013

Julie Nelson experienced an intellectual epiphany, a mental rebirth: trained as a technical economist, she held a tenured position in a top 30 US university and published in leading mainstream academic journals; now she writes on feminist economics and works at an academic environmental institute.

Economics for Humans has three main themes. First, it argues that modern economies cannot be thought of as the well-oiled machines orthodox economics holds them to be; second, Nelson believes that this way of thinking is harmful to humans and, finally, she thinks that ethics as well as efficiency is important in economics.

It would be easy to jump to a quick conclusion. Books attacking greedy, rapacious corporations and the supposed evils of capitalism proliferate.

In general, such diatribes are not worth the paper they are printed on, their connections to evidence and reality being at best tenuous. Nelson is far too intelligent for this sort of argument. Ironically, it is her experience as a rigorous economist that obliges her to provide justification for her views.

She recognises, for example, that the quality of services and commitment to social responsibility vary widely across businesses. She gives a practical example of three local hospitals, where it is the for-profit one that has the highest staff and patient satisfaction levels. Averages can conceal enormous variation within the profit, not-for-profit and government sectors.

Nelson has a nice little story of making this point to students by telling them about the statistician who drowned crossing a stream an average of eight inches deep.

The book provides detailed descriptions of the sheer variety of motivation, both corporate and individual, and institutional rules and structures that exist in the business world. Simple economic theory postulates that all firms follow the same behavioural rule: maximise profits.

In the real world, we see a vast proliferation of behaviour, much more like a complicated ecological system, with different species - different firms - following different patterns of behaviour. Nelson argues it is wrong to dismiss all business as bad. Many businesses do not merely have a sense of social responsibility, but their actions help promote it as well as generating wealth. The task is to encourage the good practices and wean ourselves away from the bad.

But the book is not without its problems. It attacks both conventional economic theory and what Nelson describes as "pro-business zealots", driven by the belief that the only thing that can possibly matter to a company is its immediate profits. The difficulty is that these two attacks are often meshed together, so that either the wrong target is hit or both are missed entirely.

Traditional economic theory certainly does regard the economy as a machine. It may be complicated, but on this view of the world, in principle it can be understood completely from a knowledge of how its component parts work.

Further, it can be controlled. Nelson is right to argue that this is a misleading view of the world. Reality is much more complex: a biological rather than a mechanical system. The component parts interact with each other and as a result often produce unexpected outcomes.

Despite the problems of conventional economics, it is not a completely empty box, for it contains a deep insight. Decision-makers - individuals, firms, governments - react to incentives. This is the only general law we have in the social sciences, but it is a very powerful one.

Again, their reactions are by no means completely predictable, but they undoubtedly take different decisions if incentives alter. This point does not really come across in the book.

Further, economics itself is changing rapidly, which Nelson does not acknowledge at all. Most of the Nobel prizes this century, for example, have gone to people working outside the conventional paradigm, with much more realistic views of the world. It is true, as this process is unfolding at the frontiers of the subject, that the teaching of economics to all except the very brightest students seems to have gone backwards.

Today's students get a dumbed-down version of the orthodox mechanical theory at a time when economists are overturning it.

Most serious businesspeople realise that companies in general have an image problem, especially among the more liberally inclined elements in society. On balance, Nelson's book can be recommended to a business audience; it gives an insight into how and why a critic has arrived at her opinions.

And we need people like Nelson inside rather than outside the tent.

- Economics for Humans, Julie A Nelson, University of Chicago Press, £10.50, ISBN: 0-226-57202-1.

- Paul Ormerod is a director of Volterra Consulting and author of Why Most Things Fail: evolution, extinction and economics (Faber and Faber, 2005).

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