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Paul Ormerod: The Death of Economics
(Faber & Faber: 1994)


“Economics has assumed a dominant position in the political life of the West, and orthodox economic theory has exercised great influence on the conduct of public policy.... [However,] even to the intelligent member of the public, economics is often intimidating. Its practitioners pronounce with great confidence in the media, and have erected around the discipline a barrier of jargon and mathematics, which makes the subject difficult to penetrate for the non-initiated. Yet orthodox economics is, in many ways, an empty box, [for] its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been obtained which will stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed...[whilst] the most devastating criticisms...come from within the profession.... Good economists know, from work carried out within their discipline, that the foundations of their subject are virtually non-existent...[and] conventional economics offers prescriptions for the problems of inflation and unemployment which are at best misleading, and at worst dangerously wrong.”
(Ormerod, pp.ix-x)

From a subject by repute “dismal”, economics has been transformed in recent years into yet another aspirant to the bestseller lists. Meanwhile, buried amidst all the puffery, a handful of well-informed books have sought to unmask the modelling behind the professional consensus - so that the rest of us can properly evaluate its claims to scientific status. And of these, Paul Ormerod’s stands out - partly due to the enviable suppleness and clarity of his writing, but also due to the open way it allows for the variety of approaches needed to redress such problems, and its own focus on the key relationship of macro-economics. All up, even the mathematically-challenged could not wish for a better first guide to this most significant terrain...and to the professional deformations which so mark its mainstream:


“Increasingly, [economics] is taught not as a way of learning to think about how the world might operate, but as a set of discovered truths as to how the world does operate...[and] substantial and impressive textbooks exist, both in micro- and macro-economics, consisting in the main of the mathematical technique of differential calculus applied to linear systems. It cannot be stated too often that very little of the content of such textbooks is known to be true, in the sense that many of the statements in textbooks on, say, engineering, are known to be true: formulae for building bridges exist, and when these formulae are applied in practice, bridges in general remain upright. The same does not apply in economics, and yet the confidence of the true believers in economics has grow’d and grow’d like Topsy. As they themselves would doubtless prefer to say, to give the description an authentic mathematical air, it has grown exponentially. Sociologists and psychologists have documented many case studies concerning the reactions of groups when views which they hold about the world are shown to be false. In such situations, far from recognising the problem, a common reaction of individuals is to intensify the fervour of their belief...[and] their efforts to convert others.... It was not always so. The great classical economists, writing in the late eighteenth and early nineteenth centuries, struggled to understand the dramatic impact on the economy and on society of the Industrial Revolution. But, as we shall see, they did so with an analysis very firmly rooted in reality, addressing questions of great practical import.... In sharp contrast, modern economics views the economy as something which can be examined in isolation. [And] there are few greater insults in an orthodox economist’s vocabulary than to describe someone as a sociologist. The institutional setting, the historical experience, and the overall framework of behaviour are ruthlessly excluded from contemporary economic theory.”
(Ormerod, pp.4-14)

“The appropriation of the word ‘rational’ to describe the basic postulates of orthodox economic theory was a propaganda coup of the highest order. The world’s most expensive public relations firms could not have done better. It carries the implications that any criticisms of it, or any alternatives put forward, are by definition irrational, and hence not worthy of serious contemplation.”
(Ormerod, pp.111-12)

“The definition of growth is intended to capture real movements in the amounts of goods and services which are produced, or real movements in material living standards...[but,] unlike many measurements in the physical sciences, there is no unique way of measuring either the size of an economy at a particular point in time, or its growth in time. [Moreover,] economists often seek to mystify rather than enlighten the public, and nowhere is this accomplished better than with economic data...[for] an economy cannot be put in a pair of scales, or have a tape measure wound about it to measure its size. The size has to be estimated. And, in the process of estimation, decisions have to be taken not only about what evidence to use, but also about what should and should not be included in the definition of size in the first place.... The choice of factors used to define the size of an economy reflects the general preoccupation of economics with monetary transactions... [while] the particular factors which are emphasised are those which were thought to be especially important in the economies of the 1930s and 1940s, when the modern conventions of national accounts were established. But there is no reason, in principle, why other factors, such as environmental ones, should not now be thought to be especially important, and hence included in the national accounts, despite the fact that many of them, such as pollution, exist but are not bought and sold. Similarly, work done within the household is not given any value...[which] is patently absurd.”
(Ormerod, pp.27-8)

Paul Ormerod is, in many ways, ideally placed to provide us with this critique. Combining a business career w/academic research - the parallel with the similarly nonconformist W.G. Runciman springs to mind - has allowed him to shrug off the discipline’s conformist pressures, whilst his early (and extensive) hands-on experience with economic modelling has forced him to confront the relentless empirical falsification so painstakingly avoided by the mainstream. In consequence, his critique is an exhaustive one, starting w/the economic statistics we are deluged with every day, then directly attacking the weird assumptions which undergird micro-economic theory - the source of mainstream economists’ unrealistic certainty, yet little discussed outside the discipline - finally broadening into the varieties of macro-economics which drive government policy. All of this, moreover, is complemented by a genuinely insightful historical/sociological analysis of the profession...resulting in a work which, despite its brevity, is astonishingly broad (yet detailed) - not to mention essential reading for an informed citizenry...


“The ability of orthodox economics to understand the workings of the economy at the overall level - the macro-level, in the technical phrase - is manifestly weak (some would say it is entirely non-existent). This is not to say that the subject is a completely empty box. At the detailed level - the micro-level - economics might be able to offer certain insights. In terms of understanding the impact of various taxes and subsidies, designed to deter or encourage the consumption of particular goods or services, a combination of theory and applied work can sometimes be useful. It is when economics strays from the particular into the general that its weaknesses are exposed more ruthlessly.... Economists see the world as a machine. A very complicated one, perhaps, but nevertheless a machine, whose workings can be understood by putting together carefully and meticulously its component parts. The behaviour of the system as a whole can be deduced from a simple aggregation of those components.... Environmentalists, by contrast, see the world as a living organism. Prodding the system in a certain way, in a certain place, may sometimes cause the beast to hop in one direction, sometimes in another, and sometimes it will not move at all...[for] behaviour is altogether too complex to be captured by a mechanistic approach. But it is not just environmentalists who have adopted this complex model as a practical method of analysis. Increasingly, hard-headed mathematicians working in biology, climatology, chemistry, and even physics are coming to see it as a more powerful way of understanding the world.”
(Ormerod, pp.33-7)

However, we’re getting ahead of ourselves, here...as Ormerod reserves any detailed development of such an alternative until the second half of his book. Still, it is important to note that we do have alternatives - albeit they’ve been shorn of the ludicrous certainties so ostentatiously paraded by the current mainstream. Meanwhile, it remains a wonderfully cautionary tale to explore exactly how the discipline managed to get itself into such a mess:


“During the second half of the nineteenth century, economics was greatly influenced by the achievements of the physical sciences. Envious of their success and prestige, and aware of the power of mathematics and its influence on their progress, economists turned their analysis in this direction.... [And, their] analogy of the world as a smoothly running machine has an important implication, in addition to...its ability to be explained, [for] it refers to a world that is in harmony and equilibrium. Once started, the machine glides along, each component part contributing to its serene progress. There is no place, in this kind of universe, for shocks and catastrophes, or even, at a less dramatic level, for any tendency of the machine to break down.... [Thus,] from an economics that took into account specific institutional, social, political, and historical factors, which for scholars such as [Adam] Smith played such an important role in determining the development of any particular economy, a theory was articulated which was believed to hold in all economies, at all times. Growth was simply taken for granted, and the problems of economic fluctuations and unemployment, which featured strongly in the classical writings, simply disappeared.... Smith had argued that free markets, in which everyone, whether a buyer or seller, of labour or of produce, followed his or her self-interest, would lead to outcomes which were to the benefit of all. It was this part of his contribution to economics that was translated into mathematics, in the [neoclassical] ‘marginal revolution’. The mathematics refined and sharpened the assumptions which were required for this result to hold, and, given these assumptions, appeared to prove Smith’s conclusion in a more rigorous way than was possible with purely verbal argument. But, in doing so, much of the richness and complexity of the original analysis was lost. [In particular,] Smith’s insistence on the importance of the institutional framework and the overall set of moral values in which free markets operate was neglected, for such concepts do not convert readily into the language of mathematics.”
(Ormerod, pp.39-46)

“The temptation to use mathematics is irresistible for economists. It appears to convey the appropriate air of scientific authority and precision to economists’ musings. More subtly, its use hides the implications of many of the assumptions which are made routinely in professional work. To take just one example, the phrase ‘assume a continuum of traders’ will be encountered in many theoretical papers on the idealised market economy. Not only is the phrase used widely, but it is important in the theoretical models.... The precise reasons for this need not concern us just yet, except to say that it is a convenient mathematical assumption...enabling [economists] to develop results by using certain powerful mathematical theorems, which would otherwise not be valid. Once this assumption is made, further assumptions are then spelt out in more detail, and, several pages of mathematics later, the conclusion is proved. But, what does this phrase ‘continuum’ actually mean? It sounds quite innocuous, yet spelt out in words it might lead people to query the realism of any academic paper based upon this assumption, or even to begin to doubt whether the article was worth writing in the first place. For the phrase means that the number of people, whether as individuals or as firms, carrying out trade in this theoretical economy is not just large, but is quite literally infinite.... [And] it is essential to the solutions of the systems of equations set up in the theoretical model.”
(Ormerod, pp.43-4)

“The initial success and attraction of marginal economics were essentially due to three factors. First, by appearing to demonstrate the superiority of the pure, free-market economy, it served valuable ideological functions.... Marginal economics appeared to ‘prove’ that business should be left as much as possible to its own devices, without help or hindrance from the state, and that the level of taxation should be as close to zero as possible, sentiments which exactly suited the Victorian philosophy of self-help and self-reliance. The second reason was, as we have seen, that the concepts of harmony and equilibrium on which marginal economics is based were very much in keeping with the scientific spirit of the times. The third reason...was that it represented a formidable intellectual achievement. [And,] as an example of abstract human thought, even at this distance in time, it is truly impressive. It appeared, by the use of mathematics and remorseless logic, to be rescuing economics from what was seen as the often complicated and occasionally contradictory verbiage of the classical economists. [Moreover,] the theoretical constructs introduced to economics over a century ago continue to pervade discussions of policy.... The deregulation of financial markets in the 1980s in the Anglo-Saxon economies; the deregulation of and increased flexibility in labour markets...the privatisation of state-owned industries; reductions in welfare programs - all these themes flow from the logic of the theory of competitive equilibrium...which is fundamental to the world view of orthodox economists, regardless of any differences which they might have about how macro-economic policy should be conducted.... [However,] the most powerful reason for the continuing appeal of the theory is that, despite their problems, market economies are clearly the most successful form of economic organization yet invented...[and] the model of competitive general equilibrium is regarded as the theoretical, idealised form of the workings of such economies. It is this link...which sustains the intellectual dominance of the model.”
(Ormerod, pp.46-8)

“By definition, any model necessarily abstracts from, and simplifies, reality. But the model of competitive equilibrium is a travesty of reality. The world does not consist, for example, of an enormous number of small firms, none of which has any degree of control over the market in which it is operating.... The theory introduced by the marginal revolution was based upon a series of postulates about human behaviour and the workings of the economy. It was very much an experiment in pure thought, with little empirical rationalisation of the assumptions. Designed as a logical description of how rational individuals and companies ought to behave, the emphasis lies equally on the words ‘rational’ and ‘individual’...[and] it was assumed...that every individual would carry out rational calculations, and consume an amount of any particular product such that the utility derived from the consumption of the final unit of it - the marginal unit - was equal to the cost of obtaining that unit. At first sight, this does seem to be a plausible description...[but] consumption may not always be governed by this principle...[as,] for some people, at least, consumption is often subject not to diminishing but to increasing returns to scale. The more one has, the more one wants, and the greater the satisfaction obtained from getting it.... [Moreover,] ironically at precisely the time when theories of...diminishing marginal returns were capturing the academic discipline of economics, the United States was moving towards world economic dominance by exploiting the unprecedented and massive increasing returns to scale of production and distribution which its rapidly expanding economy permitted. In other word, by taking advantage of the benefits of being big.... [Conversely,] in a world of diminishing returns, there are strong restrictions on the ability to reinforce competitive advantage...[as,] by definition, discounts are not available for bulk purchases of supplies, [and] efficient national and international channels of both distribution and marketing are assumed not to exist.”
(Ormerod, pp.48-6)

Now, the reader previously unfamiliar w/micro-economics might, at this point, assume Ormerod’s critique to be both established & complete, given the level of unrealism already on display... Sadly, however, he has mainly to this point been setting the stage...to accustom us to strange claims before reaching for the veritable heights of economic fantasy. And, by tempering his analysis w/historical insight, he also shows us how the discipline as a whole behaved rather like the proverbial frog, who was gradually boiled to death before he realized just what the problem was. Unfortunately, however, this particular frog has managed to drag the rest of us down w/him, and it is important for us to understand exactly how this was achieved...


“The New Right in the West have had so many easy targets in the public sector that their eulogy of the free market has attracted widespread political support. But their policy package contains two distinct offers. First, the need to eliminate waste and inefficiency in the public sector. Examples of this are both widespread and transparent.... The second part of the New Right’s policy package has been the belief that free-market solutions are always the best, [and] it is this latter view which is profoundly mistaken. Markets and profits are crucial, but the pure free-market model itself is deeply flawed.... Indeed, there appear to be so many violations of the conditions under which competitive equilibrium exists that it is hard to see why the concept survives, except for the vested interest of the economics profession, and the link between the prevailing ideology and the conclusions which the theory of general equilibrium provides.... The theoretical model of competitive equilibrium is a formidable intellectual construct. A similar situation arose, for example, in the Middle Ages, when the belief that the sun revolved around the Earth led to astronomical models of great complexity, as scholars struggled to account for ever more discrepancies between the observed paths of the heavenly bodies, and those required by  theory. Eventually, the entire model was laid to rest.”
(Ormerod, pp.65-6)

“The intellectual attraction and fascination of the model arise from two striking characteristics of the system as a whole, which follow logically from the assumptions on which it is based, but which are not at all obvious from a purely verbal description.... Indeed, they are not obvious even from a mathematical description...and it is only when the behaviour of the system as a whole is described, by adding up the outcomes of all the individual decisions made, that the results can be demonstrated. The logical proof of these...requires pages of maths. But they can be described in words quite briefly. First, a free-market, competitive equilibrium is efficient, in the important sense that demand equals supply in every market, so that all the resources of an economy are utilized, and none lie idle. Second, in such an equilibrium, no individual or company can be made better off by altering the allocation of resources in any way whatsoever, without making at least one person or company worse off.... It was the demonstration of these two results which was the really exciting intellectual feature of the marginal revolution in economics, and that even today accounts for the fascination of the economics profession with the construct of competitive equilibrium.... [In this] ideal world, since all markets clear by definition, and there is no unemployment, the government does not need to intervene in the economy to balance supply and demand. Further, by Pareto’s finding, any attempts to alter the allocation of resources which emerges can only be done by making at least one person or company worse off. In short, either economic policy has no effects, or it hurts some group of citizens. Therefore, there is no role for it. Governments in practice might make a mess of things quite frequently, but in the equilibrium model they should not even try to intervene.... [And,] as far as is possible, in this model the functions of the state should disappear. To best serve the interests of the people, the state should wither away.”
(Ormerod, pp.71-2)

“This may seem a bizarre statement to make, but...the model of competitive equilibrium which has been discussed so far is set in a timeless environment. People and companies all operate in a world in which there is no future, and hence no uncertainty.... It is worth noting at this stage that the consequences of introducing uncertainty to the model are devastating...[as] in an uncertain world, a competitive equilibrium is in general not a Pareto optimum. In short...a very powerful and attractive property of the standard model of competitive equilibrium is simply not true. Yet it is this standard, static model of equilibrium and its results which is taught as the core model of economics, to students all around the world...[who] accept its conclusions as the received wisdom.... [Conversely,] perhaps the most devastating criticisms...have come from mathematicians and economists working within the profession itself...[as] economists feel able to dismiss sociological criticisms of their model of rational behaviour, because sociologists have little or no mathematics. [Furthermore, they] are able to dismiss the conspicuous failures of certain policies, designed to move the economy closer to the competitive ideal, by pointing to flaws in the design of any particular policy. Economists are even able to dismiss the vast weight of empirical evidence against their model, drawn from economic history, by the simple device of closing their eyes and chanting the ‘as if’ mantra...it is ‘as if’ competition, in the sense of the competitive model, with its infinite number of firms, prevails.... [But] technical criticisms strike at the very heart of the theoretical model. For they take the model on its own terms, and ruthlessly expose its inadequacy.”
(Ormerod, pp.76-8)

At this point, extracting quotations becomes rather more difficult, due to the increasingly technical nature of the discussion - thankfully leavened though it is w/attention to the needs of a lay readership. Yet it is definitely worth pursuing, as it provides clear evidence as to the depth of the profession’s commitment to its model...a commitment far beyond reason:


“Kenneth Arrow of Stanford University, subsequent winner of the Nobel Prize for economics, and arguably the most fertile and productive economic theorist since the war, began work on the theory of competitive equilibrium in the early 1950s, [and] it is really through his work that economists became aware of the stringency of the conditions that are required to guarantee the existence of competitive equilibrium.... By accepting, for the purposes of analysis, all the assumptions of the competitive model, and refining them and making them more precise, it demonstrates the improbability of their existence in practice. Economists are aware of this work, and some of the best minds in the profession have in recent years risen to the challenge, by constructing models which might be described as approximately competitive...often motivated by the desire to save the equilibrium model from the challenge of empirical criticism.... [But] the conclusions of this theoretical work are unsurprising, [as] almost forty years ago...Lipsey and Lancaster proved that...the economy as a whole can theoretically be worse off if just one violation [to perfect equilibrium] exists, than it is when two such violations exist. This is a result of great practical significance. For in reality, not only in America but in every Western country, there are many breaches of the conditions required the model...[and, therefore,] every policy must be examined carefully, and judged empirically. It cannot be argued that increasing the degree of competition in an economy, when other obstacles to competition remain, will automatically improve the performance of that economy.”
(Ormerod, pp.80-4)

And, it is at this point where the supposedly sensible notion of free-market “conservatism” finally disappears, in a brutal welter of contradiction. Because “rule of law” - however minimal - is precisely such an obstacle to competition...and designedly so. For, without totally unrestricted trade in all goods and services for which there is demand - try contract killing and slavery, for example - not to mention the theoretical necessity for well-established futures markets for all such tradables, the model (by definition) simply cannot deliver on its utopian promises...

And, if you actually think that any society featuring such markets could, in actuality, be utopian, then I have serious doubts as to your sanity.

Given the frankly appalling bloodbath that Left utopianism helped make of the 20th century, you might’ve thought we would have learned at least some visceral distrust of such ideas by now. But, sad to say, I suspect humans will always go for the pie in the sky...especially when it’s tarted up to appeal to their prejudices. Which, yet again, is why I insist on putting history before theory - as our best (albeit flawed) defense against such stupidities. And the “one true dream” of the Right is just as fallible as that of the Left...albeit its excesses (and hence, its downfall) come in a very different package. Still, at the very deepest level, their fundamental failing is the same: a philosophical monism which fails human diversity/history - and, hence, cannot envisage fundamental change or a genuine difference which matters...


“Uncertainty is an integral part of life.... Yet this obvious and fundamental property of human existence was not analyzed in any rigorous way in the competitive equilibrium model until the early 1950s, when Kenneth Arrow...demonstrated that in order for a competitive equilibrium to exist, each person must prepare a complete list of all future states of the environment which might obtain. And, everyone must hold absolutely identical and correct beliefs regarding the prices which would exist in each potential state of the world, at every point in the future. This is a world which, transparently, bears no resemblance to reality.... Roy Radner, a distinguished American mathematical economist, was able to relax Arrow’s assumptions...even if different people had different beliefs...but there was a cost. For Radner also showed that, for his proof to be valid, everyone in the economy needs to have an infinite amount of computational capacity - not just access to a Cray supercomputer, but literally an infinite amount of capacity.... Radner’s conclusion is stark. The model of competitive general equilibrium, in his words, ‘is strained to the limit by choice of information. It breaks down completely in the face of limits on the ability of agents to compute optimal strategies.’ In other words, once a realistic concept of uncertainty is introduced, the model ceases to be of value.”
(Ormerod, pp.88-90)

“But, imagine now that a unique competitive equilibrium does exist.... We are already in a remarkable world, but what is in some ways even more remarkable is that...no production is carried out, nor goods and services purchased, at prices which do not ensure that all markets clear.... [Because,] once such trading has taken place, there can be no guarantee that, even if an equilibrium exists, the economy will ever converge to it. In fact, it is likely to move around in cycles around the equilibrium, from one set of prices to another, at none of which are demand and supply equal in every market.”
(Ormerod, pp.87-8)

“Two problems in particular are raised for economic theory by the concept of multiple equilibria. First, it appears to provide a rationale for government intervention in the economy after all. Even if the assumptions which are required for competitive equilibrium to exist all hold, a free-market economy is unable to co-ordinate the decision as to which of the many potential equilibrium situations will actually be called into existence. Second, and even more important, the existence of multiple equilibria reduces considerably the policy implications which can be drawn from the competitive model. If there is a unique solution to the equations which describe a competitive economy, large changes can be analyzed within this framework, since by definition the economy will always end up at the unique equilibrium position. But, with many solutions...large changes around any particular solution might lead to important and unforeseen changes in the overall nature of the new solution at which the system ends up, and which the free-market system itself is quite unable to determine.”
(Ormerod, pp.86-7)

Which is where, and not before time, we get off...

For the second half of The Death of Economics is devoted to a reconstruction of what has been the central question of macro-economics - the relationship between inflation and unemployment...the key burdens of capital & labour, respectively. By taking the data - rather than the model - as his starting point, and combining a pattern-matching approach w/a close attention to realistic modelling assumptions, Ormerod clearly shows us that a non-linear model has a much greater realism than conventional approaches. And, it also offers us a considerably different understanding of our problems, not to mention different policy implications...

Firstly, however, we have yet more received “wisdom” to discredit...in particular, the notion that there is a fixed relationship between inflation & unemployment, usually labelled the “Phillips Curve”, and the “Rational Expectations” version of same, which rules out any manipulation of this (purported) relationship to drive down unemployment:


“The phrase ‘Non-Accelerating Inflation Rate of Unemployment - or NAIRU for short - is often used in economics to describe [a theoretically] unique level of unemployment. But, showing the usual, terrifying, propaganda skill of the economics profession, the impersonal acronym of NAIRU is often translated into the phrase ‘the natural rate of unemployment’. What could be more natural? Anyone arguing against the concept is, by clear implication, defying the forces of nature itself.... [And,] whatever the actual rate of unemployment happens to have been in the recent past, the policy conclusion of free-market economists is always the same: permanent reductions in unemployment can only be achieved by ‘supply-side’ measures, of flexibility and deregulation.... [However,] an examination of the data on inflation and unemployment...tells us quite clearly, without even carrying out any statistical analysis, that a single Phillips curve has not existed in America over the post-war period, and hence that there is not a clear relationship between inflation and unemployment.... It is as if, at any point in time, an economy can either move along an existing curve, linking the levels of inflation and unemployment, or the curve itself can move...[and the latter shifts] are far too abrupt to be explained by slow-moving supply-side factors.... [Therefore,] the prime aim of anti-inflation policy should be to shift the economy from one inflation/unemployment curve to another - to shift the curve, rather than try to move along it.... One possibility is to try to shock the system by draconian measures...[but,] an alternative is to try to create a set of values in which a system of social consensus and cohesion prevails. This is a task which ranges far beyond the narrow confines of conventional economic policy, [which suggests that] economic policy is far too important to be left to economists.”
(Ormerod, pp. 123-37)

“Three properties have been identified as essential to any model seeking to explain unemployment. Briefly, in the absence of shocks to the system, the model should be capable of settling into long periods of regular fluctuations. Second, the size of these regular fluctuations, and the average level around which they fluctuate should be sensitive to the initial values values of the system. And third, when the system receives a major shock, there should be no tendency for it to settle back into the regular behaviour which it exhibited previously. When it does eventually do so, after a period of irregular behaviour, a different pattern of regularity will be exhibited. These key characteristics are all observed in the long runs of data on British and American unemployment, and even in the shorter series of data on various European countries.... Two further qualities are required of any model of the macro-economy, be it linear, or non-linear. First...there is no fixed relationship between the rate of economic growth, and employment and/or unemployment. In principle, any rate of growth is compatible with any rate of unemployment, and there is no presumption that higher rates of economic growth necessarily mean lower unemployment. Second - and this point is so obvious that it may be overlooked - developed economies grow over time...so any macro-model must be able to generate growth in output over time.”
(Ormerod, p.180)

By attempting rough matches between the real-world data sets & outcomes from a variety of possible models - rather than trying to “fix” one patently unrealistic one - along with careful attention to realistic assumptions, a genuine alternative to the varieties of macro-economic orthodoxy is brought forward for our scrutiny. Independently developed by chemist Lotka and mathematical ecologist Volterra - hence often referred to as LV systems - this family of equations is traditionally used to analyse/model interdependent variables (most famously predator/prey numbers)  and Ormerod, fascinatingly, finds them relatively easy to adapt to modelling the inter-relationship between profits & unemployment. What’s more, he also shows how the result can help us understand the post-war economic “Long Boom” - demonstrating that, although non-predictive, such modelling can make a very real contribution to knowledge...


“There are good reasons for thinking that unemployment and profit should be linked in this way. Suppose the economy is in an upswing. Growth is rapid...[and] in such trading conditions, it is relatively easy to put up prices, and increase profit margins. So the share of profits in national income rises. But a growing economy stimulates demand for employment...[so] wage demands intensify. The share of profits is squeezed, and in reaction to this companies begin to cut costs.... As a result, the economy moves into a cyclic downturn...wage demands are moderated [and,] eventually, this enables the share of profits first of all to stabilize, and then to rise.... Conventional economics pays little attention to this interplay between profits and unemployment as the key determinant of business cycles...[and] Keynes himself...placed more emphasis on investment [overshooting] as the prime source of fluctuations.... A more complete account...would combine Keynes’s theory of mistaken expectations with...the LV approach, [which] should be thought of as the basic, underlying determinant of cycles, with Keynes’s expectations being responsible for the magnitude of the cycle between the peak of the boom, and the trough of the recession.”
(Ormerod, pp.187-90)

“The model of the LV system is in many ways extremely simple...yet it is able to account for the key features of the behaviour of developed economies at the macro-level.... The mathematical form is chosen deliberately, in order for the theoretical model to be able to generate the key features of behaviour observed in the empirical data. And, importantly, the mathematical framework has a sensible economic interpretation, [as] each of the equations in the model, and the ways in which they interact, is justified at each stage by reference to economic evidence. Instead of trying to derive a theory of macro-economic behaviour from beliefs about the behaviour of individuals and companies, we have treated the macro-economy as a system with its own behavioural properties, and have sought to construct a model to account for observed movements in the key variables.... The approach is very much in the spirit of the early classical economists, addressing issues of importance in contemporary political economy, but with constant reference to the evidence of the empirical data. In terms of its economic content, our model is in line with the thinking of the classicals, restoring profits and profitability to a central place in the understanding of developed macro-economies, both in terms of growth itself, and in terms of cycles around the growth path. [And,] in catching up with the rest of the scientific world by using a non-linear methodology, the analysis discards the mechanical concept of equilibrium, which pervades economics and which is responsible for so many of its shortcomings. The basic LV model...is a simplification of reality. And it has both mathematical and economic limitations. But it is capable of giving insights into the key determinants of growth and fluctuations in developed economies, and shows quite clearly that the direction of current efforts to reduce unemployment is quite misplaced.”
(Ormerod, pp.197-8)

“While demand management did have a role to play during [the post-war] period of rapid growth and high employment, our LV model shows that other factors were even more important. Four points can be singled out. First, there was a high propensity for firms to invest out of profits. Second, the level of profits was felt by companies to justify the high level of investment. Third, behaviour in the labour market was underpinned by the prevailing social values. And fourth, there was the effect of pure good fortune.... When the Western economies, particularly those in Europe, emerged from the aftermath of war and a period of strictly rationed consumption, there was an enormous, pent-up demand for consumer products, [and] companies could carry out spending plans on investment, secure in the knowledge that ready markets existed for their products. Short-term demand management, tinkering with the temporary fluctuations in demand over the economic cycle was, in quantitative terms, much less important than this massive structural backlog.... [In addition,] the stable international framework which existed was also important in underpinning the essential optimism...[as] a virtual circle was created, in which consumers, too, became confident about the future...which, in turn, justified further investment by industry.... [And,] if long-term expectations are optimistic, the [economic] cycle is likely to be weak, in contrast to more uncertain conditions...in which people will react sharply to any change in their perceptions of longer-term prospects.... Behaviour in the labour markets was [also] important...in two ways. First, the workforce was content with the prosperity which was brought through economic growth, and did not engage in potentially debilitating struggles over the distribution of income.... The second point concerning labour market behaviour was that there genuinely was work for all, [and] groups in the workforce did not attempt to appropriate appropriate more and more of the proceeds of economic growth for themselves...thereby marginalizing others into unemployment.”
(Ormerod, pp.199-202)

Having sampled extremely widely - close to one hundred books, and counting -  the very varied efforts of economists aimed at the educated public, I have still yet to encounter any that genuinely challenge Paul Ormerod’s The Death of Economics as the best place to begin an economic re-education. For whilst bottom-up approaches such as transactions-cost and behavioral economics have so far been the most influential challenges to narrow orthodoxy - in accord as they are w/the traditional direction of neo-classical economics - due to complexity issues, these remain a long way indeed from the central bank governance which steers our macro-economies...

In contrast, Paul Ormerod - in both this book and its sequels Butterfly Economics (1999) & Why Most Things Fail (2005) - has preferred to use a carefully selected variety of non-linear approaches in an updated version of the technique of the great classical economists, which has delivered highly useful (although, unfortunately, neglected) answers to our most pressing economic policy issues, whilst helping reconstruct macro-economics from the top down... This is not, of course, to suggest that the work is complete. For a start, until economists begin to take Jane Jacobs seriously - see Cities and the Wealth of Nations (1984) - they will continue to mistake the nation-state for the basic unit of macro-economics...with the consequences she so well describes. Moreover, as Ormerod is well aware, his type of work is complementary to the bottom-up approaches so well-synthesized by John Kay in The Truth About Markets (2004)...and these three books, together, offer the reader an unrivalled introduction to the real bases of political economy.

Returning to Ormerod, alone, the concise combination of the best-mounted critique of neo-classical economics, with our best first draft of a properly realistic macro-economic model is, quite simply, unbeatable as a starting point. Moreover, well over a decade since its first publication, The Death of Economics retains all of its relevance and importance - no small thing, from within a discipline whose supposed foundations have been crumbling the entire time. Meanwhile, for your consideration, here’s one last point to think about, from a  genuinely civic, if sadly marginalized, economic realist...


“A number of economies have preserved low levels of unemployment, not just in the 1950s and 1960s.... And each, in its particular way, has exhibited a high degree of shared social values, of what may be termed social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time.... [They have also] maintained a sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified. There is, of course, a cost associated with this...but it is a cost which societies with a high degree of social cohesion have been willing to pay.... [Moreover,] the idea of a strong, broadly shared set of community values is compatible with a range of ideological positions. It can exist equally well under governments of the centre-right and of the centre-left, [and] it is by no means an automatic recipe for high taxation and state interference.... Innovation, entrepreneurship, and profits are still essential. Economic competition exists on the global scale, and economies must be equipped for it. But economic success can be achieved, and achieved more successfully, within a broader and more beneficial framework than that driven by the pure, individual, rationality of the economics textbooks.... [And] Adam Smith was a philosopher, as well as an economist, famous in his time as much for his Theory of Moral Sentiments as for The Wealth of Nations. And, as he understood so well, society is more than the sum of its individual parts.”
(Ormerod, pp.203-12)



John Henry Calvinist