Reflections on Economics

European Straits #122

Nicolas Colin

Dear all,

This should have been a week dominated by discussions with French officials in Paris 🇫🇷. Unfortunately, as happens often with that crowd, most of them cancelled at the last minute. Of course, there’s the runup to the European elections next Sunday. And then there’s the agitation following the Gilets jaunes crisis, with a radical reshuffling at every level of En Marche, France’s ruling party. A new agenda means new opportunities and everyone’s running around to try and seize them.

I’m sure some of you remember that episode of The West Wing in which Leo, who’s just stepped down as chief of staff and is now senior counselor to the president, tries to conduct a strategy session to no avail: everyone comes in late, they all look at their devices, they’re called away by various emergencies. It takes the irritation and authority of Jed Bartlett himself for everyone to finally settle down, put away their phones, and start discussing the big picture of what they’re trying to achieve as an administration.

I’m not used to such indifference to strategy anymore. The Family is a firm that’s been equipped with a clear-cut strategy from Day One, and most of our progress so far can be explained by our learning to reach clear decisions with that strategy in mind. Similarly, most of the entrepreneurs we work with are successful precisely because they have a capacity to focus on one goal at a time, with ruthless discipline—which is what strategy is all about. By contrast, politicians keep on cancelling meetings, hop from emergency to emergency, and rarely make room in their schedule for strategic work.

I’m a bit surprised, because there are many other countries in the world in which officials dedicate a significant portion of their time to learning about new ideas, understanding the world, and devising a strategy. This is definitely the case in Israel, , , and even the US. So what is wrong with France and its officials 🤔? I’d be interested to read your views!

The crisis in economics—and the bright future of history

Many readers have been sending suggestions as to what books should be added to my recent . I bought one, a biography of Deng Xiaoping, the man who transformed China and turned it into an economic powerhouse, by historian Ezra Vogel. In the book and related videos, Vogel insists on the fact that Deng was interested by practical things rather than grand theories. When he was travelling abroad, the people he was most keen to meet were scientists, business leaders, and politicians, in that order. On the other hand, he had no taste for economists and apparently pretty much never met with any economist throughout his (very long) life.

Now what does this Deng Xiaoping anecdote say about economics as a discipline?

Economics has changed a lot over the course of time. For a long while, starting with Adam Smith’s The Wealth of Nations and up until the middle of the 20th century, it was actually close in spirit and methods to ‘softer’ disciplines such as history, philosophy, and political science. It’s only recently that economics has become this mathematics-driven quasi-science that derives its conclusions from models.

How we arrived here is a very long story. One factor was the genuine interest of some economists in math, systems, and models. Not only did that enable some breakthroughs in understanding how the world functions, it also provided the entire discipline with the tools to become more respected and authoritative. If you can explain it with a mathematical formula, then it must certainly be true!

Another factor was the economic crisis that the Western world entered from the 1960s onward. Because old Keynesian economics didn’t seem to be able to explain the world anymore, the crisis provided an opportunity for those promoting the Rational Expectations Theory to take over as the influential leaders of the discipline. And this approach to economics lent itself particularly well to a model-driven approach.

This, by the way, is when economics became the prominent institution that it is today. Presidents and prime ministers started to surround themselves with economists as preferred advisors. Economics began to be taught at every level of education. A (sort of) Nobel Prize was instituted to give its most prominent figures the recognition they deserved. And then, encouraged by pundits, we all acquired the same reflex: whenever we didn’t understand something, we turned to an economist and asked him (almost never her) to explain it to us. Economics as a discipline became a pillar of our intellectual world.

But like everything that matured in the age of the automobile and mass production, I think that economics as we know it is bound to slowly drift into irrelevance. The current paradigm shift, from the Fordist Age to the Entrepreneurial Age, will redistribute influence and power between various disciplines. Some will go up, others will go down. And I’m afraid economics has not figured out how to retain its position as the most influential discipline in policy. Beyond the Deng Xiaoping anecdote, here are a few arguments:

The was widely analyzed as a crisis in economics. Few economists were able to predict the crisis, let alone avert it. And so the crisis is precisely what prompted a small group of progressive thinkers, among them George Soros and my friend Bill Janeway, to found the Institute for New Economic Thinking (INET). The goal is to go forward to the past—to a period when economics was about the world as it is, not about models that represent the world in a simplified manner.

This approach echoes the experience of practitioners. You can have a theoretical discussion about a simplified version of the world: it’s a rewarding effort that makes it possible to come out with a nice artifact and, eventually, simple explanations for what might be going wrong: taxes, deficits, skills, competition, you name it. But practitioners have no use for these explanations, because most of the hypotheses established to make the model work are precisely what makes policy so difficult to design.

The tax system, a topic I know well, is a case in point. Many economists come up with ideas on the tax system. But they base their conclusions on models that evacuate everything that’s too difficult to modelize—including what makes it so hard to design a tax system that works, like power, politics, and administrative problems. And so, believe me, economics is rarely a useful input when trying to design a better tax system 😄.

Since the world is in fact too complex to fit in mathematical models, economics is now drifting in three different directions. On one side, economists have been trying to expand their theoretical apparatus so as to better reflect the real world: this has given us new fields such as behavioral economics, network economy, complexity economics, and agent-based models. But if you go through that literature, it mostly inspires modesty. You end up reaching such levels of complexity that the usual answer is “We don’t know” or “It depends”. Not quite as authoritative as Hayek and Friedman in the 1960s!

Another direction is the commoditization of economics. Indeed, economics has become so mainstream that basic economic reasoning can now be found all around us. You only need a few hours spent watching educational videos on YouTube to come to grips with the core principles of economics…and to realize its obvious limitations! And so the commoditization of economics has not only given rise to economic bloggers and other non-academic economists, it has also made it possible for many people to realize that they know quite a lot about their own subject and that you don’t necessarily need economists to improve the state of things. As economist Mary O’Sullivan , “If you want to learn more about capital, talk to capitalists, not economists”. And this was exactly Deng’s approach!

The third direction is even more interesting: it’s about realizing that the best days of economics might be behind us and that a new discipline is probably about to replace it as the most influential in terms of policymaking. My best bet is history—and here’s why:

  • History is where you find inspiring stories—and those are what it takes to bring people together and move forward. It’s a sharp turn in our public debate. We used to disagree on stories and settle our disputes with facts. I think that in the future, we’ll disagree on facts (and economic theory), and so we’ll need to settle our disputes with stories. And what better common ground for story-based consensus than our shared history? (By the way, Tyrion Lannister approves this message: Here’s a spoiler from the Game of Thrones finale—and the video.)

  • Historians themselves are coming forward to make the argument that they have a lot to contribute during the current paradigm shift. I’ve already recommended Margaret O’Mara’s great talk on the topic: How Tech Makes History. Please don’t miss her forthcoming book about the history of Silicon Valley (to be pre-ordered on Amazon): The Code: Silicon Valley and the Remaking of America. (I made a similar argument in this article by Sarah J. Robbins: “The pitch that I do a lot is ‘forward to the past’. Because many institutions are so young, at the scale of the history of humanity, there is no particular reason to think that they are here to stay forever.”)

📘 I’m pleased to be soon sitting down with a thinker whose work I’ve admired over this past year, Martin Gurri, at The Family on June 5th for a fireside chat. Martin’s The Revolt of the Public analyzed the most prominent political discussions of the day—Brexit, Trump’s election, France’s gilets jaunes—all while being published in 2014, well before any of those events came to pass. Here are the details about the forthcoming event (in Paris): Fireside chat with Martin Gurri, author of The Revolt of The Public.

👊 One of our touchstones at The Family is “Anyone can be an entrepreneur”. But that doesn’t mean everyone can be, or even that everyone should want to be or try to be. My cofounder Oussama Ammar goes in depth on what it really means here: Anyone can be an entrepreneur.

🔂 My colleague Mathias Pastor was reading Hemingway when he realized something: what we’ve been building with founders is much like what Gertrude Stein built with artists and other cultural luminaries back at the beginning of the 20th century. History comes around again :) Family Affairs: From Collecting Paintings to Helping Founders

🚟 The economy doesn’t just turn on those big companies that dominate the headlines. Most economic activity is at a much different level, making wheels turn that most people don’t even know exist. Oussama talks about one of our portfolio companies, WeMaintain, that is in exactly one of those unseen sectors: The industries nobody notices.

Here are more articles about the past and present of economics:

Warm regards (from Paris, France),

Nicolas