Essays on Economics and Economists

5 ideas

1. Blackboard economics versus real institutions

   Blackboard economics is analysis in which the economist writes down prices, quantities, taxes and subsidies and moves them around at will, as if one mind held all the information and directed all the agents. It hides the fact that in the real world these outcomes are produced by firms, contracts, legal rules and markets that have costs of operating. Policy conclusions drawn on the blackboard can therefore be impossible to carry out through any actual institution.

2. Unrealistic assumptions produce theories about imaginary worlds

   Coase rejects the view that a theory's assumptions need not be realistic as long as it predicts well. He argues that economists want to understand why the economic system works as it does, and a model built on false assumptions about how firms and markets operate cannot give that understanding even when it forecasts adequately. He adds that in practice economists choose theories through persuasion, fashion and mathematical tractability more than through predictive tests.

3. Technique-based intellectual conquest of other fields fades

   Economists have moved into law, sociology and political science mainly by carrying over general analytical tools such as maximization and equilibrium. Coase predicts this advantage is temporary, because practitioners in those fields can learn the same techniques and will then know their own subject matter better. A discipline's durable claim rests on the phenomena it studies, not on its method.

4. Design institutions for people as they are

   Read through Coase, Adam Smith saw humans as capable of benevolence, but mostly toward family and close associates, and weak toward strangers. A large economy therefore cannot run on goodwill. The market's value lies in harnessing self-interest so that strangers cooperate without needing to care about each other.

5. Alfred Marshall's concealed family origins

   Keynes's memoir presented Alfred Marshall as coming from a respectable clerical and professional family. Coase went back to parish and census records and found a humbler background. The case shows how an admiring official biography can shape the received picture of a thinker until someone checks the primary records.

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