David Colander: Does "Economics" Have Too Much Influence Over Policy?

By Wayne Brown

The best way to understand an issue is sometimes to follow the debate rather than just one "side." I had bogged down trying to understand Monetary Theory (Modern or otherwise).

This is an introduction to the thinking of David Colander. I tripped over him when reading "Modern Monetary Theory and its Critics." Colander presents himself as a "Historian of Ideas." He is a "big picture" guy who tries to understand ideas in depth but also concerning their real historical consequence.

For example, he points out that if MMT were applied by, say, the Tea Party, the result would be a nightmare (zero tax, no government). This provides a simple example of one assumption behind all economic "recommendations" - that the supporters are in political power - more or less permanently. After plodding through endless economic arguments, I also get a whiff of "motivated reasoning."

Beware of all statements that include other things being equal. "Things" are never equal. No proposed change can be made without effects on other factors, nor can the change be made while other changes are not being made. 

Colander distinguishes between economics as a theory of control (Keynsian and all its variations) and economics that simply provides inputs to decision makers.  "Conservatives" oppose any attempt to "control" the economy. The problem is that "hands off" cedes control to impersonal mechanisms such as the market and powerful politicians. Politicians, after all, are not elected by proposing sensible economic policy. They are elected by being the "last man standing" in a mud wrestling contest. Yet, it is politicians who ultimately control the levers of economic power. As Greenspan pointed out - sometimes, these "levers" don't seem connected to the real economy.

Truly modern economics is based on huge computer models of the economy - not a few simple "all things being equal" relationships like "supply and demand."  In any model, things like assumptions and initial conditions need to be made explicit. For example, "actors" are not assumed to have perfect knowledge or to behave rationally, as all "classic" economic theories assume. Everything is connected to everything else.

It is good to understand some economics, but it needs to be kept in context. Economics places constraints on what is possible. We must never assume that politicians in control or society, in general, will agree with any particular economic theory or act the way economists assume.

To cite the nastiest problem we now face, climate change is a problem that comes from physics, not economics. Solutions, if any, will come by massive changes to human behavior. Economic "incentives" are proving to play little if any useful role, yet the political debate is often couched in the fantasies of obsolete economics, such as growth and GDP.

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P.S. A talk by Colander about complexity theory and its relevance to politics is here. Again the point is that "economics" is just one of many influences in the halls of power. "Government and markets are an odd married couple. Stuck with each other". He talks about placing an economic "frame" in the larger (complex) "meta-frame".

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