The Philosophy Of Economics

Who will take up the mantle as the next great economic philosopher?

I’ve been reading a book called The Worldly Philosophers by Robert L. Heilbroner and it’s one of the more profound books I’ve ever read. To most of us, economics is a dreary subject that belongs to banks and academics. It’s an endless deluge of noisy data and it’s very hard to look past that noise and understand the “so what, why should I care?”

That’s a shame because economics wasn’t always so technical and dry. At one point economics was steeped in history, wisdom, and philosophy — it was all about the why and the so what. Economists sought to understand several things:

1. How a capitalist economic system worked.
2. The long-term consequences of capitalism, both good and bad.
3. How those consequences impacted society, a.k.a. people.
4. And how to overcome the existential issues that if left untreated threatened to being down said capitalist system.

Why the focus on capitalism? It’s easy to forget thanks to how pervasive it is, but capitalism only started a few hundred years ago. Prior to that, feudalism was the dominant economic system where the aristocratic elite owned everything — including both the land and the people that lived on and worked the land. Back then, it was all about food production; and those that owned the land (on which the food was produced) and had the means to defend their land had all the economic power.

This changed with the Industrial Revolution when the factory became an increasingly critical and fast growing driver of economies. Factories, unlike simple stuff like a horse or plow, required significant upfront investment a.k.a. capital. Which created the need for capitalists, a.k.a. groups of people with lots of money to invest. It also created the need for advanced financing and capital gathering abilities, which the banks of the day happily obliged. The ultimate result was a transfer of economic power from the aristocratic landowner to the capitalist merchant and the relocation of many people from country to city.

These represented seismic shifts to the way people lived and attempted to make money. So economists attempted to understand why these shifts were occurring and how they might ultimately impact society. This is obviously incredibly hard to do, especially in real time. The economy, whether capitalist or another kind, is made up of countless individuals and entities, all doing their own things while also interacting with each other. There are way too many moving parts for someone to analyze without some sort of simplifying framework.

That’s why economists need models. A model simplifies something complicated like the economy into an understandable framework with just a few key levers. A good model is akin to the 80–20 rule (80% of the action is explained by 20% of the factors), where instead of seeking to capture every variable and detail, we focus on just the 20% (the key drivers) even if we are forced to give up some granularity.

But it’s easy to become obsessed and blinded by models. And when we do, we start to believe that the things that don’t conform to our model (or the 80% ignored by our model) must not be real — rather they are just temporary idiosyncrasies or noise that will vanish in a nick of time. And that’s how we get blindsided.

It’s a shame — the great economists of the past like Ricardo, Marx, Keynes, and Schumpeter spent their time looking for the unknown unknowns — the risks that could blindside a capitalist society. Their models were a means to an end, but not the end. And they thought hard about how to address these risks (either within the capitalist system or via an alternative system). Today, the discipline of economics seems a lot more micro — more focused on the minutiae of the data and superficial defenses of the status quo (you can’t get fired for sticking with the crowd).

At the same time, the philosophy is more critical than ever. Cracks to the capitalist system abound. The excesses of the past decade both in the U.S. and abroad have increased both the fragility of the global economy (can’t enlarge the economic pie without huge debts) as well as the fragility of the social system (highly unequal distribution of the pie) that the economy rests on. We can’t keep pretending that things are fine as long as stock and home prices are going up. Who will step up as the next great economic philosopher?

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