From the Nature of the Firm to the real world: Ronald Coase on the state of economics

Former University of Chicago professor Ronald Coase has an article in the Harvard Business Review: Saving Economics from Economists. This is his concluding paragraph:

It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.

I agree with all of this, although I think that the focus on ‘market economy’ already constitutes a bias. Nevertheless, the main point is that economists should explain how the economy works (and worked) and how changes would affect it. This job is not properly done anymore. The models, like IS/LM, are disconnected from reality and offer next to nothing on distribution, which seems to be a pressing issue of our times. Coase writes: ‘Even at the turn of the 20th century, Alfred Marshall managed to keep economics as “both a study of wealth and a branch of the study of man.”’ The question today is the following: if all economists are mainstream and basically assume a neo-classical supply side view of the world, how can they study anything? They have all the answers and there are no questions since there are no non-believers. Of course, all kinds of questions would come to mind for the uninitiated, but then those people haven’t made it to the level of professors.

Only very few heterodox economists made it into the 21st century and those that did are dispersed over the planet. The intellectual discussions on the crisis by mainstream economists are a shame to the once so vibrant discipline. Austerity for the economy is a result of austerity for the mind.