Undercover Economist

August 17, 2012 9:37 pm

The complex world of the policy maker

To effectively address today’s challenges, economists must have a rare combination of skills
Illustration of an old balding man©Raymond Biesinger

John Maynard Keynes once wrote – in an obituary of Alfred Marshall, although I suspect with a hint of self-congratulation – that a master economist needed to be “mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”

I had Keynes’s unachievable wish-list in mind when reading Complex New World: Translating new economic thinking into public policy, a new collection of essays published by the Institute for Public Policy Research. Here’s the challenge for policy makers: real economic policy problems are defined by networks in which each agent influences other agents, by imperfect rationality, and by a constant turmoil in which there is never a settled equilibrium. But the methods of economics – and perhaps more seriously, the basic tenets of the subject – are designed to analyse equilibrium, not disequilibrium, and to model non-networked, rational agents.

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The IPPR essays set out to address this gap, and they ask the right questions. But the ghost of Keynes is not far away: there are few answers, despite an impressive roster of contributors, including Eric Beinhocker, Paul Ormerod and John Kay. No wonder: it is almost impossible to do this stuff well.

The main message for public policy of taking complexity seriously is, “it’s complicated”. Environmental taxes have unpredictable effects once networks of social influence are taken into account. Financial regulations can backfire. Political revolutions, such as the Arab Spring, can flare up. This is all true, but a little unsatisfying. Is there anything we can do other than throw up our hands?

A few things suggest themselves. The first is that policy makers need a dose of humility. If the world is complicated, better to acknowledge that there is much we don’t know than to march confidently in the wrong direction. Alas, few people in positions of power got there because of their humility. The second lesson is that in a complex world, it is often worth trying different policy options and evaluating them rigorously – using randomised trials if possible in schools, policing and road safety. Randomised trials are catching on, and many objections boil down to a single point: how can we justify trials when we already know the answer? But we often know less than we realise. In a complex world, it’s rare that we can figure out answers by sitting in an armchair and thinking hard.

Amid the excitement about complex networked systems, it’s possible to lose sight of the fact that boring old mainstream economics has some useful tricks up its sleeve. Jim Watson, an energy expert at the University of Sussex, worries that economists put too much emphasis on carbon pricing when dealing with the problem of climate change. When consumers are influenced by what others do, and when there are bottlenecks in the innovation system, there’s no reason to expect carbon pricing to be a panacea – but it’s a little soon to write off carbon pricing when it has been so patchily implemented. Social networks and innovation bottlenecks don’t alter the fact that people respond to incentives, and a high carbon price would be a good incentive.

I hope economists continue to take complexity more seriously. But economic problems won’t yield to complexity analysis alone, any more than they will yield to any other methodological problem. Keynes was right: good economics requires a rare combination of skills.

Tim Harford is the presenter of Radio 4’s ‘More or Less’.

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