| Editorial |
| Are economic theories of any use? Well, more specifically, is the
theory of competitive markets of use to those who make the markets, to
the businesses and their customers whose transactions are the subject of
the theory? As business economists we surely have to think so, but it is
a question that crops up in two of the articles in this issue of the
Journal. |
| Indeed, it is centre stage in Christopher Murphy’s article in which
he argues that the assumption that underpins the classical analysis of
competitive markets, that decisions are made by rational agents
operating with full knowledge and through competition lead on to
‘optimal’ outcomes, does not correspond with the real world,
particularly as that world has developed in complexity and scope in
recent times. That, of course, is not a new insight, but Murphy is
concerned at the consequences for efforts to design economic
decision-making around these assumptions, around attempting to define
‘optimal’ decisions that take account of all available information.
Clearly he cannot resort to Milton Friedman’s defence that there is no
direct relation between the realism of the behavioural assumptions
underlying a theory and its validity – that a successful theory
necessarily explains much from little and the little necessarily
abstracts from a complete description of the real world – as he is
concerned precisely with attempts to realise those assumptions.1 Instead
he focuses on the work of Herbert Simon who, recognising that decisions
had to be based on imperfect information, developed an analysis based on
‘bounded rationality’ and aiming not at ‘optimal’ decisions, but at
‘satisficing’ ones. He goes on to argue for a heuristic approach, and,
although he recognises that his may not be a definitive answer, he
believes economists have much to offer to improve business
decisionmaking. |
| ‘Heuristic’ derives from the Greek word for discovery, and it is the
idea of competition as a process of discovery that lies at the heart of
Colin Robinson’s panegyric for the model developed in the UK for the
regulation of ‘network utilities’, industries based on networks of pipes
and wires. These present the difficulty that such networks are ‘natural
monopolies’ and so the consumer is at risk of exploitation by a single
supplier. This risk was supposed to be avoided by the state ownership of
such utilities but their operation became heavily politicised, to the
detriment of their economic efficiency. When as a result the UK moved to
privatise them some other regulation was seen to be needed, and a system
of independent regulatory offices was established for each utility. What
was new, Robinson argues, was their focus on the promotion of
competition, opening the way to enterprise and innovation in ways not
foreseeable to government or regulator. This model he suggests has
delivered positive results and has been widely imitated in other
countries. However, he fears it may now be under threat from the
re-emergence of government intervention by setting strategic objectives
for utility regulators in pursuit of its concerns for security of supply
and climate change. He believes this drift back to centralised planning
will do more harm than good, both because of its own inflexibilities and
because of the unrecognised uncertainties about the objectives being
pursued. It is, he says, “destined to end in tears.” |
| Tears are also foreseen by Angus Hanton in his article, where he
suggests that a “huge shift in the distribution of wealth and
entitlements in favour of older people at the expense of younger
citizens” carries the possible threat of social breakdown and a more
immediate danger that it will undermine the commitment to low inflation
as the central objective of monetary policy. He sees the roots of this
shift in a prolonged national profligacy, embodied in a ballooning
national debt. We might also point to the elephant in the room of
current economic debate, the deficit on current account that Britain’s
balance of payments has recorded for every year since 1984. The burden
of servicing and repaying that debt will be a charge on future
generations, but Hanton goes on to argue that the burden on younger
citizens will be still greater, in part because the older generation own
the bulk of the equity in residential property while the debts
associated with ownership are largely a charge on the young, but much
more because of the costs of the pensions to which the growing number of
those currently in or entering retirement are entitled, and which are
underfunded – indeed in the public sector are not funded at all – and so
will have to be paid for by higher contributions and higher taxes from
younger workers, if they are to be paid. For Hanton suggests that if
intergenerational equity is not given more attention now future policy
makers might choose to not to honour current pension commitments, and be
tempted by policies that lead to inflation. We might even see here the
disorders already seen in Greece and France. |
|
Such large questions of global political economy also feature in
Speakers’ Corner where we have reports of the Society’s Annual
Conference, where the prevailing mood was one of uncertainty about the
prospects for a sustained recovery from the most severe slump in
activity and trade since the 1930’s, and of the talk by Stephen King, in
which he examines how globalisation is challenging a West which seems
unprepared to meet it.
They also abound in our Book Reviews, where there are titles on Fault
Lines and on Globalisation Fractures, on The Crises of Capitalism and on
The Fearful Rise of Markets, but where we also notice more domestic
concerns in Parentonomics and The Politics of Happiness which Paul
Ormerod’ review finds “marred by the repeated opinion that ordinary
people simply do not know what is best for them.” But, look out. Before
you know it there will be an ‘OfHap’!
|
Jim Hirst
Editor |
| 1 Milton Friedman, ‘The Methodology of Positive Economics’, Essays
in Positive Economics, University of Chicago Press, 1953. |
|