The question really is what good did economics ever do that isn’t readily available from common sense? Economics has real world impact (“we are ruled by little else” as Keynes famously said), but where it leads to an impact which is distinctive from one which would result from applied common sense, the impact appears to be invariably bad. Of course, definitions of bad may be subjective. It could have two quite separate meanings: bad in the sense that it is counterproductive in its own terms, most usually this would mean damaging to economic growth; or bad in that it does more harm than good in such dimensions as fairness and justice. Examples of bad impacts might include free market economics resulting in great injustice and inequality as well as the creation of inevitably bursting bubbles.
Academic or theoretical economists are producing a prodigious amount of text, which they refer to as ‘research’. There are over 760 universities world-wide producing published economic research. Each university is pressed to produce more in order to gain the funding to produce more still. The Princeton University Press Economics and Finance brochure, for example, lists 188 of their books currently available, covering a wide variety of subject matter, presumably motivated not just by the desire for funding, but also by the pursuit of economic truth. A glance through the Princeton brochure indicates the flavour of current publications: “Supermodularity and Complementarity”, “Advances in Behavioural Finance Vol II”, “Indifference Pricing Theory and Applications”, “The Economic Theory of Annuities” etc, etc, etc.
Previously unresearched topics necessarily become ever more obscure and detailed and ever more distant from the big picture. This ‘research’ activity, which is driven by the need to get published to increase funding, has to produce ‘new’ knowledge. Thus it is driven to examining every feasible nook and cranny of subject matter, deploying undreamed of degrees of magnification to reveal ever greater detail. The potential magnification is infinite. But, as progress is made from one level of detail to the next, the real truth, as well as practical reality, becomes ever more distant.
A fractal, such as the Mandelbrot set, ilustrates the position nicely. The Mandelbrot graphic is infinitely magnifiable as progress is made from one level of detail through to the next and then the next and the next and so on for ever. Using fractal procedures to measure the UK shoreline it can be shown that its length is, in effect, infinite. However, this is neither useful, nor the truth. The UK shoreline, measured along the mean high waterline and including the main islands, is approx. 11,075 miles. We know that is incorrect, but it’s approximately true and close enough to be practically useful.
A recent enquiry in The Economist (referred to in the previous posting on this site) suggested that the recent financial crisis had confirmed prior economic knowledge, such as that a “fall in asset prices tend to reduce the wealth of households, which has a negative impact on consumption.” Similarly, that “capital losses on their assets reduce the credit worthiness of businesses which raises their borrowing costs and reduces investment.” It is not clear what it is about these assertions that qualifies them as ‘economic knowledge’, rather than obvious common sense. And it is still far from clear what good useful knowledge economics has ever provided beyond what was already available through common sense. Apart, that is, from the training of the mind as part of a liberal education for the theoreticians in their ivory towers.
Fighting for Fairness by Remaking the Real Economy 
There is clearly a huge amount of ‘waste’ in the production of any form of knowledge, simply because we don’t know what we don’t know. Neither do we know what bits of what we don’t know might be useful, to someone, at some point in the future. So I’m not sure that academic over-production is really the problem. Lots of cultural industries over-produce because they don’t know what is going to be successful – the record industry, publishing, art schools and so on. Rather, the issue is whether economics could ever produce useful knowledge, in the practical sense that Gordon means. Inductively, of course, we can’t know this either, but the record so far has been pretty baleful. If summarised, it could be said that economics has been useful for economists.
But that’s the pure stuff. When economics links itself back to the social and political, as radical, heterodox and institutional economics does, it becomes an account of how power works. For example, if we want to understand why development aid so rarely achieves its effects, we do need to understand economics, just not the stuff practiced by the economists at the World Bank, IMF and so on. Lets hear it for impure economics!
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While the pure stuff stays pure, it doesn’t do a lot of harm, and it might, as you say, be useful for economists. But when it gets applied, as it does, it achieves lots of harm. We are still ruled by the pure free market model (minimised regulation, minimised public sector, maximised rewards for ownership etc etc) and the evidence of the harm that does is all around us. It’s worse than baleful! But ‘impure economics’ sounds like an oxymoron. When you get down to it, it generally turns out not to be economics at all.
For example, re development, David Ellerman’s “Helping People to Help Themselves”, written after his ten year stint at the World Bank, the last five advising chief economist, Joseph Stiglitz, is not a study of economics at all. It investigates ‘an alternative philosophy of development assistance’, which is truly interdisciplinary, with the interesting ingredients coming from education, management theory, psychotherapy and what might be described as sociology. The economics input to this alternative people oriented philosophy, hardly goes beyond the common sense. The World Bank model that Ellerman is criticising, on the other hand, is driven by pure economic theory. On this analysis economics hasn’t done a lot of good for development.
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Gordon presents common sense as though this is knowledge that is obvious. But is this how the process of discovery works. What Economics does is set out the tools of analysis of economic phenomena. It is indeed common sense that as prices of commodities fall we can expect demand to increase. However for assets, we know the opposite is the case within bounds. We also know that sometimes price changes don’t impact on demand (for necessities for example). All of these propositions can be reduced to ‘common sense’ but they still need to be learned and explained. Economics does this initially by having some very simple theoretical models movig later to more complex ones. These are, as all theoretical models are, abstractions from reality, not representations of reality. Some theory is immediately useful (Keynes’s general thoery for example) while other theory isn’t but might lead to some useful policy conclusions (e.g. rational expectations theory leading to ideas about the importance of information and the credibility of the informant). Some mathematical models show the superiority in some cases of cooperation over competition. Of course you can always say that all this is common sense, but that common sense was not expressed before the theory was developed.
It is true that too much is produced. That’s because targets for output are arbitrarily set and determine career progress. To advance in Economics you have to publish four papers every five years in high ranking journals. Of course the institution gets more money, and you get promotion and have a better chance of getting a research grant. But as Martin says, that’s true everywhere else, and our economic crisis is also partly a result of capitalism’s inherent tendency to over produce.
I’d go further than Martin on development issues to say that it’s only a combination of different disciplines that might help us to understand what goes on, the most important of which is anthropology. It’s also possible that this combination is still important in developed societies.
Finally, I would ban the word useful because it begs far too many questions. Useful for what, for whom, for when? I saw a painting in Bilbao last week that represented post Civil War Spain as a canvas painted black with a small white corner. Useful? Some people might find it helps their understanding of the civil war and its aftermath, while most of us would say what this crap doing in a Guggenheim museum?
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Many points taken, though I would suggest that common sense usually comes before the theory. For example, in the case of Keynes you refer to, New Deal came first. It’s when theory is not predated, or even accompanied by, the common sense, that it does most damage – plenty of free market examples of that. I agree re the use of useful. I use it coming from a particular context and I shouldn’t be so generalistic.
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Part of the problem is peer review. If the review process for academic journals incorporated an outsider’s view of the usefulness of the research, a lot less rubbish might be produced and published. And it’s not just economics, of course. The triviality of papers published in many management journals is staggering.
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