The call for a new economics

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George Soros has decided to find an institute looking for a new economics. And as two Nobel Laureates (Stiglitz and Ackerloff) suggest this is a very good idea. For example:

Economics has generated a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that the economy, and our society, is not well described by the standard models of competitive equilibrium used by a majority of economists.(...) Similarly, modern information economics shows that even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric (some people know something that others do not, as in the recent financial debacle) – that is, always .

These are, as they stand, true statements: there is however a certain amount of nuance not being described there. For the question isn't really are markets efficient or stable, even when competitive. It's are markets more efficient, more stable, or less so that the other possible arrangements for that sector of the economy and life? There are times when they're clearly not and times when they clearly are.

But that isn't the most important part of what I hope this new institute will do. That is that instead of purely looking for a new economics, to revisit the old economics and see what has been, in the modern world, either forgotten or simply languishes unregarded. Take for example this new book, After Adam Smith. The essence of which is to look at how what Smith actually thought and said about things has been constantly and consistently reinterpreted, often to the point of obscuring the original insight.

For example, as above, there are those who think that the use of markets, the desirability of them, depends upon their efficiency, asymmetry of information or even their stability and Adam Smith is often invoked as as proof of these contentions. But that wasn't his view at all:

On the contrary, when the idea of perfect liberty in commercial relations was introduced by Smith it was because he saw it as being best suited to the development of the division of labour - that is, to increases in the wealth of the nation. It is to its effects on the rate of productivity growth that one should turn to Smith's case for fostering it, not to some putative ability of competition efficiently to allocate a given set of resources. To put it simply, the case for capitalism was that it was best suited to promote innovation and technological progress - a claim that might plausibly find some basis in the historical evidence of the last two hundred years. Freedom of international trade, too, was not advocated because it would lead to a more efficient allocation of global resources, but because Smith claimed that wihout it the division of labour would be limited by the extent of the market.

Looking for a new economics is just fine and dandy: as long as part of that effort is also to rescue what we already know from the often woeful misinterpretations of it. Markets could be inefficient, plagued with asymmetries, hugely unstable and even lead to what some might consider unjust distributions of production: but we should still be using them for they are still what make us rich as a whole, by fostering the innovation and technological advances which produce that very wealth.