Wednesday, December 22, 2004

Back to the Future for Economists

"When economics cast its fate with equilibrium analysis, it made analysis of both entrepreneurship and institutions difficult." So writes Dan Johansson in "Economics without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks" in the current issue of Econ Journal Watch.

It's an interesting theme. Economists (and others) have missed the big story for some years -- but should not have because Adam Smith made it so very clear so many years ago: economic freedom causes economic development. There is a growing literature that resurrects these ideas but, as Johansson makes clear from his inspection of leading economics textbooks, most still miss the big story.

"In the 19 books there are many references to Nash equilibrium, Bertrand equilibrium, Cournot equilibrium, Concave utility functions, Euler equations, etc.; concepts that on the other hand are not used at all, in e.g., Austrian, Institutional and Schumpeterian traditions. Instead, they emphasize actors that have disjoint knowledge (that is, not merely asymmetric information, but asymmetric interpretations), the economy is a dynamic open-ended process in continuous change, and the scope and motivation for discovery is conditioned by social rules."

Many very smart people are working very hard on the wrong problems. Very inefficient.