By Brian Toohey
Port Melbourne: William Heinemann Australia
1994. 348 pp. $24.95
Reviewed by Allen Myers
Brian Toohey is much better known as an investigator of Australia's intelligence services than as an economics writer, but in Tumbling Dice he displays the same clarity of thought and language that so annoyed governments when he was sorting through the snoops' dirty laundry.
This is a comprehensible but intellectually rigorous book about modern economic theory — a book for the responsible citizen rather than for the professional economist, but one which the latter cannot dismiss as uninformed. This is both a tribute to Toohey and a product of the nature of neoclassical economics (which is what is generally meant when people refer simply to "economics" and whose most recent well-known progeny is "economic rationalism").
Why is modern economics generally so obscure, and how is Toohey able to give it clarity? An analogy suggests itself.
Imagine that medieval theology, the theology which debated how many angels could dance on the head of a pin, was still in business — indeed, was regularly consulted by governments, which frequently seconded top theologians to advise it on such matters as pin design and whether sections of airports needed to be set aside for angel landings and take-offs. These neoclassical theologians have developed complex mathematical equations which determine the number of angels per pinhead according to variables such as the angels' rank in the heavenly hierarchy, wind direction and whether the angels in question are dancing the gavotte or the frug. There are even complex computer models incorporating further variables — from the metal used to make pins to the effects of static electricity — and of course it is all too complicated for non-specialists to understand.
And then, one day, a troublesome journalist demands an answer to the questions: Do angels exist? If they do, do they dance on the heads of pins? Suddenly, it seems less important to understand every nuance of the mathematics.
Toohey, to change the analogy, takes the role of the boy who noticed that the emperor was naked — or of the honest fashion journalist assigned to report on the monarch's wardrobe.
With the sort of verbal brutality the subject demands, he lays bare the flawed assumptions on which the whole superstructure of neoclassical economics is constructed.
These are that the economy can be explained in much the same way that Newtonian mechanics explained the movements of celestial bodies (neoclassical economists, says Toohey, suffer from "physics envy" — this is a fun book). An economy is considered as a system in equilibrium, composed of essentially indistinguishable economic agents, which act uniformly and with perfect foresight to "maximise utility".
There are, as Toohey goes on to explain, further assumptions. All, like the basic ones, are adopted not because they appear to approximate, even slightly, phenomena in the real world, but because they make it easier (or possible) to write mathematical equations which "explain" the behaviour of the economy.
Are the logical bases of neoclassical economic theory really that absurd? Yes. Toohey cites the frank admissions of neoclassical economists that their theories really have very little to do with reality. Take, for example, the remarks of one John Hewson in his master's thesis: "... the validity of a theory [of economics] is not determined by the correspondence, or lack of it, between the assumptions of the theory, or its conclusions, and observations in the real world. A theory as an internally consistent system is valid, if the conclusions follow logically from the premises, that is, if it is mechanically correct."
In the latter part of the book, Toohey points out that even some of the more astute neoclassical economists are coming to question their fundamental assumptions. In terms of "physics envy", they are beginning to confront the reality that physics and science in general have moved on from Newtonian mechanics to replace concepts such as equilibrium with quantum changes, chaos and self-organisation. Australian official economics, Toohey notes, lags behind much of the rest of the developed world in this regard.
Toohey offers no guarantees that this newer economics will, in the end, produce reliable guidelines to economic policy, but he sounds guardedly optimistic, which is understandable if only because this changed outlook is so obviously an improvement on its ancestry.
I would be even more cautious. It is necessary, but not enough, for this newer economics to reject the false assumptions of neoclassical economics. It must also establish its own basis positively, or risk floating off aimlessly into the academic stratosphere, where it would end up dancing with angels again despite all its best intentions.
"Neoclassical" economics is a misnomer, in that it implies a further development of classical economics. Both its practitioners and its opponents are generally agreed that neoclassical economics started over again on a totally different project, rather than taking classical economics to a new level.
Classical economics is the study of capitalist economy as it really exists. It is generally considered to have begun with Adam Smith and to have reached a culmination (good or bad, depending on your viewpoint), and it has enjoyed something of a revival on campuses in recent years (the political economy vs economics dispute).
Neoclassical economics, no matter how much it refines its mathematics, can't maintain firm contact with reality largely because it began divorced from reality. A major part of this separation was its refusal to confront, understand and then accept or reject its predecessor. This task still lies before it, and Toohey's exposure of its failures may perhaps drive it in that direction.