The Awakening of an Econ Student

I became an economist by mistake. The malicious will say that you can deduce it from the quality of my writings. I like to believe in the bizarre paths of Destiny on which the flights of human liberty stumble along.

Here I would like to link my personal experience – of little interest to the reader – to the far more interesting subject of the ongoing debate in economic science. Indeed, as is well known, particularly since the crisis began in 2007, a certain disillusionment has been growing about economists’ ability to foresee the course of events. While asking economists to foresee something perhaps pushes them into the sphere of magic to which they do not belong, there is strong discontent with their ability to explain events in progress. If the beautiful and highly formal mathematical models developed over the course of decades do not serve to predict the future – and it astonishes me that someone might believe that – they lack ex-post usefulness in interpretation. In short, they are not very useful.

Here I want to focus on the moment when I understood that something was wrong with the economics I was learning as a student. I enrolled in the economics faculty of the University of Verona in 1999, after two unsuccessful years spent working on a degree in computer science (I compensated for that lack in 2012 by marrying an Indonesian girl with a computer science degree). That choice was something of a fallback, a sort of last resort that reconnected me to my high school studies in accounting. In the spring of 2000, having to choose which exam to take, I focused on “history of economic thought”, which seemed to me to be useful for other exams. That year the department chairperson was on sabbatical, and the course was taught by Professor Sergio Noto, who still works at the University. Long story short, that course – taught as it was by Prof. Noto – was the beginning of a passion; I was struck in particular by Joseph Schumpeter, the economist to whom I dedicated my best years, and who has still not abandoned me.

Noto and Schumpeter (Austrian by birth but not of that school of thought) were my keys to entering the so-called Austrian school of economics; I will return to that later.

In addition to devouring Schumpeter, I began to stock up on books by and about the Austrian school. The experience that truly and radically changed the course of my studies was reading The Economics of Time and Ignorance, by Gerald O’Driscoll e Mario J. Rizzo.  Only after many years did I discover that it was one of the foundational books of the youngest generation of Austrian economists, particularly by those who considered themselves students of Ludwig Lachmann, but at the time I was instinctively struck by it even without being able to place it within its context.

One example in particular captured me, which I have since repeated for years to my students or in my seminars. As anyone who has studied economics knows, the textbook definition of “perfect competition” is an economic system in which the number of buyers and sellers is so high that no one is able to engage in price discrimination; everyone produces the same thing with the same characteristics, and the technology is given. The authors commented on that more or less like this: “Excuse me, but a system in which no one can discriminate on prices, the products are all just alike, and there are no technological differences – isn’t that socialism? Doesn’t the word ‘competition’ suggest something more dynamic, as in sports in which someone wins by virtue of a difference, whether it be on price, quality, technology, marketing, luck, etc.?”

For me that example was an epiphany. My microeconomics textbook – basically all of them on the market – gave a definition of perfect competition that better described the exact opposite of competition (socialism). From then on I began to study more critically, and I tried to build up an alternative understanding based on the teachings of the Austrian school of economics. Moreover, that critical approach allowed me to later construct my own personal vision within the Austrian school, and today I find myself an unorthodox person within an unorthodox school.

The important lesson I drew from that epiphany was not only to more critically approach my study; above all I remain convinced of the fact that economics is useful if it helps us understand reality. Of course some level of abstraction is necessary, but not to the detriment of its explanatory power.

In short, I am convinced that the economics in vogue, which today is primarily econometrics, reasons more or less like this: let’s take reality, empty it of the human element (that is, creativity, unpredictability, and non-determinism) and the flow of time (which is what brings novelty), and let’s build very elegant formal models where everything comes out right, because what we want to explain is already included in the hypotheses of a static model.

But what can we do with an economics without time and without people – that is, without ignorance? Precisely little or nothing.

To be continued…

10 comments
  1. Anonymous said:

    Of course socialism isn’t defined by market operations; to me it’s defined by responsibilities to other people.

    • Well, the article was not about the definition of socialism (which anyhow is not related with responsibilities to other people but is defined by the ownership of the means of production and by the absence of market process and market prices), but more on the idea that some definition in textbook economics are inadequate.

      • One of the definitions of socialism. Like capitalism it is in the eye of the beholder. And there is NEVER competition without cooperation. Even the team sports you cite are highly cooperative.

  2. Well, the article was not about the definition of socialism (which anyhow is not related with responsibilities to other people but is defined by the ownership of the means of production and by the absence of market process and market prices), but more on the idea that some definition in textbook economics are inadequate.

  3. I think that the model of perfect competition is better understood as one of two things, or both: 1) a Weberian ideal type 2) as Schumpeter argued, a description of the end result of a general equilibrium, which will ultimately be disturbed.

  4. Ernesto Vaihinger said:

    Los esquemas que explican aspectos de la economía no tienen sentido ontológico. Permiten interpretar ordenadamente procesos sociales desde la economía (hermenéutica social según profesor JGH Olivera). El ejercicio de la política económica le da sentido ontológico a los principios del análisis económico.

    • Ernesto Vaihinger said:

      The schemes that explain aspects of the economy do not make ontological sense. They allow an orderly interpretation of social processes from the economy (social hermeneutics according to Professor JGH Olivera). The exercise of economic policy gives ontological meaning to the principles of economic analysis.

      • Ernesto Vaihinger said:

        The schemes that explain aspects of the economy do not make ontological sense. They allow an orderly interpretation of social processes from the economy (social hermeneutics according to Professor JGH Olivera). The exercise of economic policy gives ontological meaning to the principles of economic analysis.

  5. A an amateur — self-taught — economist, I am waiting to read the next instalment.

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