Author Archives: carmeloferlito

by Dr Carmelo Ferlito

CEO – Center for Market Education, Malaysia

The subject of the crisis experienced by economics as a scientific discipline and its teaching is not new and a call for a reform centred on pluralism, multidisciplinarity and realism was raised by many scholars. However, economics remains under the spotlight for what it is interpreted mainly as the inability to understand and interpret the real economic world. Furthermore, so-called heterodox economists have often criticized mainstream economics on a pro-planning and anti-market basis (ideological ground), rather than with regards to the actual theoretical edifice; in fact, as pointed out by Geoffrey M. Hodgson (Loughborough University London), the neoclassical core of mainstream economics has been used to support socialism as well as capitalism[1]. In a nutshell, different policy recipes did not reflect substantial theoretical differences. 

I will recur here to the great Joseph Schumpeter to hint something about the nature of the crisis experienced by economics. While some of the main Schumpeter’s theoretical contributions, such as the concept of creative destruction[2] and the relationship between entrepreneurship and innovation (as distinct from invention)[3], became familiar to the reader of economic facts, his methodological reflection is unfortunately widely ignored even by the great majority of contemporary economists.

While it is impossible here to discuss Schumpeter’s methodology, I will focus on his concept of vision. In his History of Economic Analysis (1954), the Austrian economist explained that, when we start our research work, «we should first have to visualize a distinct set of coherent phenomena as a worthwhile object of our analytic efforts. In other words, analytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort»[4]. Schumpeter called that preanalytic cognitive act Vision.

In other words, the economist is not an observer alien to reality. He or she lives in specific conditions of place and time and it is thanks to the interaction with and the observation of the reality typical of such conditions that the vision is shaped. The analytical effort is then the attempt to convert the vision into concepts, into a scheme; however, such an analytical work contributes to make the vision to evolve so that – to borrow Schumpeter’s words – «[f]actual work and ‘theoretical’ work, in an endless relation of give and take, naturally testing one another and setting new tasks for each other, will eventually produce scientific models, the provisional joint products of their interaction with the surviving elements of the original vision, to which increasingly more rigorous standards of consistency and adequacy will be applied»[5].

It seems to me that a great part of contemporary scholarly work in economics is affected by the attempt – more or less conscious – to escape the vision. The idea that economics should be “pure” has perhaps contributed to move the researcher away from his or her own reality. And this seems to be more a contradiction today, when economics cannot be accused of not being empirical; quite the contrary: data collection and interpolation has almost entirely replaced the activity once known as theorizing.

What I see is that the content of the analytical work has been disjointed from its predecessor – the vision – and by its consequence – the theory. To use a metaphor, the modern economist looks like a bricklayer who is putting brick over brick but without the idea of building a house and without having in mind which kind of house he or she wants to build. The result can only be, at best, the approximation of a house.

The vision is the idea of wanting to build a house after a certain fact happens in reality: seeing a nice plot of land, getting married and so on. Theory is the finished house. The analytical effort is bricklaying: theory is shaped by the vision but not necessarily an exact mirror of it, as the construction work may reveal something that was previously unknown and that may force to revise the vision.

We now experience economics as a series of erratic data collections, while statistical correlation is often confused with actual causation. The time is come for the economist to sit back, look out of the window and let his or her observation in astonishment to shape that vision which is so much needed if the blackboard work has to have a meaning at all.

[1] Hodgson, G.M. (2019), Is There a Future for Heterodox Economics? Institutions, Ideology and a Scientific Community, Cheltenham and Northampton, Edward Elgar, p. vi.

[2] Schumpeter, J.A. (1942), Capitalism, Socialism and Democracy, London and New York, Routledge, 2003.

[3] Schumpeter, J.A. (1911), The Theory of Economic Development, New Brunswick and London, Transaction Publishers, 1983.

[4] Schumpeter, J.A. (1954), History of Economic Analysis, London and New York, Routledge, 2006, pp. 38-39.

[5] Schumpeter, J.A. (1954), History of Economic Analysis, London and New York, Routledge, 2006, p. 40.

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…