Stop that man he's an economist!
This is not as you might expect the beginning of a rather puerile and banal joke, it is a genuine question. People know what their accountant does for them, but the economist is an aloof and higher power outside the reach of their day to day understanding. So I sat down with Dr Adam Cox to find out what this breed of sneaky mathematicians are really all about.
“Economics is not about money”
‘It is often a massive surprise to people when I say this but economics is not just about money!’ says Dr Adam Cox from the Business School when I throw my opening gambit at him of what is an economist? Adam goes on to explain to me that if anything it is a science, the science of decision making to inform scarcity. So we’re only four minutes into the interview and I am having to challenge him already to make the sentence comprehensible to those outside the trade. Scarcity, what on earth is this about, and so he goes on to explain, decisions - individuals or firms will make decisions on what to produce, what to purchase or buy and sell but within that there are the constraints of scarcity - the resources available to make it happen such as raw material or time. Money in itself is not a direct resource, more of a common bartering tool that allows us to acquire resources to set value. The recent trend in contactless transactions being further evidence of that.
So it’s not about money, but all I ever hear economists talk about is the economy and Gross Domestic Product (GDP) and similar phrases in terms of £ billions, so does what you have said really live up to reality? Adam explains that the public generally only hear from the Professional economist (more specifically those working for Government) where value is used as an indication of resource so as to generalise on a country scale. ‘Don’t tar us all with the same brush!’ he emphasises. Adam goes on to explain that whilst there are two broad disciplines in economics - Micro and Macro, there are at least three different types of economist jobs that the public will come across. The academic, the researcher and the private or government economist. This latter job is the one that we hear from most usually via grand predictions at a whole country or governmental level.
The micro-economist - studies individual and business decisions, microeconomics focuses on supply and demand and other forces that determine the price levels in the economy. They take a bottom-up approach to analyzing the economy.
The macro economist - studies the behavior of a country and how its policies affect the economy as a whole. They analyze entire industries and economies, rather than individuals or specific companies, taking a top-down approach.
The private economist - looking at a specific segment of strategy or existing policy to see what has happened or to attempt to theorise as to what will happen. If Government subsidise programme A what will be the economic impact, how will industry respond, will more people be in work etc? You hear, in the press from this type of economist more often as the scale of the predictions/analysis is often grand (eg, on a nationwide level) and therefore the outcomes, which are often numbers, are large and of interest to the press. A great example of this is the Government Economic Service.
Economists are there to solve problems that you didn’t know you had
So I cheekily throw in my next question, how do you differ from my accountant? After an initial look of intense rage or consternation, Adam laughs as he recalls someone once telling him as a joke ‘Economists are there to solve the problems that you did not know you had!’ (unsurprisingly, there’s a T-shirt you can get for that he adds). It’s perhaps a little arrogant until the explanation is given. Being an economist is a little like driving a car when the only view you have is that of the rear view mirror! Economists are asked to look at historical data and conceive potential future scenarios and then decide statistically which is more likely.
So armed with this fortune-teller wisdom, do Adam’s investments do better than mine? No of course not and Adam goes on to explain that in most research the markets average out over time and there is no real gain to be had from investing in one particular commodity. Knowing what might happen and what will happen are not the same thing.
Take the example of throwing two dice, we know that if we map out all of the potential sum totals of the outcomes that seven is possible in six out of the 36 permutations (see figure) more than any other combination, but it doesn’t help us predict when we will throw a seven and it’s not a given that if we throw the dice 36 times that it will happen six times.
Economics explains what happened in 2008 and that it will happen again
I provocatively ask the question, did economists predict or even cause the global financial crisis of 2008? Should they be on the run? Adam laughs and explains that no, they did not cause it and for every economist that says they predicted it, there are a dozen more with predictions that didn’t come true. Economics does tell us that it (or something similar) will happen again, although in what form and when he can’t tell me. He goes on to explain Economists use sophisticated modelling techniques to forecast possible future outcomes. These will come with assumptions and an estimated range of error (a probability attached to the suggested outcome). If any of the assumptions do not play out in reality, then the forecast can quickly become wildly off the mark. One of the key issues underpinning the financial crisis was that we all assumed that the credit ratings were accurate. They weren’t!
I dig a little deeper as it’s intriguing to hear an economists view on the crisis. Adam explains that the fundamental cause of the crisis was that the market was setup to displace risk. Firms were bundling debt together and then selling that debt on to new owners who did not have a good understanding of the dangers therein. This absolving responsibility model meant that a lot of financiers had debt on their books with little resilience or likelihood of repayment, but didn't know it and so when times got a little harder for example credit ratings were downgraded lots of debt collapsed and this happened on a global scale. The solution, tighter regulation and financial buffers, ensures that it won’t be this mechanism next time, but looking in the rear view mirror we know it will be something as history has taught us that moments like this are part of a regional or global economy, we just can’t predict them.
It is time for a breed of economists that can be trusted to be unbiased, transparent fact-checkers
I cannot resist asking the question uttered a lot in recent political times, ‘Have we really heard enough from economists?’ Adam doesn’t think we have but he thinks it is time for a breed of economists that the public trust to be unbiased, transparent fact-checkers. Adam thinks there is a clear role for academia here and organisations like National Institute for Economics and Social Research. They recently published a balanced review of economic opinion around BREXIT, yet it is little heard due to the fact that the research did not polarise opinion and therefore has not made the news. Adam thinks that regional economists should team up and collaborate to create a strong voice in their region and together in the country.
Touching potential future business leaders with that economic knowledge is vitally important!
Adam confesses that although he is a micro-economist he goes wherever his passion and the challenges take him, and on that note I ask him how is your work adding value to society?
Education through teaching economics turns out to be a significant area of pride for Adam. Once people realise that numbers are a tool to measure an economy but that it is about decisions and resources we will have better informed businesses and a brighter economy. Every graduate that is touched by our teaching goes out into the business world understanding economics of their future business and how it will interact with other businesses and the wider regional and/or global economy. Whether it’s looking at fundamentals such as Keynesian economics or spending time in modern Bloomberg style simulation facilities; touching potential future business leaders with that economic knowledge is vitally important.
Research into economic practice and theory is also pretty important. It lends itself to that unbiased approach that can help inform a better world economy. Influence through practical projects is also a great way to show the value of economics. All too often I see economic impact conflated with economic activity that makes a project or industry look like it is adding to the economy at a far greater rate than it is in reality. Our research or involvement with these sorts of evaluations gives them a robust and trustworthy base and in recent times we have been able to undertake research on regional economies such as the Isle of Wight, industries such as the Royal Navy as well as work on cross channel programmes comparing economic impact in Europe. Having solid, reliable figures means that the future policy is more likely to be effective.
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Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of economic perspectives, 17(1), 59-82.