How Economics Can Save the World and My Journeys in Economic Theory: Far from dismal

How Economics Can Save the World

Author: Erik Angner

ISBN-13: 978-0241502693

Publisher: Penguin Business

Guideline Price: £20

My Journeys in Economic Theory

Author: Edmund Phelps

ISBN-13: 978-0231207300

Publisher: Columbia University Press

Guideline Price: £22

The description of economics as “the dismal science” could be assumed to be due to the subjects it studies and the predictions it makes. The study of financial crises is rarely the cause of joy. Recommendations on how to manage public finances do not frequently trigger outpourings of happiness.

Economic texts abound with lots of numbers and technical language. It all looks a bit, well, grim.

The facts behind the “dismal science” epigraph refute this dreary description. It was first used by Thomas Carlyle, in 1849, when he attacked an economist who argued for the emancipation of slaves. The economic argument was actually far from dismal as it did not offer support for the maintenance of slavery.

There is certainly nothing dismal in either of these two books.

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“Economics has always been about fixing the world – making it a better place, more fit for human flourishing” is the sprightly claim of Erik Angner in How Economics Can Save the World.

Scarcity is fundamental to his conception of economics. A choice is economic if it requires trade-offs to be made. Countries and consumers cannot get everything they want as resources are always limited.

However, for the author, economics is about more than analysis, it is about making wiser decisions “to rebuild the world and make it better – including eliminating poverty and ignorance”.

This is demonstrated by a series of case studies. Each chapter focuses on how economic theory can lead to a more effective solution to pressing challenges.

Topics include better policies to reduce climate emissions and reduce poverty. However, the beauty of this book is the many other unexpected themes, such as How to Be Humble and How to Build Community.

This allows the author to accessibly explain different areas of economic theory. This includes how collective outcomes are reached by groups of individual decision makers, the insights behind arguments for carbon taxes and how over-confidence can affect decision making.

The author skilfully introduces contemporary economists and their research. This book is delightful in demonstrating how economic theory has developed new and unexpected frontiers.

The best example of this approach is the chapter on strengthening communities. It explains how the accumulation of decisions by individuals can damage the very societies that individuals depend upon.

Phelps and Angner are not content with explaining economies. Understanding is needed to develop policies that lead to positive change

This is why institutions develop policies, which are “a set of rules, or ‘prescriptions’, that humans use to structure all sorts of repeated interactions”. The wisdom of the economist, Elinor Ostrom, is then shared, focusing on how economics can act as a “catalyst of self-governance”. This can be achieved by improving the design of institutions.

Ostrom developed design principles to improve the functioning of institutions and increase their benefits for societies. Principles included the importance of defining the boundaries of institutions and the need for gradually escalating sanctions if rules are breached.

The irony is that for a social science that has become associated with the excesses of individualism, economics is at its strongest in explaining how individuals live in a dense network of social and economic relations.

This is a beautiful and wise book as it contends that “it’s ultimately the network of social institutions that gets people out of the social dilemmas that imprison narrowly rational, short-sighted and selfish agents”.

Vivid social science

A similar zest for reflecting on the structure of economies and their impact on societies is to be found in My Journeys in Economic Theory by Edmund Phelps. Economics is also presented as vivid and dynamic social science, always evolving and capable of improving the welfare of individual societies.

Phelps is one of the most eminent of contemporary economists. He is a winner of the Nobel Prize for Economics, and has made pioneering contributions to economic thought.

Two important differences exist between these books.

First, this is very much a study of the thinking of the author and his contribution to the development of economic theory. The work of other economists is constantly referenced but the focus is on a personal intellectual journey.

Secondly, this is the work of a professional economist. Sections of this book are highly technical. For example, the claim that an economic model is “built around the Phelps-Winter model of the product market, combining it with a version of the Calvo-Bowles shirking model of the labour market and the Blanchard-Yaari model of the capital market, to obtain another general equilibrium framework” will puzzle nearly every reader.

The general reader can skim over such passages because this is a book that merits perseverance and hard work.

This is due to work by Phelps on areas of economic research that can make a big difference to the wellbeing of communities and societies. This demonstrated by his insights into why some economies grow.

He identifies the importance of innovation in driving the development of economies. In a similar tone to Elinor Ostrom, he acknowledges the importance of institutions in creating the conditions for the flourishing of creativity.

More is needed to sufficiently encourage the development of creativity. Institutions are “necessary tools” that are activated by “large numbers of people stirred by an emerging ethos – the spirit of the time and its leading figures”.

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The author contends that cultural qualities, such as the rise of individualism and the value of self-expression, inspire this ethos. The Enlightenment is, therefore, a seminal moment when these qualities fused to allow, for example, the reimagining of techniques of production.

This theory is developed in an earlier, and more accessible book, Mass Flourishing. It describes how the development of these conditions, at scale, can create a very different economy. This is one “rich in jobs offering a sense of agency: people taking responsibility and exercising initiative”.

Phelps and Angner are not content with explaining economies. Understanding is needed to develop policies that lead to positive change. Differences in accessibility and subject matter make these two very different books. They are united in their belief that the welfare of societies is to be advanced by the study of economics.

Paschal Donohoe is the Minister for Public Expenditure and President of the Eurogroup