Arnold Kling is a rare bird, an economist who recognizes that mainstream economics is empty and worthless today. More specifically, he accuses economists of inhabiting the world of the 19th Century, where the mental model is one where “hordes of interchangeable workers in stark factories toil in the service of the owners of capital”. It’s pretty stupid, he implies, for economists to look at today’s economy through 200-year old glasses. As an example of the blindness that comes of looking through ancient glasses, Kling asks how economics can place a value on intangibles (like a Google search or free content accessible to all on the internet) when its 200-year old theories of value creation are based on factory production and physical capital.
After this explosive introduction, his essay, accessible through Medium, wanders off into what he calls “research directions” for a new economics. But that’s academic. We don’t need research directions. We need new principles of economics, to develop a science that is truly useful to help people succeed in a rapidly changing world.
Here are 6 pillars to build on.
Economists are always trying to aggregate economic activity into quantified data such as Gross Domestic Product and the Consumer Price Index and Total Employment and the Money Supply. But economics should deal with the actions of individuals, how they make decisions, and how they exchange goods and services with others. All economic actions are performed by individuals. All decisions are made by individuals. Individuals’ choices of ends and means are drivers of those decisions.
The unit of analysis for economics is the individual. If economics is to be a useful science, it will help individuals to make better decisions for themselves, in the context of productive collaboration with others. There’s a fancy academic term for this approach: methodological individualism. However, let’s not go there. Let’s just help shed light on good economic decision making.
Arnold Kling wonders how economics can ever put a value on intangibles like Google search and Amazon marketplace. By analyzing how individuals make decisions, he would know. Value originates inside the mind of consumers, and they take action as a result. If they feel that, by deciding to use a tool like Google search, they will improve their situation (e.g. answer a question, expand their knowledge, find an appliance they were looking for, or whatever it might be), then value has been created. Every entry into the Google search bar is a statement that “my life would be better if…….” If I had this information, if I knew that answer, if I could find this object, if I could bring more knowledge into my decision-making.
Value is inside the customer’s mind. Google is valuable because people use it to improve their lives. The measurement of value is the level of satisfaction the user feels.
Connections and Interactions.
There are billions of individuals in this world. Economists try to place them in collectives in order to pursue their goal of aggregation. They talk about the working class and the middle class, or about the workforce and the capitalists. But the opposite perspective is the right one.
Individuals seek to be economically unique, to find a way to specialize and differentiate themselves from others to make themselves valuable in the marketplace. And then they connect and interact with others so that their uniqueness becomes a contribution to the system.=
The new world is a set of nested and networked systems, within which individuals play their role. Every time they connect and interact with others, new information is produced, a service is given, an exchange is made. It is the interactions that are productive.
That’s how the modern world is advancing. Because each individual is empowered and augmented and connected like never before by technology, the number of interactions and the frequency of interactions and the quality of interactions and the precision of interactions are virtually unlimited. There’s an economy of individual value creation in these ecosystems of interactions. That’s where economics should focus.
Services As Software.
Kling’s accusation that economists still seem to think as if the economy were made up of factories and line workers is doubly telling. First, the US economy is now 80% services – defined as the use of knowledge to serve others. But, even if economic theory were able to keep up with this development, services have moved on, and are becoming software.
Financial services are a good example. Financial services as software will change every perception we have of financial institutions. There will be no banks, just apps on a mobile device, with the same digital experience as any other. Instead of bottlenecked institutions, we’ll see peer-to-peer, self-initiated, self-controlled, low cost transactions that feel instantaneous, smooth and frictionless. There’ll be high privacy, high security, and no discrimination.
Kling suggests economists don’t understand financial intermediation today. When finance is disintermediated, they’ll understand even less.
Real World versus Theory.
Economists are always talking about economic theory: monetary theory, labor theory, capital theory, price theory and so on. Economics should be about the real world. There’s no shortage of real world data, and in fact much of it is real time. And we have advanced analytics to detect patterns and trends and identify insights from the data.
The data is factual – it’s about actual individual behavior. From these facts we can deduce the feelings and motivations behind the behavior, and hence individual value preferences. There’s no need for elaborate theories (which are often riddled with counterfactual assumptions) and even less place for the spreadsheet models that economists build on top of their theories and assumptions. We now have machine learning based on patterns of facts.
Economics As Morality.
The current world of interconnected individuals exchanging services points towards a highly moral society. Each individual wants to help others realize their subjective value preferences. They try their best, and accept market feedback with grace to achieve continuous improvement. The most just society is the one that releases the creative energies of their entrepreneurial citizens in service to others. Economics should concern itself with true morality.
Well done, Arnold Kling.
Dr. Kling has done economics a great service. He has demonstrated its emptiness. He has declared it worthless. Thank you, Arnold. New thinking can now take over.
Also published on Medium.