The relationship between economics and business?

Given an email discussion I was having with a friend (another economist) recently, I was reminded of something I wrote back in 2012. It seems my view of economics is out of step with other views of the subject. I see it as a social science with a close relationship to moral and political philosophy, political science, psychology etc. But this it seems is a minority view. Many people, economists included, seem to see the subject as simply being part of business, its sole role is to train better businessmen (whatever "better" may mean in this context).

Of course, I would ask, What use is general equilibrium theory or the theory of the firm or time-series econometrics or experimental economics or ..... to a businessman? Does your local dairy owner really need to know about Granger causality or the second fundamental theorem of welfare economics to run a successful business? I would say not, but it seems I'm wrong. Others believe these to be vitally important for the success of the enterprise.

Now I would argue that a basic knowledge of economics is valuable and useful for all people be they businessmen, school teachers, truck drivers or whatever. What I don't see is why businessmen need more economic knowledge than other people. ,p>Oh well, like on so many things, it looks like I'm wrong yet again :-(

What would Adam "Moral Philosopher" Smith say?

I should add that I was not the first person to think economics is of little use to businessmen. A. C. Pigou got there well before me, in 1922 in fact:

"[ . . . ] it is not the business of economists to teach woollen manufacturers to make and sell wool, or brewers how to make and sell beer, or any other business men how to do their job. If that was what we were out for, we should, I imagine, immediately quit our desks and get somebody - doubtless at a heavy premium, for we should be thoroughly inefficient - to take us into his woollen mill or his brewery".

Lionel Robbins followed up in 1935 by arguing that running a business is beyond the competence of economists,

"[t]he technical arts of production are simply to be grouped among the given factors influencing the relative scarcity of different economic goods. The technique of cotton manufacture [ . . . ] is no part of the subject-matter of Economics [ . . . ]".

Ronald Coase notes that when he went to the LSE to study for the Bachelor of Commerce, specialising in the Industry Group,

"It will have been noticed that during my two years at LSE I studied a great variety of subjects, devoting therefore very little time to each and inevitably doing no systematic reading. I took no course in economics [...]" Obviously, in Coase's day economics was not seen as vital to business.

Ulrich Witt notes that early in the history of economics in Germany economic theory was separated from business economics,

"There, economic theory (Volkswirtschaftslehre) and business economics (Betriebswirtschaftslehre) were institutionally segregated as early as at the turn of the century to a degree still unknown today in the Anglo Saxon world. As Lachmann once conjectured, Austrian writers therefore considered the organizational form of entrepreneurial activities to be a topic best left to their business economics fellows."

May be my view is just old fashioned.

Latest Blogwatch column

 My Blogwatch column from the latest issue (Issue 70, April 2021) of the NZAE magazine Asymmetric Information.

Published!!

My latest book is finally published!! The publisher's page for the book is here.

Foundations of Organisational Economics: Histories and Theories of the Firm and Production delves into a range of key topics to do with the history of the mainstream approach to the theory of production and the theory of the firm. This includes the frameworks used to analyse production, the division of labour and its application to the firm and the development of the neoclassical model of production. The first topic explored is the change from a normative approach to a largely positive approach to the analysis of the theory of production, which occurred around the seventeenth century. The next topic is an examination of the relationship (or the lack of a relationship) between the division of labour and the theory of the firm. In the fourth chapter, the focus is on the development of the proto-neoclassical approach to production. Here, the development of the theories of monopoly, oligopoly and perfect competition are discussed, as well as the theory of input utilisation. Chapter 5 looks at Marshall’s idea of the representative firm, which was the main early neoclassical approach to the theory of industry-level production. The penultimate chapter considers the criticisms made of the neoclassical model between 1940 and 1970. This work is an illuminating reference for students and researchers of the history of economic thought, industrial organisation, microeconomic theory and organisational studies.

Table of Contents 1 Introduction 2 Normative versus positive analysis in the history of the theory of production 3 The division of labour and the theory of the firm 4 Proto-neoclassicals and the theory of production Appendix: a very brief history of perfect competition 5 The representative firm 6 The neoclassical model under fire 1940–1970 7 Conclusion

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 69, December 2020) of the NZAE magazine Asymmetric Information.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 68, August 2020) of the NZAE magazine Asymmetric Information.

Thomas Sowell: Common Sense in a Senseless World

Thomas Sowell: Common Sense in a Senseless World traces Sowell’s journey from humble beginnings to the Hoover Institution, becoming one of our era’s most controversial economists, political philosophers, and prolific authors. Hosted by Jason Riley, a member of The Wall Street Journal editorial board, the one-hour program features insights from Sowell and interviews with his close friends and associates, revealing why the intensely private Thomas Sowell is considered by many to be “one of the greatest minds of the past half-century” and “the smartest person in the room.”

The Theory of the Firm: An Overview of the Economic Mainstream, Revised Edition

This is a revised edition of Walker (2017). New sections or subsections have been added on the X-inefficiency model, the division of labour and the firm - both pre and post-1970, ownership of the firm and the human capital based firm. Additions have been made to sections on entrepreneurship, the incomplete contracts approach to the firm, the discussion of Coase’s paper on the ‘The Nature of the Firm’, the discussion of industry-level analysis versus intra-firm analysis, reasons for ignoring firm, a small addition has been made to the Sreni material in section 2.1 and material on Commenda, Waqf and the Clan Corporation has also been added to section 2.1. Appendix 4 has been deleted.

Walker, Paul (2017). The Theory of the Firm: An overview of the economic mainstream, London: Routledge.

The Theory of the Firm: An ... by Paul Walker

The antitrust case against Google

From the Cato Daly Podcast comes this interview in which Geoffrey Manne of the International Center for Law and Economics evaluates the claims in the antitrust case against Google.

Grumpy Economist: the future of cities. a conversation with Harvard's Ed Glaeser

Does Zoom mean we all work from home? Will cities bounce back? Will San Francisco and New York fade and smaller cities grow? What problems are the policies causing and can cities reverse downward spirals? How to help unfortunate people who live in cities?

The Black Death

At VoxEU.org Mark Koyama is interviewed by Tim Phillips on the topic of The Black Death

Seven hundred years ago the worst pandemic in history killed almost half the population of Europe and the Middle East. Mark Koyama tells Tim Phillips about the centuries-long economic impact of the Black Death.

Questions about Neanderthals answered

From the BBC's History Extra Podcast comes this discussion about Neanderthals.

In an episode produced in collaboration with our colleagues at BBC Science Focus Magazine, archaeologist Rebecca Wragg Sykes tackles some of the big questions about Neanderthals and their relations with modern humans.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 67, April 2020) of the NZAE magazine Asymmetric Information.

Recalibrating affirmative action

From The Glenn Show comes this video in which Professor Glenn Loury interviews Professor Peter Arcidiacono on affirmative action.

Wage and price controls in a pandemic

If there is one thing we don't need in a pandemic it's wage and price controls. From the Cato Daily Podcast comes this discussion of the effects of wage and price controls in the US. Caleb O. Brown interviews Ryan Bourne and they discuss the role of prices in helping economic actors to adjust to new realities.

George Selgin on Average Inflation Targeting and "The Menace of Fiscal QE"

From Macro Musings comes this video in which David Beckworth interviews George Selgin about the Fed’s new policy framework and Selgin's recent book titled, The Menace of Fiscal QE. Specifically, David and George discuss the Fed’s quantitative easing evolution, and how the move to a floor system helped pave the way for fiscal QE to become a more popular policy in the present.

 

Macro Musings · George Selgin on Average Inflation Targeting and *The Menace of Fiscal QE*

David Neumark - using minimum wages to fight inequality and poverty

From the School of Social Sciences at the University of California, Irvine comes this video in which Professor David Neumark talks about using minimum wages to fight inequality and poverty.

The Theory of the Firm: An Overview of the Economic Mainstream, revised 11 July 2020

In this overview we give a short survey of the way in which the theory of the firm has been formulated within the `mainstream' of economics, both `past' and `present'. One aim is to give an outline of the historical developments that led to the contemporary theories. As to a breakpoint between the periods, 1970 is a convenient, if not entirely accurate, dividing line. The major difference between the theories of the past and the present is that the focus, in terms of the questions asked in the theory, of the post-1970 literature is markedly different from that of the earlier (neoclassical) mainstream theory. The questions the theory seeks to answer have changed from being about how the firm acts in the market, how it prices its outputs or how it combines its inputs, to questions about the firm's existence, boundaries and internal organisation and the role of the entrepreneur. That is, there has been a movement away from the theory of the firm being seen as developing a component of price theory, namely issues to do with firm behaviour, to the theory being concerned with the firm as a subject in its own right.

The Theory of the Firm: An ... by Paul Walker on Scribd

Marxism at the movies

From the IEA comes this podcast on Marxism at the Movies.

Complaints about left-wing bias in the movie industry are not new. You can find articles from as far back as the 1930s, in which right-wing commentators lambast Hollywood as, essentially, an outpost of the Soviet Union.

Today, the woke, virtue-signalling actor, ready to jump on every fashionable left-wing bandwagon, has become a popular cliché. Clichés, of course, often contain a very large grain of truth.

Since the beginning of the lockdown, the average Briton's TV consumption has gone up by almost an hour per day. For better or worse, movies and TV series are now a bigger part of our lives than ever before.

Dr Kristian Niemietz, IEA Head of Political Economy, turns film reviewer and speaks to Emma Revell, IEA Head of Communication, about two recent examples of dystopian science fiction-thrillers The Platform and Snowpiercer, asking are Marxists taking over cinema?

Who was Ronald Coase? - with Cento Veljanovski

From the IEA comes this video in which Syed Kamall interviews Cento Veljanovski about the work of Ronald Coase.

 

Foundations of Organisational Economics: Histories and Theories of the Firm and Production

This essay provides introductions to five of the major topics to do with the history of the theory of production and the theory of the firm. The first chapter is an introduction. The second considers the change from a normative approach to the theory of production to a largely positive approach. Before, roughly, the 17th century the main approaches to the theory of production were normative. The third looks at the relationship (or the lack of a relationship) between the division of labour and the theory of the firm. Even today the mainstream of economics does not emphasise the division of labour in the theory of the firm. In the fourth chapter, the development of the proto-neoclassical approach to production is examined. The development of theories of monopoly, oligopoly and perfect competition as well as the theory of input utilisation are discussed. The fifth chapter looks at Marshall’s idea of the representative firm. This was the main early neoclassical approach to the theory of industry-level production. Marshal wished to be able to construct an industry supply curve without having to assume all firms were identical. The sixth examines the challenges to the neoclassical model in the period 1940-1970. The last chapter is a short conclusion.

Foundations of Organisation... by Paul Walker on Scribd