Unfathomable economic acts

Samuel Brittan is best known for his elegant and thoughtful articles on contemporary economics in the Financial Times . This collection of short essays is made up in part of some of these incisive pieces written over the past few years.

But there is much more than this both to the man and to the book. Brittan's interests range from practical international politics through political philosophy to economic methodology. These are reflected in the scope of this book, which contains eight sections. There is only one section on specific British economic policy. The others cover topics such as globalisation, the arms trade, the euro, the pretence to knowledge in much of academic economics, the failings of postmodernism, as well as reflections on political philosophy and essays on some of the great social scientists of the 20th century such as John Maynard Keynes, Milton Friedman and Friedrich Hayek.

The unifying theme running through the diverse essays is classical liberalism, which is reflected in the book's subtitle, "Reflections of an Individualist". Brittan discusses the concept in a wide-ranging manner in one of the longest single chapters. He summarises his philosophy thus: "In its minimalist form, it is the belief that actions should be judged by their effects on individual human beings". He goes on: "The danger of collectivism is that of attributing a superior value to collective entities over and above the individuals who compose it. This disastrous error... reached its apotheosis in the state worship of the Nazi and communist regimes. But it is lurking behind even the apparently more soft-hearted varieties of commun-itarianism."

The way in which Brittan uses this philosophy when discussing practical issues means that he is not easy to classify in conventional ideological terms. He is in favour of the operation of markets and supports globalisation. This much is obvious from his general position, which is disliked by blinkered interventionists, as the arguments on choice in public services show. Yet he approves of a basic income for all, an egalitarian measure, and is opposed to the promotion of the arms trade. His genuine liberalism leads him to wonder aloud whether we should experiment for five years with unrestricted immigration. But it also means that Brittan is scornful of any attempt to restrict freedom of speech even, or rather especially, when such a measure is proposed for "progressive"

reasons. So, he is strongly against making Holocaust denial a criminal offence, arguing that "the virtues of free speech and unimpaired historical inquiry would be cast aside in favour of the bogus virtue of the self-righteous, thus giving the philosophers of totalitarianism a posthumous victory".

In this eclectic mix of opinions, at least to orthodox political classifications, Brittan is very similar to Friedman, who is the subject of an illuminating chapter in the book. Attempts to brand Friedman a right-wing Republican were always confounded by the views of the man himself. He was, for example, strongly opposed to the military draft in the Vietnam War era and he argued against anti-drugs laws on the grounds that they were a subsidy to organised crime.

A key theme of the book is how useful economics can be in analysing a wide range of issues, for Brittan is a political economist in the proper sense of the term. Characteristically, however, he remarks at the outset that "the best case I can make for economics is to reflect on the greater nonsense that most non-economists utter". In a paper based on his 2000 address to the British Association for the Advancement of Science, Brittan lists a dozen or so principles of economics that are very useful. For example, in general, if the price of a product rises, less of it is bought.

As he points out, this is at first sight trivially obvious, but it is important because of the "numerous cases in which it is denied by public figures". Other examples include opportunity cost, the principle of comparative advantage in international trade and the circular flow of income. For some unknown reason, the latter two in particular cause all manner of problems for non-economists. Yet their basic rationale is easy to understand. Brittan argues that "ignorance of the circular flow of income is probably the most important single source of perverse economic policies today".

In the same piece, however, he doubts the value of much academic economics:

"I have said nothing about... Nash equilibrium, the NAIRU (non-accelerating inflation rate of unemployment) and a good many other concepts, not even maximisation" - all concepts used frequently by academics. Indeed, it is scarcely possible to publish an article in many economics journals without reference to at least one of this sacred trinity of ideas. Yet the trend at the frontiers of economic research is to validate Brittan's intuitive scepticism. Extensive empirical research shows that in real life, except where it is obvious, few people play Nash equilibrium strategies. Even more evidence, culminating in the award of the Nobel prize to the Americans Daniel Kahneman and Vernon Smith, suggests that the principle of maximisation, the core of conventional economics, is not how most people behave most of the time. Brittan's scepticism here arises from his belief in the inherent limits to knowledge in human social and economic systems.

These cannot be overcome by gathering more data or by carrying out cleverer research. They are as inescapable as the physical laws of the universe.

This view leads him to be particularly critical not just of economic forecasting, but also of a great deal of the subject of macroeconomics, much of which consists of trying to discover simple quantitative regularities between economic variables. Brittan's opinion is summarised in one phrase: "The problems of forecasting are rooted in the complexity of the phenomena under examination."

Here again, Brittan's thinking is in line with the direction of modern economics, at least as it is practised in the US. The concept of the economy as a complex system is increasingly fashionable. The individual people and firms that make up the economy are not fixed in their behaviour but are influenced by the behaviour of others. The phenomena we observe at the macro level arise from the interactions of the millions of decision-makers at the individual level and cannot be deduced directly from them. The whole is more than the sum of the parts.

Hayek anticipated this thinking 60 years ago and was virtually drummed out of mainstream economics. Incredibly, a leading British economics journal even refused to publish his Nobel lecture. Not surprisingly, Hayek is the subject of a long and very sympathetic piece in this volume.

The format of collected essays means that this is a book to be dipped into rather than read cover to cover. But it is hardly possible to recommend this book too highly. Brittan writes about difficult concepts in an admirably clear style. Apart from any professional interest they may have in particular topics, economists at all levels can benefit from these examples of how to do and write very good economics without using incomprehensible jargon. Non-economists will see both the usefulness of economics done properly and gain an appreciation of the limits to knowledge not just within economics but the social sciences more generally.

Paul Ormerod is the author of Why Most Things Fail (Faber, 2005) and a director of Volterra Consulting.