Reviewed by Scot A. Stradley University of North Dakota
The world should take notice when a book about economic theory and economic history is issued in paperback after being published in hardback. The interpretation of the phenomena is difficult, though. Is it an attempt to lower price to increase the quantity demanded for an otherwise lackluster performance, a marketing plan to expand sales of a differentiated product, or a genuine attempt to respond to the large demand that developed as a consequence of the response to the first edition? This writer believes that the latter is the actual fact.
Such an introduction is appropriate since this book is another contribution to the historical literature produced by doubters and skeptics. The book addresses the history of economic thought as a means of approaching its more serious purpose of evaluating the origins of the present crisis in economic theory regarding its inability to predict economic phenomena. Economics suffers from an adherence to mechanistic modelling in a static framework and fails to consider economic problems from Lhe viewpoint of dynamics rather than statics.
The book is, at least in Part 1, “The Present State of Economics,” not original in its viewpoint. Economic theory has a long history of criticism both of its form and its content. Omerod follows much of this tradition without citation in order to advance an argument that economics has become preoccupied with a paradigm of statical mechanics based on intimate connections with the history of science. Further, economic science developed an “abstract” human being, rational economic man, to make its mechanistic explanations of economic behavior work. The model is less than plausible and has failed to successfully predict economic phenomena. Us failure is the source of the current crisis.
This failure is moreover a failure in public policy. Omerod, whose own work must be admired for its mixture of theoretical discussion and historical examination, presents evidence drawn from the major late twentieth century economies that intertwines with his argument that orthodoxy has failed. The greatest danger of this is rightly shown to be misguided public policy makers. Omerod makes a good case that public policy, misled by economists’ reliance on general equilibrium models based on the behavior of rational economic man, have generally made mistakes that result from considering only the statical framework. A proper approach to modelling requires incorporating historical perspective to produce a dynamic model, rather than a static model.
Transforming method requires giving up the idea of general equilibrium through time. The perspective is more like that found in biology and geology, and Omerod is to be complimented for using an interdisciplinary approach, where equilibrium is a temporary state of affairs. Equilibrium ends when some substantial change in any or all the variables results in a catastrophic shift in the relationship. Shocks change the level of the equilibrium and the way the system producing the finite equilibrium works. Omerod uses biological literature to illustrate this idea of change, but strangely does not mention Stephen Jay Gould’s concept of “punctuated equilibria,” or similar ideas in geology. He also does not mention the small literature on catastrophic change in economics such as Hyman Minsky’s work on systematic financial fragility, or Charles Kindelberger’s numerous contributions to this conceptual perspective.
Omerod’s book is highly recommended because it is written very well and would serve as an excellent trade book for a public perplexed not only by what they experienced in their college economics course, but also concerned about the direction and stability of the existing and transforming market economies. The book would also serve the undergraduate and graduate student that senses the “crisis” in economics and is frustrated by the great inertia which prevails in all systems of natural and social philosophy. The book not only finds fault with the past, but offers an alternative for change. The mathematical economist and the econometrician should read this since their skills are required in both the old order and the new order, should chaos theory come to be integrated into equilibria theory. In fact the mathematical and statistical challenges are substantially greater.
The economic historian should read this book as well. Scientific method once advocated that hypothesis be developed after one had engaged in a thorough examination of the evidence. This did not mean consulting government data. Omerod really advocates historical perspective as the necessary foundation of both economic statistics and theory. Both would gain and economic science would increase in stature because the new dynamic method would succeed where linear, mechanistic economics did not. The theorist would especially benefit from the historical perspective because it teaches that institutions are important economic variables. This advice to the economics profession was also delivered when Douglass North won the Nobel Prize for making the same point.
Omerod offers an interesting synthesis of mechanistic and chaotic science. His own model combines shocks from the institutional domain to the general equilibrium system. The model is used to examine the unemployment problem in the advanced industrial nations. The model has important implications for policy makers. The result is a common criticism of economic orthodoxy combined with an emerging dynamic approach to modelling written in a manner that both expert and neophyte can understand the modern literature in political economy.
