In defense of economists and their dismal science

You doubtless remember the scene in Monty Python’s “Life of Brian” where John Cleese exhorts members of the People’s Front of Judea to ask themselves, “What have the Romans ever done for us?” Well, he concedes, one or two things, obviously. But apart from the aqueduct, sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system, public health and peace, what have the Romans ever done for us?

Economists, it seems, are under-achievers in much the same way. At least, that’s the claim of Robert Litan’s new book, “Trillion Dollar Economists.” Very unfashionably, he has written not just an introduction to economics, but also an enthusiastic appreciation of the discipline – with a focus on the way economic ideas have transformed business, to the enormous and usually unacknowledged benefit of ordinary folk.

(Before I go on, I should mention that Litan is a former colleague of mine at Bloomberg, and that his book is published by Wiley and Bloomberg Press. I intend to praise it lavishly, regardless.)

The book has three main parts. The first covers economic ideas that have directly yielded big business and social benefits. The second is about economic ideas that have raised living standards indirectly, by driving public policy in ways that support economic growth. The third looks at ideas that might be equally transformative in the future, but haven’t yet been applied to full effect.

Throughout, Litan provides sketches of the economists who led the intellectual innovations, and links to accessible accounts of their thinking. His book would be valuable, in fact, merely as a guide to key thinkers and further reading.

It’s a lot more than that, though. If you’re going to read only one book on applied economics, you won’t find better. Excellent as “Freakonomics” and its various sequels might be, for instance, they’re too preoccupied with gimmicks, anomalies and arcana. (That title said it all. “Economics can be fun! Really!”) Litan conveys the same delight in economic reasoning but a much better sense of why it matters and how it helps.

Part one deals with privately profitable and socially valuable ideas on pricing, cost control, data analytics, experiments, market design and financial engineering. The explanations are clear and the style is engaging. Good, you might think – but with the Great Recession still dragging on the economy, that last item on the list seems jarring. The benefits of financial engineering?

Never fear, Litan is no blithe apologist for the excesses of modern finance, or champion of the markets-can-do-no-wrong school. Elsewhere in the book he explains why financial deregulation happened, where it made sense and where it went wrong. It’s one of the best short treatments of the subject I know. But he’s careful to give financial-product innovation a fair shake. The social benefits of ideas such as index investing have been enormous. He gets the blend of wonder at the power of markets and awareness of their defects just right.

Turning from financial rules to other “policy platforms for private business,” as he calls them, Litan discusses unfinished deregulation in transportation. This was a bigger deal than you might imagine. “One huge irony,” he says, “is that the age of Internet commerce, seemingly untethered from the physical world, would never have developed as rapidly as it did without the fundamental policy reforms that transformed the physical transportation world in the 1970s and 1980s.”

Economic ideas also helped reshape the energy and telecommunications industries. Again, the results have been profound. Decontrol of oil and gas prices set the scene for the technological revolution that is making the United States self-sufficient in energy and has lowered costs across the economy. The dismantling of AT&T’s telephone monopoly paved the way for the infrastructure investments that are building the modern digital economy.

You’d be hard-pressed to argue that this is the golden age of economics. At the moment, scholars given to reflecting on the state of the discipline are mostly grief-stricken over their own failure (and the even greater failures of their colleagues) to anticipate the crash or correctly advise on where policy should go from here. It’s true that what happened demands a fresh look at some accepted orthodoxies. But the affectation of despair for the future of the science is much overdone. Litan’s excellent book is a timely and valuable corrective.

Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board.