I’ll tell you a tale about an English economist, Ely Devons. I was at a conference and he said, “Let’s consider what an economist would do if he wanted to study horses.” He said, “What would he do? He’d go to his study and think, ‘What would I do if I were a horse?’ And he’d come up with the conclusion that he’d maximize his utility.”
That wouldn’t take us very far if we were interested in horses, but we aren’t really interested in horses at all.
What Devons said was, I think, part of the problem, but not the whole of it. I think it’s not really the most important objection – the lack of realism.
What I think is important is that economists don’t study the working of the economic system. That is to say, they don’t think they’re studying any system with all its interrelationships. It is as if a biologist studied the circulation of the blood without the body. It is a pretty gory thought, but it wouldn’t get you anywhere. You wouldn’t be able to discuss the circulation of the blood in a sensible way. And that’s what happens in economics. In fact the economic system is extremely complicated. You have large firms and small firms, differentiated firms and narrowly specialized firms, vertically integrated firms and those single-stage firms; you have in addition non-profit organizations and government entities – and all bound together, all operating to form the total system. But how one part impinges on the other, how they are interrelated, how it actually works – that is not what people study. What is wrong is the failure to look at the system as the object of study.
– Why economics will change, remarks at the University of Missouri, 2002