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Remember the intangibles: A caution to the 21st-century economist

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Today’s economists have no shortage of confidence, offering models and measurements aplenty. But are the tools of the field keeping pace with the actual forces and factors at work?

“The combination of economics with statistics in a complex world promises a lot more than it delivers,” economist Russ Roberts recently wrote. “We economists should be more humble and honest about the reliability and precision of statistical analysis.”

Indeed, in our modern, complex economy, what can economists actually know?

In a new essay at Hacker Noon, economist Arnold Kling offers a hint at an answer, or at least a solution, noting that the more fundamental problem has to do with an overreliance on materialistic assumptions and a basic blindness to the intangible factors at work.

“Wake up! We’re not in the 19th century any more,” he writes. “It’s time for economists to stop trying to look at today’s economy through 200-year old glasses. In particular, economists need to update their thinking to take into account the complex evolution of business strategy.”

It’s a topic that Kling has tackled before. In his 2011 book, Invisible Wealth: The Hidden Story of How Markets Work, Kling and co-author Nick Schulz point to the “intangibles” of the modern economy, and the need to recognize them in our broader study. Whereas Economics 1.0 was concerned with tangible inputs like labor and capital, Economics 2.0 ought to also be concerned with other factors, such as creativity, collective intelligence, trust, social practices, property rights, and levels of corruption. Without this wider imagination, economists will struggle to make sense of the world.

In the latest essay, Kling teaches us that same lesson, but by drilling more specifically into the area of business strategy. “Our outdated economic textbooks still treat business strategy as nothing more than deciding the mix of capital and labor along with the quantity of output,” he writes. “21st-century economists should instead be aware of the way that the Internet has made business strategy much more complex and important.”

Highlighting the range of “mental-cultural” forces at play in many modern businesses, Kling offers 4 examples of research directions that economists have thus far failed to seize upon (abbreviated excerpts below, but read the whole thing).

In each area, we see the importance of paying heed to the intangibles and the risks of ignoring them.

1. Firm Interaction

The most promising theories of the boundaries of the firm stress intangible factors, such as information processing by management and the challenge of providing motivation and compensation in a setting where output is the joint product of teamwork. But because economists are more comfortable working with tangible, measurable goods, there has not been much effort devoted to applying these theories to the real world. In the 21st century, there is an opportunity to rectify this.

… The entire business ecosystem is complex in ways that no economist imagined a hundred years ago. My essay on the value of economic classification systems pointed to examples of economists who have explored this complexity. We need more work like theirs, which involves staring at the real world instead of at a mathematical model.

2. Determinants of Economic Success

Neoclassical economics says that factors of production are paid their marginal product. But mental-cultural factors and rapid evolution make “marginal product” unobservable.

In short, neoclassical economics treats the creation of value as technologically determined by the characteristics of the factors of production. It sees the capture of value as proportional to the creation of value. In reality, value capture and value creation are much more contingent. Value creation depends on how business and engineering ideas are combined and on how competitive strategies are employed. Value capture depends on how various strategies interact with one another.

3. The Functions of Financial Intermediation

Mainstream economics is materialistically oriented. Economists view the firm as an entity that transforms tangible inputs into tangible outputs…But banks and other financial intermediaries operate entirely in the realm of the intangible. They change the way that risk and duration are perceived…Because this effect on perceptions is intangible, economists have been reluctant to explore it. As a result, many obvious questions about financial intermediation have not been addressed.

4. Measuring Overall Economic Performance

We may need a variety of indicators of economic well-being. They might include subjective measures of occupational satisfaction and consumer satisfaction. They might include objective measures that currently do not receive much attention, such as workplace injury rates for people in the labor force or rates of chronic health problems among the elderly.

As an economist, Kling is understandably focused on a very particular set of intangibles, and the practical tweaks he suggests offer plenty of healthy challenges.

But for Christians, and particularly for Christian economists, they also invite us to think even further beyond the material, connecting flurries of dots between and among the wider range of “intangible assets” we see and discern—economic, political, and “mental-cultural,” but also social, spiritual, and otherwise.

Whether we’re studying shifts in business strategies or the larger economy and marketplace as a whole, we have the opportunity to adapt our imaginations to a new reality and see our peculiar abundance with fresh, discerning eyes. What might it teach us as a result?

Image: Taka Umemura / CC BY-SA 2.0

Joseph Sunde is an associate editor and writer for the Acton Institute. His work has appeared in venues such as The Federalist, First Things, The City, The Christian Post, The Stream, Charisma News, Juicy Ecumenism, Ethika Politika, Made to Flourish, and the Center for Faith and Work. Joseph resides in Minneapolis, Minnesota with his wife and four children.

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