Book review: Cogs and Monsters

Last week, I reviewed What's the Use of Economics?, edited by Diane Coyle, and noted that I wished I had read it much earlier. In part, that's because I felt that economics had moved on a bit from where it was in 2012 when that book was compiled. Diane Coyle's 2021 book Cogs and Monsters updates the situation and simultaneously argues that, while economics has moved on since the Global Financial Crisis, we haven't yet reached the final destination. And this is important. Economics and economists are constantly the target of ill-informed criticism, with which Coyle is clearly annoyed:

This book reflects my frustration with the straw men arguments because, as well as ignoring welcome changes in economics and in the way it is taught, they have allowed economists to overlook or deny some things that are badly wrong with the discipline, both in its intellectual approach and in the ways economists are so unrepresentative of the societies we aim to study.

I also bristle at the ongoing criticisms of economics that don't reflect the reality of modern economics, or that treat all economics as if it is macroeconomics (when microeconomics in particular has seen many important developments in recent times). In contrast, while Coyle outlines a critique of economics, hers comes from a position of greater knowledge and understanding. And her goal is not to simply engage in petty point-scoring, but to have economics incorporate many of the changes in theoretical and empirical understanding, as well as recent changes in the way that the economy works. And it is those two aspects (critique and improvement) that define the cogs and the monsters from the title of the book:

...the cogs are self-interested individuals assumed by mainstream economics, interacting as independent, calculating agents in defined contexts. The monsters are snowballing, socially-influenced, untethered phenomena of the digital economy, the uncharted territory where so much is still unknown (labelled 'Here be monsters', on mediaeval maps). In treating us all as cogs, economics is inadvertently creating monsters, emergent phenomena it does not have the tools to understand.

That last point, on economics creating monsters, is the theme of the first parts of the book. The key message is that, by assuming rational, self-interested agents, economic models can actually create the conditions that lead to more people acting in self-interested ways, and how this is not ultimately for the good of society. Much of this happens through economics' influence on policy. However, Coyle argues that, while economists might believe otherwise, they are unable to truly stand outside of the world that their models are being used to understand, and that the distinction between positive (what is) and normative (what ought to be) is a false dichotomy.

The last part of the book looks at what economics needs to do differently, and concludes with a special focus on the digital economy (where Coyle has a deep and longstanding interest, going back to her 1998 book The Weightless World). Coyle argues that we already have many of the elements for an improved economics, but they need to be systematically incorporated into the mainstream:

We need to build on the work that already exists to incorporate as standard externalities, non-linearities, tipping points, and self-fulfilling (or self-averting) dynamics. We need to revive and rethink welfare economics... We need a modern approach to the public provision and regulation of information goods, applying the rich literature on asymmetric information and older network industries to the non-linearities and externalities of the digital world. And we need to put the social, not the individual, at the heart of the study of economics, taking seriously the line often-stated about the importance of institutions and trust to economic outcomes. This means above all returning to the origins of economics as political economy.

Sadly, the book had less to say about institutions and trust than about the other aspects, which was a bit of a missed opportunity. Certainly, more could have been made of those points. And there were other parts of the book where I disagreed with particular aspects, although the overall message is important and economists should take heed. If I had one minor quibble though, it was one part of the book that discussed the 'Close the Door' campaign:

As you walk down a high street in winter, you will find many stores with their doors wide open blasting out heat in the entrance. This is not a desirable state of affairs either in environmental terms or in terms of the stores' energy bills. So why do they continue to do it? Their fear of discouraging ambling shoppers from entering their store, when every competitor's door is open, outweighs their desire to cut the electricity bill, or reduce emissions. No sop can shut the door unless the others do so. It is a classic co-ordination problem...

What Coyle describes here is not a coordination problem (which in game theory has two or more Nash equilibriums, like here or here), but is a prisoner's dilemma (where there is a Nash equilibrium that results in all players being worse off, whereas if they agreed to work together, there is an alternative outcome where they could all be better off, like here or here). This situation would be a coordination problem if there are two stable outcomes (all stores keep their doors open, or all stores keep their doors closed). However, in this case, each store would be better off if every store keeps their doors closed (since their energy bill would be lower), but every individual store has an incentive to open their door to attract more customers. Opening their door is a dominant strategy (it is a better choice for each store regardless of whether other stores open their doors or not), leading to a worse outcome for all. Despite that quibble, the policy response is the same (it will require regulation to get the stores to close their doors, since any agreement between the stores may just result in the stores cheating on the agreement). The irony of this story, though, is it is the rational, individualistic behaviour of the stores that leads to the outcome of all stores having their doors open, when Coyle has already spent most of the book arguing that we shouldn't be modelling decision-makers as rational and individualistic.

Overall, I did really enjoy this book, and it offers much more for both the general reader and for economists than What's the Use of Economics?, and not only because it is of more recent vintage. Economics students would also likely benefit from the broader perspective on the discipline that they are about to join.