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Economists and strategists

Posted By on April 29, 2013 @ 13:30

A couple of weeks back, ASPI hosted a half-day meeting between economists and strategists. The goal was to explore how the two groups can cooperate in a public policy sense. It turned out to be a lively and interesting afternoon. As a scene setter, I spoke on what I saw as the similarities and difference between the two disciplines and also on the opportunities for collaboration. This post is a summary of what I said.

The core goal of public policy is very simple; we desire more good things and less bad things. Economists and strategists largely sit on opposite sides of this dichotomy. Economists seek to arrange society so that we can have more good things than would otherwise be the case. In contrast, strategists try to mitigate the risk of a particularly nasty class of bad things by reducing their likelihood and consequence.

The demarcation isn’t absolute. Economists worry a lot about economic stability (which is about avoiding bad things) and strategists take regard of the advantageous spin-offs from defence investment (which is about having more good things). Notwithstanding such exceptions, economists are mostly concerned with making the world a better place while strategists want to stop it from becoming a worse place.

Economics and strategy (in the form of strategic studies and the like) are both well established in our universities. But, while both fields produce credentialed experts at a rapid pace, it’s only in economics that formal training really counts for something. While it would be extraordinary for a non-economist to head the Reserve Bank or Federal Treasury, it’s routine for strategy to be practised by people with little or no formal academic background in the field. When was the last time a Secretary of the Department of Defence (or a Chief of the Defence Force) had an academic qualification in strategy?

There’s a reason economics is a full-blown profession while strategy remains a game for amateurs. The technical aspects of economics constitute a barrier to entry which isn’t easily crossed without formal training. If you don’t know the difference between the Phillips Curve and a Phillips head screwdriver, you’ll be found out pretty quickly. In strategy, most educated folks with an interest in the world can hold their own in a discussion over, say, the value of the ANZUS alliance to Australia.

Part of the reason why the barriers to entry for strategists is low is that they long ago outsourced most technical matters (of which there are a great many in defence and strategic affairs) to a subordinate cadre of tame scientists, technologists and intelligence specialists who ‘worry about the details’. In contrast, economists are intimately involved in the details of what they do. The reason might be that economists have mountains of data to play with, whereas on the big issues strategists ultimately have to rely on little more than a handful of historical anecdotes.

The large disparity in the availability of data shapes the nature of the respective theories that economists and strategists develop. A lot, but by no means all, of economic theory is mathematically based and amenable to falsification in principle—though it sometimes turns out to be often surprisingly difficult to draw definitive conclusions in practice. As for strategists, to the extent that they have theories, they’re more akin to ideologies; plausible but largely untestable presumptions about how countries behave in the international community.

So what about the similarities? To start with, economists and strategists share all the frailties of being human, including, critically, a limited capacity for objective judgement. In each field, people coalesce into mutually reinforcing sub-groups with a particular worldview. Students adopt the prejudices of their supervisors to perpetuate ‘schools’ of thought. As such, the outputs of both fields owe as much to social context as objective analysis. Neither area of study can claim the high ground on this count. In 2007 there were at least as many economists who believed that the business cycle had been tamed into a ‘great moderation’, as there were strategists who believed that Iraq was bristling with weapons of mass destruction in 2002.

At some level, both fields try to make predictions about the future and offer policy prescriptions about what to do. All the standard jokes about economists having an almost unlimited diversity of views hold equally if you substitute ‘strategist’ for ‘economist’. And both fields have their share of shills promoting the views of vested interests. More importantly, there’s little evidence that commentators in either field are any more prescient than thoughtful non-specialist observers. If that sounds doubtful, check out the work by Philip Tetlock [1] on the matter.

To be fair, both fields deal with very difficult and often complex problems. It’s disappointing, but ultimately not surprising, that our best experts more often than not fail to foresee monumental developments such as the fall of the Soviet Union and the Global Financial Crisis. At the heart of the problem of prediction lies the uncertain dynamics of individual and aggregate human behaviour. We have no better idea what Kim Jong Un will do tomorrow than we have of where the equity markets will close in a week’s time—and there’s nothing we can do about it.

The final point about the two disciplines is a positive one. When all’s said and done, both fields have made an overwhelmingly positive difference to the world in the post-WWII period. Two things stand out. A generation of strategists managed to avoid war with the Soviets and lived to see that version of authoritarianism related to the dustbin of history. At the same time, economic growth spread across the globe, raising living standards and boosting life expectancy to unprecedented levels—a tribute to the economist’s prescription for freer domestic and international markets. On the big stuff, we got it right. And although the two disciplines largely worked in separate silos to achieve these results, there’s no denying that their positive outcomes were mutually reinforcing. Peace is good for prosperity, and prosperity is good for peace.

Looking to the future, it’s become pro forma to assert that the world is becoming ever more complex, interconnected and uncertain so that we must break down the silos and adopt a multi-disciplinary, whole of government, holistic, integrated… etc. I think such claims overstate the problem. They also betray an ignorance of history; the current series of financial ‘crises’ in Europe pales into insignificance compared with what happened in the 1920s and 30s in that same part of the world.

Yet, I believe that there are some issues upon which strategists and economists might usefully engage. Here are a few possibilities:

  • Managing international finance during a strategic crisis. Given the massive foreign holdings of US and European debt, what consequences might there be in the event of a strategic crisis?
  • Resource and energy security. It’s impossible to properly understand resource or energy security without an appreciation of how global markets operate.
  • Trade policy and geopolitics. The barely concealed strategic competition between China and the United States is a relevant factor in understanding the competing trade liberalisation agenda being pushed in the Asia Pacific.
  • Defence efficiency. Recent attempts to reform the Department of Defence have been led by strategists, generalists and managerialists, with minimal input from economists. The results speak for themselves.
  • Monetary policy and geopolitics. One country’s attempt to stimulate economic growth through ‘quantitative easing’ has a potentially unwelcome impact on the terms of trade of others, and thereby on its international relations.

Mark Thomson is senior analyst for defence economics at ASPI.



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[1] Philip Tetlock: http://www.newyorker.com/archive/2005/12/05/051205crbo_books1

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