Classical Economics: Understanding Dubai

Why isn’t classical economics taught in business schools?

Business professionals obviously need to know the fundamentals of supply and demand, and yet departments of economics are more commonly found in schools of arts and sciences than in schools of business. Although some business schools have developed programs with hybrid names like business economics, classical economists are generally considered social scientists and not business professionals.

In fact, many universities with no business programs at all often maintain thriving departments of economics. John Nash, for instance, is the Nobel Prize winner in Economics who invented the Nash Equilibrium, and who has lived to see Russell Crowe play his character in the Academy Award winning film A Beautiful Mind. He spent much of his career teaching economics at Princeton, a university with no business school.

A Pair of Dubious Arguments, and a Credible One

So why are departments of classical economics housed in schools of arts and sciences instead of schools of business? Some academicians may note that the study of economics extends back to the publication of Adam Smith’s The Wealth of Nations in 1776, and thus predates the development of the nation’s first school of business at the University of Pennsylvania’s Wharton School in 1881. However, the study of accounting – a core department in all business schools – actually extends back much further, to the publication of Luca Pacioli’s Summary of Arithmetic, Geometry, Proportions and Proportionality in 1494. Thus, the explanation that “economics exists outside of business schools because its study predates them” is clearly a dubious one.

Other academicians may observe that economics affects individuals, organizations and societies in profound ways, and thus should be closely integrated with social psychology, engineering, and many other disciplines of the social sciences. However, social psychologists do study and teach organizational behavior in many schools of business, and engineers do likewise in the field of operations research. In other words, this observation doesn’t explain why economists are singled out from these other academicians and classified as social scientists.

So why is classical economics taught in schools of arts and sciences instead of business? A more credible answer to this question involves the focus of economics on holistic balance and equilibrium, a concept that also pervades biology, literature, meteorology, physics, sociology, and many other disciplines in the arts and sciences.

From Pip to Harry Potter

The core theory of micro-economics is that forces of supply and demand continually interact and eventually determine equilibrium market prices. Likewise, the core theory of macro-economics is that the production of national wealth is determined by forces of consumption, investment, and spending. Whenever these forces become imbalanced, economies react by becoming unhinged, leading to product shortages, valuation bubbles, and other short term maladies … but then expectations change, prices adjust, and economies regain conditions of long term equilibrium and balance.

Many other disciplines in the arts and sciences focus on similar forces. Biologists, for instance, often attribute obesity to overindulgence in unhealthy snack foods, and recommend that individuals adjust their lives and find their own equilibrium weights by combining diet and exercise. And literature abounds with “fish out of water” protagonists, from Charles Dickens’ Pip to J.K. Rowling’s Harry Potter, about people who are thrust into unfamiliar (and often dangerous) situations. They can only restore balance to their lives (and, in Potter’s case, to the forces of good and evil) by adjusting their own personal philosophies and perspectives as they respond to evolving circumstances.

Meteorologists, of course, classify weather patterns as high and low pressure systems; they study how collisions between these systems result in temporary but devastating storms. Likewise, physicists study similar forces on a molecular level, creating storm-like nuclear explosions that can be harnessed for peaceful (e.g. nuclear energy) or warlike (e.g. atomic weapons) purposes. And sociologists study how cultural forces, such as globalization and the growing ubiquity of the internet, can disrupt societies while laying the foundation for future prosperity.

Explaining Dubai

All of these disciplines, incidentally, can help us understand why wealthy societies occasionally encounter severe financial disruptions. Last Thursday, for instance, Dubai stunned the world by announcing that its government owned Dubai World needs more time to repay some of its staggering $59 billion in debt; much of it was spent on gigantic skyscrapers and indoor ski resorts in the midst of the Arabian desert.

How did this happen? Economists explain that Dubai’s oil wealth generated an excessive supply of capital that turned such dubious projects into realities. But biologists and meteorologists note that the human need for sophisticated air conditioning and water systems in brutally hot desert environments inevitably inflate the operating costs of such establishments.

Meanwhile, literary critics and sociologists can cite numerous stories about problems that have arisen when global cultures have engaged in massive Westernization initiatives, beginning with Czar Peter the Great’s construction of St. Petersburg in 1703. And physicists can offer numerous examples of energy sources like whale oil and kerosene that have declined in use because of newer technologies; they often warn against assumptions that oil producers will be forever wealthy.

All of these forces – economical, biological, meteorological, sociological, cultural, and physical – help explain the conditions that led Dubai into such fiscal peril. By analyzing the forces that continue to both stabilize and destabilize the Emirate, we can more effectively predict how Dubai will eventually find its way back to economic equilibrium.