In her latest book, Cogs and Monsters, University of Cambridge economist Diane Coyle, co‐​director of the Bennett Institute for Public Policy, undertakes an ambitious project: to say what we need to change about economic thinking inherited from the 20th century to help us explain, understand, and make economic policy for the 21st century. Unfortunately, she rarely goes into specifics. Whether it be about how to measure well‐​being, what antitrust policy should be for an economy with industries in which one firm is dominant, or how large the role of government should be, she typically fails to pull the trigger. Along the way, she gives good examples of mistaken 20th century economic thinking without seeming to realize that her refutations can be accomplished with 20th century economic understanding. Although she has flashes of insight and affirms some important economic truths that economists have understood for more than a century, such flashes and affirmations are too rare in a 200+ page book.

The cogs in the title are "the 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 unchartered territory where so much is still unknown." Coyle advocates that economists start thinking less about cogs and more about monsters.

Why the straddles? / In surveying 20th century economic thinking, Coyle gives some credit where it's due. She highlights, for example, economists' belief in school vouchers and trade liberalization and she seems to second those beliefs. She also quotes a beautiful passage from economist Paul Seabright about the international origins of the various components of a shirt, a quote that is reminiscent of Leonard Read's 1950s essay "I, Pencil." She could have titled the quote "I, Shirt." She understands Friedrich Hayek's insight, expressed in his 1945 article "The Use of Knowledge in Society," that only a market can aggregate individuals' local knowledge and that a central planner would not have access to that knowledge. Coyle also points out that economists' "market-oriented instincts" do not depend on understanding higher-level math. She writes, "Markets are far more useful in practice than they are in theory." Nicely said.

At times, though, she seems to straddle an issue by not taking a position. There's nothing wrong with that per se, but when one straddles, one should explain why. In discussing Harvard philosopher Michael Sandel's critique of markets (see "The Smart Philosopher vs. the People," Fall 2012), for example, she writes, "He argues for excluding medicine from the market — should only the rich be able to buy a kidney or a heart?" Because Coyle doesn't make clear whether this rhetorical question is Sandel's or hers, she leaves the reader wondering what her view is. The obvious economic answer is that allowing anyone to buy a kidney or heart — something that is illegal now — would give people a strong incentive to sell one kidney when they're alive and both kidneys and one heart when they die. That would enormously expand the number of hearts and kidneys supplied and would make not just rich people, but also many others, recipients of hearts and kidneys. If you found out about a GoFundMe for a modest-income neighbor who wanted a kidney for her daughter, wouldn't you contribute a few hundred dollars? I would.

Coyle's criticisms / In a chapter titled "The Economist as Outsider," Coyle criticizes economists, sometimes justifiably, for not thinking through counterfactuals. One of her main examples of this poor thinking, though, seems to be a different failing. The example is the complaint of premium headphone maker Sennheiser that fake Sennheisers cost it $2 million a year, a sizeable amount for a small company. How did the firm reach that estimate? By assuming that if fake sales had been prevented, everyone who bought a fake set at a much lower price would have instead paid the higher price for a genuine Sennheiser. But any economist who thinks clearly about the relationship between price and quantity demanded would know better than that. You could call the flawed estimate a bad counterfactual, but that seems like an overstatement. Most economists would say it's ignoring the law of demand.

Parenthetically, this failure to understand the law of demand is why so many people fall for U.S. companies' claims that Chinese firms' violation of their intellectual property (IP) causes them a huge loss. There is a loss, but it's overstated: with well-enforced IP rights, many of the current violators would not even be in the market.

Coyle criticizes the view of many economists that people are rational. There are reasonable ways to critique that view, but she chooses a strange example to make her case. She writes, "For instance, economics predicts that rational consumers will use [annual percentage interest rates] to compare the cost of loans, but if that were the case none of us would borrow on credit cards, never mind payday loans." She doesn't say why she thinks this follows from rationality. It doesn't. What about the young couple who really want to furnish their home and have, as their only option, a credit card? Or what about the young military enlistee who badly wants an Xbox but won't have the funds to pay for it until two weeks from now on pay day. How strained must her view of rationality be to argue that such choices are irrational?

Incentives and progress / One of the biggest surprises I noticed in her view of economics is her statement, "Competition is quite a tender plant." She explains, "The more successful, the larger, the more profitable and powerful the incumbents, the harder it is to maintain competition." Actually, something closer to the opposite is the case. The more profitable the incumbents are, the greater is the incentive for new competitors to enter the industry. As I put it to my students the first day of class, competition is a hardy weed, not a delicate flower. That's why so many competitors lobby various governments to limit competition, whether by licensing, high tariffs, or stingy import quotas: without such government restrictions, those firms would face tougher competition.

In discussing "the new agenda for economics in the digital economy," Coyle asks, "What kind of regulation and governance would make digital markets deliver broad social benefits?" Yet, by her own admission, they already do deliver broad social benefits even without new regulation and governance. She reports Stanford University economist Erik Brynjolfsson's finding that the average person would need to be compensated by a whopping $17,000 to give up search engines for a year and $6,000 to give up email. Of course, we should take such survey data with a large dose of salt. But even if those estimates overstate the true numbers by an order of magnitude, which I think implausible, those are still pretty big annual benefits for the average family.

Even more telling, in some ways, is Coyle's own testament to economic progress and growth. In a particularly eloquent passage, she writes:

When I was a teenager in the 1970s, there was no internet or web, no mobile telephony, no personal computers or tablets or smartphones, and none of the services such as search, streaming music or movies, email, text messaging. Phones were tethered to the wall, usually in a cold hall (as central heating was far from universal), and the line was often shared with a neighbour. Vinyl was still on its first run although cassette tapes were now available as an alternative. Banking meant going to the high street and queuing. Cars used toxic leaded petrol, burned less efficiently, had no radios or electric windows, none of today's safety systems, still less built-in GPS and air conditioning. MRI scanners had not been invented, nor today's drugs for cancer; cataract and varicose vein surgery were not simple outpatient procedures. As well as obviously significant innovations like the internet or medical or pharmaceutical advances, there have been a multitude of incremental improvements in everyday life: outdoor gear made from fabrics that really do keep out the wind and rain, disposable contact lenses, tights that do not immediately ladder, the ability to watch TV programmes when you want, energy-efficient light bulbs.

Well said.

It probably is harder for a new entrant in the digital economy to displace a competitor because of two factors she discusses: large economies of scale and network effects. But here's my prediction that I'll put $1,000 on and give odds of 4:1: five years from now, even without new regulation, Facebook and Google will be substantially less dominant in their current markets than they are today. I offer this bet, not because I know how the competition will happen. I don't know and that's the point. Precisely because we pedestrian economists don't know and because government officials know even less, we should loudly advocate that governments let competition rip unhindered by regulation.

Criticizing Coyle / Coyle is concerned that young economics students aren't learning much economic history. I agree. The cost of focusing on complicated math is high: there's no time for learning much about 19th century or even 20th century economies. At times, though, she shows her own ignorance of history. She refers, for example, to the Gilded Age of the 1920s; the Gilded Age actually took place in the late 19th century.

A more important failure of hers is one of omission: She credits financial economist and Nobel economics prizewinner Robert Shiller for his warning in 2000 that the stock market was in a bubble. Of course, it did crash, once in 2000 and again in 2008. But a reader unfamiliar with history won't learn from Coyle's book that at the time of Shiller's warning, the Dow Jones Industrial Average was around 11,000 and the S&P 500 was around 2,200. Now the Dow is at about 35,000 and the S&P is at about 4,300. In both cases, that more than compensates for inflation; moreover, the gain in both indices badly understates the gain to people who reinvested their dividends in the stock market. Some bubble!

We economists may need to adjust our thinking in light of the huge economies of scale and network effects in so much of contemporary economies. Unfortunately, Cogs and Monsters, although it tries, doesn't make that case.