5 acts in the history of modern economics
from Edward Fullbrook
Kevin Gallagher has called my attention to a brilliant interesting piece in today’s New York Times on the past, present and future of modern economics. It comes from an unlikely source, Republican commentator David Brooks. Titled “The Return of History”, it declares that the change currently taking place in economics “is clearly one of the most consequential things happening in the world today.” Brooks divides the history of modern economics into five acts: scientism, splintering and slowly emerging sophistication, exposure of the shortcomings of the whole field by its “causing untold human suffering”, soul-searching (today), and the blowing up of the whole field to become a subsection of history and philosophy.
Act I in this history would be set in the era of economic scientism: the period when economists based their work on a crude vision of human nature (the perfectly rational, utility-maximizing autonomous individual) and then built elaborate models based on that creature.
Act II would occur over the past few decades, as a few brave economists tried to move beyond this stick-figure view of humanity. Herbert Simon pointed out that people aren’t perfectly rational. Gary Becker analyzed behaviors that don’t seem to be the product of narrow self-interest, like having children and behaving altruistically. Amos Tversky and Daniel Kahneman pointed out that people seem to have common biases when they try to make objective decisions.
Act III, the economic crisis of 2008 and 2009. This act is a climax of sorts because it exposed the shortcomings of the whole field. Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.
Act IV, the period of soul-searching that we are living through now. More than a year after the event, there is no consensus on what caused the crisis. Economists are fundamentally re-evaluating their field. . . . are taking baby steps into the world of emotion, social relationships, imagination, love and virtue.
In Act V, I predict, they will blow up their whole field.
Economics achieved coherence as a science by amputating most of human nature. Now economists are starting with those parts of emotional life that they can count and model (the activities that make them economists). But once they’re in this terrain, they’ll surely find that the processes that make up the inner life are not amenable to the methodologies of social science. The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics.
Once this is accepted, economics would again become a subsection of history and moral philosophy. It will be a powerful language for analyzing certain sorts of activity. Economists will be able to describe how some people acted in some specific contexts. They will be able to draw out some suggestive lessons to keep in mind while thinking about other people and other contexts — just as historians, psychologists and novelists do.
At the end of Act V, economics will be realistic, but it will be an art, not a science.
The whole of David Brooks article is available at http://www.nytimes.com/2010/03/26/opinion/26brooks.html