All noisy on the economics front

from Peter Radford

One of the fun aspects of our continued dire circumstance is that all the lunatic name calling in politics and the associated brouhaha is being matched, step for step, by a similarly chaotic upheaval in economics. The latter is probably a less public bun fight, but it’s just as entertaining.

The once vaunted halls of economics now echo with shouts of dissension and name calling. Rightly so. I don’t think economists know anywhere near as much as they think they do. Or did. The better amongst them now freely admit that this is, to put it politely, a period for somber reflection and theoretical reconstruction. The subject is a mess. The discipline undisciplined.

We all know why of course: the orthodoxy that prevailed just prior to the great crisis of 2007/2008 failed miserably. And I mean miserably. The defeat of so many hallowed ideas in one great swoop was breathtaking. The debris astonishing. The total collapse immense. 

I can dream can’t I?

The most aggravating outcome of the entire debacle is the continued, and tenacious, grip on theoretical dominance of what historians will surely call … well I don’t know what they will call it, but I doubt it will be complimentary. The few decades before the crisis had seen a steady increase in the assuredness of orthodox economists who not only thought they had solved the riddle of economics, but that they had done so permanently. So much so that they actively sought to expunge all memories of those ideas they thought they had debunked. It turns out that the joke was on them. Their theories might have looked nice in the context of those years, but that was a total coincidence. Yes, it looked as if the sun went around the earth, their ideas seemed to fit the facts – or at least those facts they bothered to track – and so they congratulated themselves on their triumph.

Whoops.

It isn’t as if they were ignorant or stupid. They weren’t even hustling for prestige and honor. Not all of them anyway. They had a theory that looked about right, and they set out to mold the world to fit their vision. They said if only we could get government out of the way and let markets work their magic, all would be well. You can’t beat the market, after all. The infamous Lucas critique sits somewhere near the center of their rise to power, along with a series of attempts to create a theory of human psychology and behavior that, when retrofitted appropriately, bends reality sufficiently to cause their notion of a market to appear magical. Which is just what they wanted. They were, after all, working backwards from that end point and so were very careful to choose what they put into their theories up front. By being selective in how much reality they allowed in the front door, they could control what emerged out the back. And, as I said, they wanted the market to emerge out the back as the exemplar of distributive excellence.

It was all, sadly, a classic case of garbage in, garbage out. Sadder still, many of them cling to the sullied mess and deny its defeat.

It is this selectivity in the extent of reality they allowed in that leads me to see economics as non-scientific. I am not so sure that a truly scientific economics would be so choosy. There would be more room for anomalous artifacts and phenomena – they would be explained within the theory and not excommunicated to the sidelines as being awkward nuisances that mucked up the pristine coherence of whatever shiny new idea ruled at that moment. When orthodox theorists did turn their minds to those anomalies they would, inevitably, simplify, bash away at, and otherwise distort them until they could be explained through the desired market magic lens.

And there would be more latitude for competing explanations.

It always comes as a shock to outsiders to realize that orthodox economics has no solid internally consistent and compatible explanation for common things. Like growth. Like the modern business firm. Like involuntary unemployment. When it offers up its explanation all reality has been squeezed out in order to keep market magic primary. The whole edifice is riddled through with the equivalent of epicycles. There has to be a better way. There must be a better way. What we know is that the market magic way is not it.

The public has a right to that better way and an expectation that economics will, eventually, provide one. Then economy is too central to our well being for us to allow economists hegemony over the way we think about it. Especially if they refuse to improve. Especially if they cannot provide a decent road map for action.

This doesn’t mean we need a new orthodoxy, although there’s part of me that would welcome one if only for simplicity’s sake, but we do need a humbler, less rigid, less formal, and more applicable economics. One that actually relates to what we all see around us rather than to a dream world inside someone like Robert Lucas’ head.

The arrogance of the debunked can be breathtaking, which accounts for all the noise inside the discipline. It is nicely captured whenever they step out to defend themselves. They disparage their critics, but in doing so expose their own cluelessness. They call the critics to task for not understanding this or that. Yet the lack of understanding they criticize is not ignorance but usually the knowledge that the “this or that”in question is a castle built on sand, or, worse, is just plainly idiotic.

You just don’t build real world explanations of economies on absurd degrees of rationality; on general equilibrium that no one has ever observed; on instantaneous and costless communication; or on any of the other nonsensical foundations upon which orthodoxy so proudly stands. You just don’t. Nor do you presume the future mimics the past, for to do so expunges novelty, and novelty – it seems to me – is one of an economy’s most interesting aspects.

Anyway, I am hopeful that the noise inside economics will be more productive than that in our politics. Perhaps a new theory will emerge, or, more likely, a new understanding of the subject will take hold. One that acknowledges that there is no unified theory and that we need the flexibility to respond to different facts from different vantage points. This is called pluralism by some of my friends. I am beginning to question that moniker. I see it as a new, more extensive, whole. Plural in the sense of its diverse pieces. Whole in the sense of its comprehensive coverage. One economics with many parts. That’s the way it ought to be taught. That’s what students are clamoring for. But the noisy rearguard of the old orthodoxy prevents it. Not for long, I hope.

As I said: I can dream can’t I?