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Reforming economics

from Lars Syll

Robert Heilbroner Quote: “Before economics can progress, it must abandon  its suicidal formalism.” (7 wallpapers) - QuotefancyThe typical economics course starts with the study of how rational agents interact in frictionless markets, producing an outcome that is best for everyone. Only later does it cover those wrinkles and perversities that characterise real economic behaviour, such as anti-competitive practices or unstable financial markets. As students advance, there is a growing bias towards mathematical elegance. When the uglier real world intrudes, it only prompts the question: this is all very well in practice but how does it work in theory? …

Fortunately, the steps needed to bring economics teaching into the real world do not require the invention of anything new or exotic. The curriculum should embrace economic history and pay more attention to unorthodox thinkers such as Joseph Schumpeter, Friedrich Hayek and — yes — even Karl Marx. Faculties need to restore links with other fields such as psychology and anthropology, whose insights can explain phenomena that economics cannot. Economics professors should make the study of imperfect competition — and of how people act in conditions of uncertainty — the starting point of courses, not an afterthought. …

Economics should not be taught as if it were about the discovery of timeless laws. Those who champion the discipline must remember that, at its core, it is about human behaviour, with all the messiness and disorder that this implies.

Financial Times

  1. JD
    October 26, 2020 at 8:57 pm

    Alternatively, a basic economics course could start with “What is the purpose of the economy?”, going on to, “How is that purpose accomplished in the real world?”, and refining the analysis with, “What public policies support or hinder that purpose?” If you accept that the purpose of the economy is to provide what people need most and, to the extent possible, what they merely want, you will be in a position to make meaningful assessments of the performance of actual economies and you will eventually come to see how they can perform better. If you don’t accept that the real-world functioning of the economy is subject to many overlapping and sometimes conflicting public policies and laws, you’ll never be able to understand why it works the way it does. The issue is not so much that human behavior is messy. It is rather than no system of thought based on the idea that human behavior obeys strict logical rules or that it can be captured by mathematical formulas will ever be particularly useful.

    • Econoclast
      October 27, 2020 at 5:12 am

      Try this:

      The overriding goal of political economy is to manage the human part of the biosphere. The economy is a human artifact, of the people, effectively designed by the people for the people.

      This goal cannot be achieved in fairness and justice as long as the power of predatory corporate capital rules. The cooperative is the only institution, public or private, that is democratically run. Nothing less than some form of democratic socialism is required. The political power must come from self-organizing of those directly affected by the resulting institution, whether at local, state, regional or federal levels. The idea that this is difficult to achieve does not make it impossible.

      • Meta Capitalism
        October 27, 2020 at 8:13 am

        Econoclast well said.

  2. pfeffertag
    October 27, 2020 at 10:21 am

    Suicidal? Perhaps a more accurate word would be murderous. For economists, sitting in the power seats of government, the formalism, expressed as timeless laws, has been anything but suicidal.

    “Fortunately, the steps needed to bring economics teaching into the real world do not require the invention of anything new or exotic.”
    Unfortunately, the evidence is to the contrary. Firstly, were it possible, then surely it would have been done—back in the 1960s, say. Secondly, the Methodenstreit resulted in a clear victory of theory over ad hoc interference. If theory is what counts, only rival theory (new, exotic) is going to budge the dominant paradigm.

    “…psychology and anthropology, whose insights can explain phenomena that economics cannot.”
    If psychologists had any explanatory insights wouldn’t they sit beside economists at the centre of power? Politically, they don’t exist. Why? Because the behavioural sciences, unlike economics, have no body of formal theory; indeed, rather than bringing order, their few disparate factoids exemplify human messiness and disorder. Until they develop theory concerning human behaviour and human preferences, economists will continue to rule the world.

    Such a theory is not in sight and if it did arise, economists would resist it. AO Hirschman’s “exit, voice and loyalty” might have come nearest. Though he was a prominent economist, it seems “voice” introduced too much uncomfortable sociality and his theory was not built on. I discuss this and consider some approaches rival theorising might take at:
    https://rwer.wordpress.com/comments-on-rwer-issue-no-93/#comment-173367

    • October 27, 2020 at 12:57 pm

      I totally disagree with you, pfeffertag. The new (and not particularly exotic) theory exists, but not in economics and other statistical/behavioural versions of science. The Myers-Briggs (Jungian) version of psychology is explained by the physical architecture of the brain and vice versa, as interpreted using theories from radio communication and navigation.

      There is no ‘if’ about it: the theory exists and economists have resisted it. In Myers-Briggs terms because they are trained to be Thinkers, not Intuitives: as G K Chesterton put it in 1908. these representing “two lobes of the same brain”. Kenneth Boulding in “The Image” saw the formalism of the one as symbolic, the other iconic. As Paul Samuelson was saying by 1964: “Twenty minutes of poring over [a flow] diagram may be worth hours of disconnected musing about economic pricing”.

  3. Frank Salter
    October 27, 2020 at 2:16 pm

    While economists fail to distinguish what valid abstract mathematical theory is, they will be incapable of rethinking anything. I have explained many times that the quantity calculus invalidates all conventional analysis. This seems to have been totally ignored. Reading these blogs is like “Groundhog Day”. They never develop any further.

    • October 27, 2020 at 4:29 pm

      Not totally ignored, Frank. I think you are on the right track, but that the quantity calculus itself needs to be rethought, not least because it doesn’t account for information and the logic of representation. I’ve been calling that ‘complex’, but I now see it may be less ambiguously described as ‘complementary’. Its truth values are not anyway simply ‘true’ or ‘false’ verbal propositions but like yours: pointing more or less truly in the right direction.

  4. ghholtham
    October 27, 2020 at 4:23 pm

    The economy is an abstraction that does not have a purpose. People have purposes and they frequently subsume those with others in the purpose of a group or organisation. The interaction of those organisations and individuals yields the economy. Looking for the teleology of the economy is therefore not the place to start. We want the economy to deliver good outcomes, of course, and that should be the purpose of public policy but the first step is understand something of how it works and why.
    The notion that human behaviour cannot be captured by formula is a superstition. It is possible to predict traffic jams and the course of an epidemic within limits. Economic behaviour is no different. Individuals may be unpredictable but generalisations work with large numbers of people. The problem with economics is not the use of mathematics, it is the mis-use of mathematics to work out the consequences of unrealistic assumptions. Pfeffertag’s belief in the superiority of economics to other social studies is largely unwarranted. Marketing departments and HR departments of companies do not employ economists they employ people with a background in psychology or social psychology. Sociologists are often more useful in framing social policies than economists are. Lars Syll is right that economics would benefit from more openness to other disciplines and less hubris. H A Simon, an economics Nobel laureate who made significant contributions to organisation theory, psychology, operations research and computer studies, understood that. Unfortunately his followers remain a minority. Still, if you want an example of the illuminating use of quantitative methods in economics look at the work of Haussman and Hidalgo at Harvard. With careful analysis of trade data they showed how countries develop and computed an economic complexity index which accurately predicts relative GDP growth. Not a homus economicus or an equilibrium in sight! Sensible, creative economics is possible.

    • October 27, 2020 at 5:01 pm

      I disagree with you too, Gerald: here because the type of abstraction the word ‘economy’ refers to is a set of people, each of whom does have his own purposes: these evolving as they mature, but remaining variable. A subset of this set of people are parasites, sharing the chrematistic purpose of making money from the rest, their attention directed away from the biological and environmental sustainability which is at the root of their self-interest.

      Reform of the economy needs to provide for these variable purposes in the way the internet does, with each person time-sharing with the rest using his own brain and personal computer.

  5. ghholtham
    October 27, 2020 at 5:19 pm

    Dave, I can’t see that you are disagreeing with me. I don’t disagree with what you say and it doesn’t contradict anything I said before. it is true that economics has conventionally ignored the issue of environmental sustainability. That has begun to change but needs to change further and fast.

    • October 27, 2020 at 7:11 pm

      Apologies if old age and Covid angst are making me disagreeable!

  6. Craig
    October 27, 2020 at 7:25 pm

    Correct Lars. The rejection of formalism as an answer in and of itself is one of the necessary pre-paradigm signatures listed in my book, but it is only the beginning of the real solution. Why? Because it leads to iconoclasm, but economic theory has been in iconoclasm for a very long time. What becomes ultimately necessary is the first signature of paradigm change and that is the willingness and ability to consider COMPLETE conceptual opposition to orthodoxy. That, and then with the new tool and/or insight that has always accompanied historical paradigm changes and enables theorists to see how applied policy causes temporal reality inversion….finally breaks the image and shows the way forward.

    Like:

    1) Conceptual Opposition: an austere statistical monetary and economic general equilibrium vs a dynamic, interactive, integrative and abundant monetary free flowing statistical disequilibrium created, enabled and controlled by:

    2) Missed Insight: becoming aware of the fact that most basically money is accounting/double entry bookkeeping and thus must adhere to that discipline’s conventions so that

    3) New tool/Insight: becoming aware of the tremendously powerful implementation point of retail sale for monetary and price policy because it is a true factor summing and ending point for economic system and so potential temporal economic reality pivoting point and so

    4) Temporal reality Inversion: with equal direct and reciprocal monetary debits and credits at that point changes systemic austerity and individual purchasing power scarcity into abundance of both, that changes the economic vice of chronic inflation into beneficial deflation and last but not least will also enable the industrial policy rationality necessary to survive climate change.

  7. ghholtham
    October 28, 2020 at 9:33 pm

    Hallelujah

  8. Ken Zimmerman
    November 28, 2020 at 7:51 am

    Over the years since the invention of a professional called economist and a profession into which that professional supposedly fit those who pledge allegiance to the profession and those who work in it have made many assumptions to build the profession and the professionals. For example, it was once common to say that economics could trace its roots back to the ancient Greeks. The Economics (Greek: Οἰκονομικά; Latin: Oeconomica) is a work ascribed to Aristotle. Most modern scholars attribute it to a student of Aristotle or of his successor Theophrastus. The title of the work means “household management” and is derived from the Greek word, οἶκος, oikos, meaning “house/household”. The term includes household finance as it is commonly known today and defines the roles members of the household should have. In a broad sense some historians say the household is the beginning to economics as a whole. The natural, everyday activities of maintaining a house are in their view essential to the beginnings of economy. From farming, cleaning, and cooking to hiring workers and guarding your property, the household can offer a model for a modern understanding of society. The two books that comprise this treatise explore the meaning of economics while showing that it has many different aspects.

    Today many historians credit Scottish philosopher Adam Smith with creating the field of economics. However, he was inspired by French writers who shared his hatred of mercantilism. In fact, the first methodical study of how economies work was undertaken by these French physiocrats. Smith took many of their ideas and expanded them into a thesis about how economies should work, as opposed to how they do work.

    Smith believed that competition was self-regulating, and governments should take no part in business through tariffs, taxes, or other means unless it was to protect free market competition. Many economic theories today are, at least in part, a reaction to Smith’s pivotal work in the field, namely his 1776 work The Wealth of Nations. In this book, Smith laid out several of the mechanisms of capitalist production, free markets, and value. Smith attempted to show that individuals acting in their own self-interest could, as if guided by an “invisible hand,” create social and economic stability and prosperity for all. But it is virtually useless if we assume the purpose of the discipline of is to describe how and for what purposes the people involved in economic activities create and perform these activities. The former is religion or normative belief system. The latter is a social science. If the latter, then the next question is why economics is necessary since there are already multiple social sciences studying the creation and use of economic activities. It appears most economists pretend to follow the second path but prefer the first. This places economics in direct conflict with the social sciences and tends to lock in a dogma that serves well neither economies nor economists. And to boot undermines the stability of most modern societies.

    As of the present time this is the received dogma of the field of economics as the study of economies. This dogma may be useful if the discipline of economics is normative. Describing and applying the dogma to as suggested by Smith set out the rules about how economies should work.

    Economics can learn from the other social sciences as to purpose and focus. Common definitions of sociology, for example, include
    1. Through its particular analytical perspective, social theories, and research methods, sociology is a discipline that expands our awareness and analysis of the human social relationships, cultures, and institutions that profoundly shape both our lives and human history.
    2. The main function of sociology is to examine how humans organize power and relationships between groups, families and individuals.
    3. A threshold learning goal is the understanding that humans are social beings. A secondary learning goal is understanding that social factors affect a great deal in life, even things that may appear not to be influenced by social factors, for example, knowledge itself.
    4. Another important learning goal is being able to recognize the difference between empirical and normative statements, and realizing that in sociology empirical understanding is considered a very important way of knowing about the social world. Sometimes these empirical investigations may disprove or debunk prevailing social beliefs. At the same time that sociology seeks to describe and explain the social world empirically, many sociologists also desire to change the world. They have value commitments to fairness, social justice, and the inclusion of everyone in society.
    Similarly, with anthropology,
    1. Anthropology is the systematic study of humanity, with the goal of understanding our evolutionary origins, our distinctiveness as a species, and the great diversity in our forms of social existence across the world and through time.
    2. Anthropology demands the open-mindedness with which one must look and listen, record in astonishment and wonder at that which one would not have been able to guess, Anthropologist Margaret Mead
    3. The purpose of anthropology is to make the world safe for human differences, Anthropologist Ruth Benedict
    4. Anthropology is the most humanistic of sciences and the most scientific of the humanities, Anthropologist Alfred L. Kroeber

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