Real World? Unicorns? Where? What?

A correspondent – Ken – responded to my recent article about an economics of the absurd by suggesting I have a muddled and not too consistent view of what I mean by reality. I would say he accused me of being vague, but I don’t think Ken is an accusatory sort of fellow. Well now. He’s right. I do use the word “reality” an awful lot, especially when I am trying to take shots at orthodox economics, which in my opinion is not of this or any other world. It is a dreamscape.

But Ken has a good point.

If we are to keep up the attack on orthodoxy and retrieve economics from the distant dead end into which it has been led, we need to have a decent notion of why we think it isn’t “real world” and why other forms of economics are. As a general rule I look at the real world as being anything that orthodoxy isn’t. That’s being provocative. Let me explain.

But before I go too far, let me say I am hardly alone in denouncing orthodoxy as other worldly. Most people who are trying to overthrow its stranglehold on economics slip into the easy criticism of highlighting its apparent detachment and disregard for real world phenomena.

With that in mind let’s get to work.

First: the evidence from within orthodoxy itself is solid. Robert Lucas, a luminary if ever there was of orthodox thinking, makes the claim that his way of thinking is utopian. That is to say he sees his role as creating alternative, or parallel universes, to ours that run according to a set of simplified, logically consistent, and rational rules so that he can observe their trajectories through time and make comparisons to what he observes out his window. These alternative universes are embodied in mathematical models that, themselves, obey the rules of the particular form of math he thinks appropriate. He has gone so far as to say that the only form of true economics is this mathematical modeling form. All else is what he calls ideology.

So we have, from the very beginning, a view being expressed by one its leaders that orthodoxy is not concerned with the real world, but rather with exploring alternative worlds and then making backward references to the real world in order to draw inferences, both about the models and the real world. This approach suggests that Lucas sees a division between what he studies and something else. That something else being the real world. Reality is thus not his primary subject for study, that would be his modeled alternative world, it only becomes important after that fact when he wants to validate or explore the output of his theorizing.

I should also note that some of his more aggressive colleagues take him to task for this attempt to make the empirical connection. They see it as valueless. Instead they advocate economics as being an entirely self contained modeling exercise that may, or may not, connect eventually with its empirical surroundings. To them economics is truly a dreamscape.

Second: simply modeling and simplifying does not make something automatically “unreal”. The physical sciences are constantly employing the same approach in order to penetrate beyond the obvious and to explore the hidden nature of reality that lies beyond our everyday senses. Is orthodoxy just mimicking this approach?

I say no.

The physical sciences are still, however abstract, formal, and approximate, trying to reveal regularities in the universe. They are not inventing an alternative universe for comparative purposes, they are digging more deeply into the real one. Yes, some of what they discover is bizarre and may be controversial, but they are still grounded in reality. They are investigating real things. However small or large, their subject matter is the set of artifacts that comprise the universe as we experience it. No physicist has, to my knowledge at least, created an alternative universe in which gravity pulls things up into the air when thrown out a window, and then describes the situation we observe as being a “gravity failure” needing explanation.

Orthodox economics has strayed from this path. It excludes many artifacts of economies as we experience them. Indeed many such artifacts have fallen so far from the agenda of orthodoxy that many orthodox economists are nonplussed when those artifacts pop up and influence the way in which real economies unfold. Debt, bubbles, recessions, depressions, and all sorts of market failures clutter the real world. They are not in the set of features of orthodoxy, they are exceptions to the idealized rule. Why? Because they get in the way of the pursuit of purity. And purity has become the goal of orthodoxy, not reality.

Third: it wasn’t always this way. Classical economics, before the current orthodoxy emerged, concerned itself with discovering explanations for the way in which real things worked. It wasn’t utopian. It included things like classes, groups, and other real phenomena and tried to account for the way in which regularities emerged from the complex relationships between those groups etc. It tried to account for the empirical rather than eliminating or ignoring it. Ricardo’s use of marginal analysis was concerned with land and rents. He did not generalize it. Presumably, he saw no need to.

After the so-called marginal revolution of the late 1870’s – a revolution inspired in my view by the need for an ideological alternative to classical and particularly Marxist thinking , and in reaction to the social upheavals of 1848 – economics began its steady march towards utopia. In part this was a political move. And in part it was an attempt to move in lockstep with the success of the physical sciences. Either way the move allowed the subject to separate itself from the need to explain real economies, and thus to move, ultimately, to the space it now occupies as a more limited exercise and concerned with the properties of equilibrium and so on, which may or may not be properties of real economies, but which are the central properties of the models orthodox economists ponder.

In order to cleanse itself of the very muddiness that characterizes, to my mind, real economies, and which makes locating the simple causes and effects and regularities economics is trying to explicate impossible, orthodoxy has been forced to get rid of humanity from its models. Its axiomatic structure, its assumption base – widely acknowledged as ridiculous, and even its focus on strict individualism are all telltale signs of an effort to make reality more tractable to the methods orthodox economists prefer. In effect they try to make reality bend to their methods, rather than bend their methods to reality.

This seems to me to be backwards.

It also seems to have come at the cost of dismissing reality from the stage and substituting some other construct instead. One more malleable and ultimately more ideal. The hope being, presumably, that by studying the ideal, orthodox economists can eventually say something sensible about the much less than ideal real world.

It is this hoped for outcome that I dispute. And my willingness to dispute is based precisely on what Ken, in his critique of my vagueness, argues as a truer conception of reality. For, in my experience, a real economy is an entangled mesh of interconnections, relationships, and confused or contradictory activities from which a sense of apparent order emerges. But that order is largely an illusion. It is emergent from the complex web of an economy and cannot be reduced to cause and effect relationships every single one of which is based upon individuals pursuing their self-interest. Order may exist at a high level of analysis, but there is no way of predicting that order from the interactions of the lower level phenomena. It just is.

This still leaves us with the argument that by studying utopias we can reveal, by comparison, sources of likely problems in the non-utopian real world. This sounds plausible until we consider the alternative argument that any property of utopia is just that: utopian. We have no basis upon which we can consider it a property of our actual world. There is no point in discovering the way in which perfect markets work, because we will never encounter one. Ever. We cannot. Real markets have people in them, not perfectly wonderful, super rational, calculating marvels. People make mistakes. They cheat. They hoard information. They apparently have a very limited cognitive capacity when compared to the automatons that inhabit orthodox utopia. And they contradict themselves with abandon. That is reality. At least for me. What is not real is the odd world of orthodoxy.

Drawing pretty pictures of unicorns is not a basis for the study of horses. Real horses are not “unicorn failures” because the lack a horn on their heads. They are, well, real horses. Making statements about real horses on the basis of our imagined vision of a unicorn makes no sense. Nor does making policy recommendations based upon the properties of dreamed up things like dynamic stochastic general equilibrium models, efficient markets, or perfectly rational consumers. They are the equivalent of unicorns. Unfortunately a real world economy is more limited than those our imaginations can conjure up. Limited in idealized possibility, but unlimited in the confusion and clumpy information that litters its landscape. The two are very distinct.

It is this distinction that has made orthodoxy irrelevant, and has induced the urgent need to replace it with a real world economics.

Perhaps we don’t even need to define reality very well in order to continue to call for change. After all that would involve us in a long winded and endless philosophical discussion. We need to be more practical. Dare I say it: pragmatic?

So, that’s my rough and ready response to Ken.

I just want economics to rid itself of its unicorns.

I am sure you all have different notions of the topic. I think we should spend some time talking about it.

After all we are trying to create economics for the real world.