Do Over?

You would have thought that, after all this time, economics would change. Or be changing. Or even be hinting at the possibility of changing. However, while there are a few encouraging signs, there is precious little sign of said motion inside the citadels that dominate the discipline. We still have a profession stuck in a most unprofessional rut, pursuing thinking that reflects not the world around it, but itself.

So, let me say it again: economists are, by and large, more interested in economics than in economies. They spend much more time on trying to display mathematical virtuosity than in trying to get to grips with the world around them. Even those who give the real world space to intrude into their thinking wrap it up in strange and unrepresentative ways.

Let me make this plain to those of you who follow the sport from a distance: most economists make their reputations nowadays by being steeped in the latest mathematics and by being capable of producing supremely logical, tightly wound models that conform to the discipline’s rules and to what the discipline thinks of as important. The relevance of an actual economy – for example the US between 2007 and now – is not considered if it does not allow the wizardry to be displayed.

Rigor is decidedly more important the relevance.

In some part I think this is due to the notion held by many powerful and influential economists that the big questions have been decided upon and the main analytical approaches selected. Anyone straying from this ground is thus not regarded as serious. Especially if, when they stray, they appear to be a little ad hoc or less than totally committed to a mathematical exposition. Words as well as reality are a hindrance to being accepted.

One of my favorite examples of this tendency is the entire ‘macro from micro’ project. For the uninitiated this is the notion that all theorizing about the grand aggregate artifacts of an economy can only be treated as serious if it is based upon the prior theorizing about the tiny stuff such as how a person develops their preferences or how they act over time in reaction to incoming information.

This project is both absurd on its face and intellectually damaging in practice.

It is absurd because it precludes from the very beginning that the web of interactions between people and firms can cause artifacts to develop at a higher cooperative level than the lower individual level. It eliminates the possibility of economies having properties worth studying that are not those reducible to those of an individual. There is no emergence. No complexity. Nothing beyond the sum of its parts.

This flies in that face of reality where emergent properties are abundant, and it defies progress made in many other disciplines where complex phenomena and the products of complexity are inspiring much new thought.

It is damaging in practice because economics has decided, apparently, to stay rooted in the simplicity of some past era when the complexities of modernity didn’t cloud the analytical picture.

This also comes across in the way in which economists routinely dismiss government as intrusive rather than as an integral part of the system. The most extreme examples of this can be found in the disjointed and contradictory way in which economists treat actual people. When ‘we the people’ express ourselves through our government, as we do in democracies, our actions are viewed as a burden on the freely working marketplace and are often dismissed as arbitrary. Government employees are looked upon as being self interested and, or, short sighted and thus likely to interfere with rather than assist the marketplace. Yet those self same folks appear as cogs in the market where, miraculously, they cast aside their foibles and failures and are reincarnated as perfectly rational and hyper aware. The only way this can happen is that the act of being government is automatically an act of dullness bordering on anti-social stupidity. Or at least economists treat it as such.

So much for the nobility of self-government.

I think this odd sentiment is itself an artifact of the past. Much of contemporary economics has it roots deep in 19th century struggles, and some owes its existence to the life experiences of theorists who came of age in early 20th century autocracies on the brink of elimination. They saw government as an arbitrary obstacle to freedom precisely because it was. The problem is that they never adjusted their thoughts to the existence of democracy where what appears, perhaps, as arbitrary government policy is actually as expression of ‘we the people’. Yes, the same people who inhabit those magical markets.

The result of all these peculiarities is that economics has a multitude of blind spots and inbuilt prejudices that prevent it from progressing and, in many cases, even from engaging with reality.

Such an engagement would require a wholesale do over of much of the foundation upon which the discipline now stands. It would have to accept that it is currently a caricature rather than a simplification. A caricature badly drawn too. Its rigor is actually not rigor at all but an avoidance of deep issues. It is a rigor that tries to hide rather than reveal the nuances of modernity. It is a rigor applied unevenly to various social phenomena. And it is a rigor that forces economists to open an ever increasing gulf between what they study and what they purport to study. In short it is s rigor designed to encourage disengagement from reality and to be applied selectively within a narrow range of phenomena.

Economics is thus largely irrelevant, but that is by design not by accident. It is by design because the actual economy is littered with artifacts and has a multitude of properties that sit outside the purview of a discipline based, still, on a 19th century worldview. Quite a bit has changed in the past two hundred years. Economics never kept up. It needs a do over.

Oh. And one last thing: if you are going to persist in enforcing that ‘macro from micro’ rule you had better make sure the micro makes sense and that it is a good representation of actual human behavior. Right now the gap between how micro models the way people make decisions and how they actually make decisions is embarrassingly large. As in an unbridgeable chasm. The foundation is rotten. We ought not trust any macro built in such sand.

The do over needs to include the base too. We need new micro. New macro. And, even more so, a whole new meso.