Quote of the Day #6: Reformist Economics

“… the act of judgement that leads scientists to reject a previously accepted theory is always based upon more than a comparison of that theory with the world. The decision to reject one paradigm is always the decision to accept another, and the judgement leading to that decision involves the comparison of both paradigms with nature and with each other.” – Thomas Kuhn, The Structure of Scientific Revolutions

I will break my recent silence – I am still burrowing down into the issue of inequality – to make a comment on the skepticism I see concerning the Institute for New Economic Thinking.

It is justified.

Let’s think about this a moment.

If we are to set up an institute to support change, provoke discussion, and otherwise meddle about with the established way of thinking, and thus to earn the moniker of “newness”, we ought not to pack our agendas with a steady stream of establishment figures. That is not the way to revolution. It might, however, be the way to raise esteem and thus get the institution media attention.

Newness in economics is devilishly hard to locate. This is due, possibly, to the continued warring amongst longstanding points of view that have neither been reconciled nor defeated. Indeed, from my perspective, it is practically impossible to kill off an economic idea once it has attached itself to an ideological flag. If the flag persists so does the idea. No manner of empirical refutation is sufficient to get rid of old economics. There is always someone ready to argue its case or to critique the efficacy of the data. The entire economics enterprise is riddled through with such ideas lingering on in the shadows until they can jump back onto the stage suitably re-burnished. People call these ideas zombies for good reason. Society deserves more from its economists, but, unfortunately, has to settle for this constant recycling.

This doesn’t mean that no progress has been made over the last two to three hundred years. Not at all. We have a ton of valuable insights to arm ourselves with. Smith’s passing comment on the wonders of the invisible coordination of an economy gives us an opportunity to ponder on the powers of decentralized, one might say disorganized, organization. Then there’s Ricardo’s look at marginal production in land and its subsequent generalization into a whole edifice of like minded thinking on all sorts of economic matters. There’s the Marxist critique of capitalism and its socially destructive tendencies that are being borne out once more in our contemporary rise of inequality. And there are many more.

But Kuhn is right. Theorists are highly conservative people. They cling on to their theories despite a tide of empirical contradiction. Especially if they feel that no convincing alternative is available. After all it would be an odd economist who was willing to admit that all the currently available theories are wrong and that the profession has no much to say about the economy after all. Except for those insights of course, none of which are capable of carrying the burden that subsequent acolytes have attempted to pile on them.

An example: free market economists have taken decentralized organization and made it into something it cannot possibly be as long as people are involved. In the headlong pursuit of supposed scientific credibility they have erected an enormous intellectual superstructure on the flimsiest of bases. The whole thing totters and falls when poked at, which is why they don’t poke. Or, rather, they only poke behind closed doors where outsiders can’t see how frail the enterprises is. Meanwhile their ideas do enormous damage to everyday folk who suffer the consequences of policies the depend on the purity of theories that are partial at best.

The same is true for all stripes of economic theorizing. They are all incomplete, incoherent together, and can only be described as works in progress. None are “right”, but most are useful in one way or another. As long as you don’t take any of them too seriously, and as long as you admit their severe limitations, you can get a pretty good feel for the economy. Just don’t accept any of them as being “true”.

Which brings us back to the INET and to the reform of economics in general.

The crisis in economics – and there is one – was caused by the loss of pragmatism and a great forgetting of crucial lessons. The hubris of mid-20th century economics was that it forgot its many flaws. It pressed its claims way beyond any sensible limit. It forgot the essential contingency of its greatest insights – Smith, Ricardo, Marx et al were explaining what they saw before them. These were not eternal claims, but were historically rooted observations that may or may not be relevant in other times or circumstances. This hubris was part of a great up-swelling in confidence based upon a very small data set. Theory after theory was accepted because it passed muster when applied to a short time span. Few economists, apparently, thought to look back into deep history or to test theories against longer spans of time. So we ended up with a slew of ideas that stood up well in the short run and which were then accepted as being applicable more generally.

We ended up with theories to explain the exceptions and none to explain the rule.

So, when the latest exception blew up in our faces – the so-called great moderation – the economic orthodoxy which seemed to explain it so well, was suddenly revealed to be just another side bar. We can, apparently, explain yet another special case. We cannot yet explain anything more.

If Kuhn is correct and changes in theoretical paradigms depend on the availability of credible alternatives at the moment of crisis, then any institute of new economics ought to be searching the landscape for those new ideas and not rolling out proponents, no matter how notable, of the old. Plus it ought to fend off  the descent into blandness that seems inevitably associated with institutions everywhere – INET, to my eye at least, seems a little too eager to appear credible to those whose very ideas it purports to debunk, it lacks edge, and its efforts look highly sanitized to avoid overt conflict with the old establishment. The subject matter it deals with doesn’t look very controversial and already it seems destined to be just another island in the economic archipelago rather than an agent for change.

All in all the INET has little new about it, but is certainly more. Plenty more because of its ample financial support. Its bulk runs the risk of squelching smaller and less well funded alternatives and it could do its credibility a load of good were it it to provide wider support for the search for newness.

I won’t carp any more. George Soros is entitled to his vanity and his efforts. But as a person who made his fortune playing with financial hedges of various sorts he ought to recognize the value of variety and of competition. He could, for instance, back many horses in the race for the new. He could fund the grassroots of economics rather than its alternative establishment. He could fund dissident academic departments. He could do all manner of things that would be “new”.

What he is doing isn’t.