Mind the Gap

I wonder when economics will reconnect with modern thought. I wonder, for instance, when economics will take on board contemporary theories about real human behavior and jettison its antiquated and utterly unreal notions of rationality.

Not that I will hold my breath.

One of the great planks of orthodox economics is its odd fascination with rationality. It fixates on it as if it had anything to do with the way in which real people make their decisions. It doesn’t. It is a perversion of what actually goes on.

But it makes the math more tractable. And as we know from Robert Lucas: economics is simply math. Well he didn’t quite say that. He said that the only economics worth a lick is that expressed and theorized as math. Since human quirks and self-contradictions make math a tad difficult if not impossible, economists in the Lucasian tradition simply ignore real humans and invent a new species more compliant to the needs of economics-as-math. In order to pull this neat trick off those economists have had to invent their own psychology, sociology, anthropology, biology, and so on. They have had to ignore all those subjects otherwise. So, for instance, advances in psychology are reflected nowhere inside economics unless they undergo a “fitness” test. With “fitness” being an attribute that ensures total compliance with the prior regime of rationality.

Yes, I know that behavioral economics is a hot topic nowadays. It is revealing just how little economists knew about people – the gap is embarrassing, but so far the Lucasians have managed to ignore that gap and, instead, plod along in their imaginary world.

That world is one where their totally fictions and laughable micro economic theories supply a foundation for their consequently ridiculous macro economic theories. There’s no way around it: modern orthodox macro theory is constructed in mid-air where it is safely sealed off from contamination by the real world.

Meanwhile down here in the muck and mire of human interaction, where what real people actually do matters, we all ought to be very mindful of that gap.

You know the one: the gap between reality and the market magic that so obsesses most economists.