Wednesday, 18 March 2009

The Future of Economics

Economics is a prostitute, really. After having managed to turn itself into the most science-like of all those groups thinking about the ways and whys of societal behaviour, a feat done mostly via the application of mathematics as language, it has sold itself, body and soul to, well, whoever pays.

The people who try to figure out how economies behave tend to be preoccupied with the question of how to make money (how many investment bank ‘research’ analysts are really interested in the way the society works?), or with how to keep the economy going so that the next election can be won (or retrospectively, which of those populist promises must be delivered on if the election was won), or how to keep the bankers and politicians from ruining the economy for good (enters the central bank).

The people left in ‘academia’ either tend to do a lot of consultancy for the corporate/policy researchers, and thus are steered towards answering the same questions but do it using slightly different frameworks (and earn less money for it), or choose to remain on the fringe of the debate.

Thus, economics has become more of an engineering discipline than a science. If its subject matter were houses, for instance, it would be concerned with how to build, or maintain houses, rather than what houses are, or where they come from. Maybe think of it as the relationship between physics and engineering; only with the physics bit mostly missing…

As a consequence, economics is the most coherent, but also the most backward social science. Its usage of mathematics ensures rigour, but the prostitution of the questions asked disrupts any real scientific endeavour. Incidentally, the parts where the applications are the least profitable tend to be the most innovative (game theory, networks).

The failure of the discipline is most evident in the current crisis. Analysts in investment banks keep giving in to the latest fads, seeing no point in making calculations any more. Policy economists appear to have decided - for some very odd reasons - that the old models must have been fine, it was just the implementation of the consequent policies that landed us where we are (a bit of self flagellation is always fun, but that is no guarantee for being right). Academic economists are mostly left baffled, living off their reputation, taking any opportunity to pretend that they know something of an Answer.

I challenge all academic economists to recognise the need for a new theory. In particular, a model describing how the global economy behaves is needed. It is increasingly evident that the world economy is as much not a macro economy, as a national economy is not a large market. We will need to depart from the macroeconomic theories, just as macro had to depart from micro some eighty years ago.

The future is global economics.

13 comments:

  1. Some good points, but this is not times for new ideas, is it? Experiment with the world with caution.

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  2. tamas is right in that the past two years have proven the uselessness of economics

    the range of explanations of what is happening in reality are astonishingly wide

    what is global economics then?

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  3. I agree with the first comment. These are not times for lab experiments. Keep those to yourself, or your simulations.

    If you must innovate, do it theoretically first. A lot of new data and observations are coming in now. Use those. Do not try to forecast the outcome, and - more importantly - do not try to come up with new policies based on half cooked theories.

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  4. the problem is that the old models do not work, have not worked. that's the point!

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  5. Bee, before you give up on all the old theories, you should perhaps remember that the world was not born yesterday. In other words, those theories are products of decades of thinking by thousands of exceptionally good economists. The policies are tried and tested. We should stick to them.

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  6. @dragon tamer: There must be a time limit on how long the policy maker should trust the old models. This would be a kind of policy stop loss.

    @ anonymous: It is an experiment NOW. The reality is that nobody has a clue. Why not broaden the horizon?

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  7. Peter, you cannot seriously think that all options are already exhausted. That would be ridiculous at best.

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  8. dragon_tamer: you forgot to put arguments into your comment...

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  9. Economic historians will have plenty of fun analysing how the politicians and their advisors think about the world during the current crisis. There are probably several axioms of economics that we all share, and which will turn out to be false. These might only be functional forms, that is, how the world behaves, but perhaps the fallacious axiom list will also include what the world 'is'. My bet is that the global economy is not a large market, or the structureless assembly of national economies. It perhaps has a distinct structure, and reacts to quasi-global policies.

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  10. Tamas,

    I understand that you are pushing for something new, a new economics of sorts. You keep using the term "global economics". You have not put forward much in terms of content though.

    I am fairly sure you are not suggesting that others should do the thinking, do you?

    J

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  11. You are right man, Global Economy is not the same as Macroeconomics. The same way that microeconomics does not apply at the macro level, now the world is facing a new era when macro does not apply globally. Therefore a new model should come up, but as a result of a global crisis, then the world will realize the problem. The same that happened during the Great depresion in 1930's. Macroeconomics arised to explain how to handle the issues of that time. Now, we are facing new issues, that requires new solutions.

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