Nov 10th (day 28): The crisis in economics November 10th, 2008 by Hang
Economics, however much economists seem wilfully blind to it, will soon undergo a radical paradigm shift (in the strict Kuhnian sense). The old model of the economically rational actor is coming increasingly untenable as we gather more evidence from behavioral psychology and a new paradigm of behavioral economics will be arriving within the next 10 - 30 years. What is interesting though is how obvious such a shift is from those outside of economics while insiders seem utterly unaware that the foundations they are standing on are crumbling.
Why is it that economists seem so blind to what’s going to happen in economics? There are the standard Kuhnian factors which Kuhn lays out in an exemplary fashion in The Structure of Scientific Revolutions but I think economics also had one other unique factor as well. Economics is a highly non-intuitive science and there is an almost perverse pride in illuminating just how poorly our naive view models the world: Raising the minimum wage decreases well being, trading with people who are universally more efficient than us increases our well being, allowing businesses to fail causes more businesses to suceed. These are all well established parts of the mainstream economics canon and they are all, by and large, true.
But the result of this curious structure of economics is that economists are extremely used to hearing well meaning and sincere economic arguments made by non-economists which are grossly flawed. They’re used to hearing the same shop-worn fallacies assembled to yet again make a seemingly devastating attack on the tenets of economics which, in reality, miss the mark so wide you could fit yo mamma through (sorry, I couldn’t resist). What’s more, these errors are conceptual in nature and to correct them would require indoctrinating the opposing party in the entire philosophy of economics.
As a result, economists have developed a simple zero knowledge proof: At the first obvious sign that the other person is not a complete insider of economics, stop listening and nod politely. And by and large, this is effective. For the vast majority of cases, people jibber jabbering about the evils of globalisation or the benifits of socialism simply have no idea what they are talking about. But the unfortunate side effect of this is that economics as a field has become highly insular and unreceptive to outside influences. In order to mount an effective attack on economics, one needs to be well versed in both the standard economic paradigm and the research methods and corpus of behavioural psychology. There simply aren’t enough people who have the time, intelligence, determination and opportunity to get to that point and, as a result, economics simply isn’t advancing.
Kuhn writes a lot about a crisis point and how paradigms tick over and I think an interesting thing is how the current bailout crisis just might be the crisis point needed for economics to finally start making the transition. The bailout crisis has begun to lay bare some of the fundamentally untenable assumptions of conventional economics and has brought to the forefront radical (to economists) new ways of analyzing human behaviour. Things like non-linear analysis, game theory of groups and incentive structuring theory. Terms like “Black swans” and “tipping points” are being used.
It may seem like such things were in economics already, game theory has been used in economics for decades. But the economics version of game theory was game theory formulated in an economic language. What this shift really represents is economists now being forced to grapple with very different standards of proof and modes of argument. Whether this will herald the beginning of a systematically behavioural view of economics remains yet to be seen.
Also featured in blogs: Figuring Shit Out
| Comments (2)
November 10th, 2008 at 12:38 pm
Interesting - it seems trivially obvious, now having read your post, that the Kuhnian idea of changing scientific paradigms is applicable to economics like this, but I’ve never really thought of it that way.
I wonder - economics, because it’s so widely practiced and laced into our political lives, seems to have more of a ‘folk’ or social component than other sciences. I’m not sure that this will affect paradigm shift in academic economics, but I wonder how long it will take for main-stream uptake of those changing ideas.. That is, how much longer will folk economists take to change, and what effect does that delay have?
Either way, thought provoking.
November 10th, 2008 at 7:19 pm
That’s an interesting question. It seems folk economics is driven more than ideology than theory and what I foresee happening is that the Libertarian ideology becoming increasingly more discredited and people from the Socially Liberal ideology selectively taking pieces of evidence from Economics and using it to strengthen their world view.
One thing I think would be an easy win for the socially liberal is an economically justifiable version of a luxury tax on the basis that happiness depends more on relative wealth than absolute wealth.