New economic thinking is creating change in Germany.
The latest evidence is from German business magazine Wirtschaftswoche, which recently published an article arguing that economic theory is detached from reality.
The article suggests that economists had only realized recently that the “homo oeconomicus” paradigm is misleading, when other social sciences such as philosophy and sociology had come to that conclusion long ago. Journalist Dieter Schnaas writes(all quotes translated from German):
“The economists are still hesitating to depart from the classic theory of market harmony – even though Adam Smith (in this regard) has seen Schumpeter put the final nail in his coffin. They still cling to their desire to explain markets according to natural laws, although word should have got round by now that no market has ever been immune to political influence and that people are not entirely predictable, rational beings. At the same time we see Robert Shiller, George Akerlof and Daniel Kahneman being celebrated as innovators in the field for precisely this "finding" and honored with Nobel prizes for the "discovery" of irrationality. Why is this? Because they no longer reduce people to bundles of rationality, but instead to stimulus response machines?
Schnaas continues his criticism of economics by noting seminal thinkers in other disciplines that economics has too long ignored:
“Ultimately the guardians of the temple of individual freedom, of self interest, of the Homo economicus: could it really be that the world of economics has systematically bypassed the relevant literature on sympathy (Adam Smith), pity (Jean-Jacques Rousseau), the division of labor in society (Émile Durkheim) and recognition (G.W.F. Hegel)? Haven't the economists heard that community, friendship, family and couple relationships have been established since the time of Aristotle as meaningful alternatives to the methodological individualism that continues to dominate their theoretical models?”
It is long past time for economics to include the wisdom of other social science, and Schnaas looks to past economic thinkers who recognized this, including Hayek, for inspiration:
“For Hayek it is clear that ‘truly fertile research requires a very diverse combination of different kinds of knowledge and understanding,’ and that economics is above all a life science that should not only work with formulas, but also make use of herneutic (interpretational) methods. Economics, in Hayek's view, should not only turn its gaze inward and aim for empirical proof of properties inherent in the system. It should also interpret itself, embed itself in a cultural and historical context. Otherwise it is not a science of people but a science of numbers that disavows its own basic assumption – methodological individualism – by describing people as total quantities, as aggregated bundles of data. Hayek: ‘No one can be a great economist simply by being an economist, and I am even tempted to add that someone who is only an economist can easily become a nuisance, if not a real danger.'"
And finally, Schnaas criticizes equilibrium theories of capitalism and markets:
“Stabilized capitalism is a contradiction in terms. Capitalism is change. Its tense is not the present but the future. Its modes are not cycle and repetition but expansion and transformation. Its money is not accumulated wealth (capital) but created promises (credit). As such, the science of capitalism should also think of itself as an open path of knowledge, as an interface between disciplines, as a constant attempt to build up and tear down one analytical construction after another in a never-ending sequence – just like Joseph Schumpeter always preached. Not one single game, demand, trade cycle or margin utility theory will show us the way into the future, but the capitalist imperative: Always think new ideas into the open!”
Schnaas’s critique of classical economics in a prominent German business magazine shows that the cracks are showing in the old paradigm and that more and more people can see them. These people are now looking to new economic thinking to create more realistic and relevant models of capitalism and markets, models that place real human beings at the center of their analysis, not the cartoonish facsimiles of orthodox economics.
Comments
It seems that the existence of a rational relationship between prices and authentic value is questionable. The prices fluctuate according to the nonrational interactions of three types of traders, the fundamental, the optimistic and the pessimistic.
In 1999 the economist Thomas Lux and the engineer Michele Marchesi came to the abovementioned conclusions after studying the fluctuations of their computer simulations on stock exchanges: the simulated fluctuations almost perfectly matched those of real markets, with self-similarity structure on all time scales and a distribution of price changes that looks just like the real thing: a ‘power law’ revealing a great susceptibility to large fluctuations. The point in the model-experiment of Lux and Marchesi is that according to the power law describing price fluctuations, not even the magnitude of future changes can be predicted, thus for example a 20 percent fall or rise does not require a particular cause, it can simply happen because of the presence of speculators who exert a constant influence on each other, totally independently of the evolution of fundamentals. Read more: http://www.moneytaoism.com/#!publication/55_reflexivity_power_law
Economics isnt just a science at all. Whether or not it could be so in the future, depends on the path that the world itself would take. As by now, all it could be reasonably said about the subject, is not but that economics is the atraction point of a few theories on political, if not just legal, foundations.
"Could such an atraction point ever become a science?"...such a question seem to be an ill-founded one.
The reason why economics went astray so far, is given (not explicitly, of course) in a couple of german philosophers of the 19th and 20th century. Such a path was a rather deep necessity. The same necessity of these comments on a blog discussing about economics, of being disregarded or unnoticed within the midst of another large-scaled mismanagement of the world economies by the deeply unavoidable mainstream insigths or blindness.
If I may be so bold, but it matters little if the forward thinkers in economics recognize the issues and problems with the discipline.I once wrote Martin wolf that the problem with economics is that too many economists practice it. What really matter is that in the halls of power and policy frorward thinkers are appointed and given the ability to influv=ence policy. I have little hope of this as those who have always gained by the status quo will do all they can to maintain the status quo. A perfect example is Haldane's recent work on simple leverage rules. Something clear to people on philosophical grounds out side the field doesn't get adopted. Var risk and complexity is much easier to game and rig for one's own benefit, hence poor systems get maintained. Regulatory capture and academic capture will work very hard against effective change regardless of how economics advances
I will also add the role of media which almost unquestionly accepts the logic of the status quo.
“ . . word should have got round by now that no market has ever been immune to political influence and that people are not entirely predictable, rational beings.” I think a large majority of us supporters of traditional economics would regard the latter two points as statements of the obvious.
Economics is not a science, economics is religion.
Anyone, who has ever gotten financial education, knows (at least theoretically), that there is no money without debt. Despite of this fact, most of the economists bear testimony to monetarism by presenting debt as public enemy in their area (meanwhile they gives us moral lessons about our greed and irresponsible consumption). The problem is that all economists, all over the world, simultaneously interpret debt as public enemy in their own national environment. Because the rock-solid accounting fact that money=debt, we can say that they are wrong: the Earth has become into a closed economic system based on two main currencies: US dollar and euro. This 'inquisition-activity' of the revered economists can be explained by the mechanism of conformity (instinctive submission to the loudly represented 'truth' of the majority), or by professional bias, or by 'being impostor'.These economists are guilty of the same behaviour for which they reproach the banks: doing the same thing at the same time. All the banks have been active and optimistic at the same time (credit activity), then all the banks got frightened at the same time which meant to be the beginning of the "credit crunch" (the inner bank market was frozen for a few days in 2008).
Don’t forget: in a Neoclassical economy only the private banks are allowed to increase the quantity of money by their credit activity, because the governments are banned from stimulating the economy. The Neoclassical (and nationalist) economists can only think in open systems, where the money is coming from outside. www.moneytaoism.com
It seems as if the institure doesn't alk much about this subject, and this is really the heart of the matter.
http://www.zerohedge.com/news/payoff-why-wall-street-always-wins-excerpt
Excerpts from THE PAYOFF: WHY WALL STREET ALWAYS WINS, By Jeff Connaughton
The Blob
In January 2009, Ted Kaufman was sworn in as a U.S. Senator, filling Joe Biden’s seat and saying immediately he wouldn’t run two years later in the special election. Kaufman never had to raise money to become a Senator or to stay there longer. For two years, he fought for average investors. THE PAYOFF: Why Wall Street Always Wins, written by Jeff Connaughton (Kaufman's chief of staff), tells how Kaufman and he took on Wall Street in Washington and had to fight “The Blob.”
The Blob (it’s really called that) refers to the government entities that regulate the finance industry—like the Banking Committee, Treasury Department, and SEC—and the army of Wall Street representatives and lobbyists that continuously surrounds and permeates them. The Blob moves together. Its members are in constant contact by e-mail and phone. They dine, drink, and take vacations together. Not surprisingly, they frequently intermarry.
Indeed, a good way to maximize your family income in DC is to specialize in financial issues and marry someone in The Blob.
Well, Ralph, even if the statements are recognized as "obvious," they certainly have not been assimilated into a coherent view of economics, but merely acknowledged and then tossed aside. Economics becomes a fundamentally different discipline when you take political influence and irrationality into account.
"These people are now looking to new economic thinking to create more realistic and relevant models of capitalism and markets, models that place real human beings at the center of their analysis, not the cartoonish facsimiles of orthodox economics." I'd suggest it is to some OLD economic thinking that we should look, starting with John Ruskin's Unto This Last.
Civilization's long established what real wealth is. THERE IS NO WEALTH BUT LIFE, Ruskin reminded us. It took the bastard "science" of modern economics to drum that wisdom out of us and instead mis-measure our riches by quantifying them, discounting what can't be quantified, and calling what's left wealth. In the process it corrupted our collective religion into a false faith in carelessness toward all but our own private selves: God become markets, his invisible hand, his true will, evident to all.
None of history's wise men or women--not even Adam Smith, properly read -- would have advised this disastrous course.
A debased society must start rebuilding its economics at the foundation and ask: What is wealth? The answers are not new.
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