The crisis in economics
What I see as the crisis in economics, is the fact that the 'science' has alienated itself from the world. From the real environment, from real people.
Models are regarded as truths on their own, rather than a narrow -quantitative- reflection of a more important -also qualitative- world. This separation has gone hand in hand with the 'financialization' or 'monitization' of the economic science.
As money-value seems easy to measure, and makes elements of the economy easily comparable, we have monitized all the world's qualities and non-qualities, and express them in the same currency. Even though we all know that we can't compare apples and oranges, we tend to put entities as diverse as the cost of unemployment, the value of water quality, investments in education, the size of the weapons industry, or the total value of throughput of computers per year on the same axes. All measured in the same currencies: $, €, £.
By consistently measuring all aspects of life in money terms, we have created the shared mental model that money is real, and absolute, whereas qualities like our natural environment or 'life' are relative. This has not only sucked all ethics out of economic thinking, but more importantly, it has led us into the current upside-down world view. In our world we ask ourselves whether - in money-terms - we can afford investments in sustainability (read: keeping the qualities of the earth such that human life here remains possible). This is of course completely the wrong way around, and if you think about it even hilarious! We have come to believe in money more than in the life-generating system that the world is. Our question should of course be: How big an economy can we afford ecologically? The economy is not the limiting factor; our earth is.
This is nothing new; MIT's 'Limits to Growth' and E.F. Schumacher's 'Small is Beautiful' explained us more than 30 years ago what the absolute boundaries of our economic realm are.
The crisis in economics is not new. If as I say our underlying world-view is the crisis, it's been there for decades. What we call the crisis today is only a symptom coming to the surface, just as many other -interrelated- symptoms, such as peak oil, climate change, loss of biodiversity, based on the same crisis of perception.
It's silly to just blame the economists, or any group of -ists for that matter. We have built our society on the belief that we can explore and exploit forever. Today we know that there are physical limits we have to take into account. This requires for a whole new foundation, new principles, and new assumptions for economic theory. And a systemic approach in which 'away' or 'externalities' don't exist.
It's time for us to understand and model the economy of 'What goes around comes around', in which postponing solutions to the future is unheard of, and a level playing field exists within absolute ecological boundaries.
Crisis in economics
I view the 'crisis in economics' as the divergence of economic theory from reality. It seems that the economists that held sway since the 1970s under the influence of Hayek, Friedman,etc.. were totally immersed in an economic dream world that bore no relationship to the real world.
Did they ever read Charles MacKay's 'Extraordinary Popular Delusions and the Madness of Crowds'?
His chapter on 'Tulipomania' would have clarified whether there was a housing bubble in the early 2000s.
I am not an economist, but by late 2002 I knew there was a housing bubble when my cousin's home appreciated 25% in 6 months even though it had a damaged roof and no improvements done to it in the previous 10 years.
In addition, having someone like Alan Greenspan, a cult follower of Ayn Rand and Milton Friedman, become the head of the U.S. Federal Bank is like having a fundamentalist who believes the world is 6,000 years old and that the bible is the literal truth become head of the Paleontology department at Harvard University. There may be a 'slight' divorce from reality.
In essence the 'crisis in economics' is a crisis in the preception of reality.
Economics needs to look at
Economics needs to look at the real world and stop being a hypermathematised branch of free market theology. Being rigorous is not a panacea if your assumptions are flawed.. If economics is the study of mankind in the ordinary business of life, then any theory, no matter how elegant, needs to be tested against observation. Students should read more economic history and sociology and build fewer models.
The Crisis
The crisis in economics is that the profession has lost its sense of purpose and lost its reputation for expertise in guiding society. Technical virtuosity in mathematics or statistics has become sufficient to be tenured professor. As Harold James said in his recent book, the historians have become prophets in this crisis because the past is the future. Economics has gotten into a 'deductive frame of mind"to a degree that mathematical novelty is the path to success and deep understanding of the economy matters little.
What do you see as the “crisis in economics?”
The fact that 1bn people are starving whilst a handful of powerful people and corporations own a high proportion of all the world's wealth and no one seems to know how to cure this disease.
Obsession with microfoundations
The tenor of most contributions to this inaugural conference is that we need better microfoundations, now in the disguise of behavioural economics. It has become the economist’s way of saying that we need a more plausible theory of human behavior to explain what happens in the aggregate. The problem with this route is hidden in the word ‘aggregate’.
Macroeconomics is not simply the aggregate of microeconomics, the sum of a myriad of individual actions. Not only is this a fallacy of composition; we cannot infer from the parts how the whole behaves. Meaningful macroeconomics explains how a particular form of social interaction (exchange) and social institutions (money, markets) create the resource endowment that is given for the microeconomic working of the (relative) price mechanism. Keynes was a great economist not because he recommended counter-cyclical fiscal policy in a depression but because he founded macroeconomics as a field of study in its own right, not as an aggregated form of microeconomics.
The famous ‘paradox of thrift’, not invented but popularized by Keynes, is a case in point. The paradox is that households’ attempt to save more can lead to less saving in the economy. This is not an abstract thought experiment: after a period of high spending, households will at some point want to save more of their income, and sometimes many of them at the same time. But if there is — for this very reason of dwindling consumer demand — no corresponding readiness of firms to invest more (or the government to incur more deficits or the foreigners to import more), then the lack of demand for the goods produced will make prices and incomes fall until households’ savings plans and firms’ investment plans (or government’s budget policies and foreigners’ intentions to import) are compatible.
This sounds almost like a behavioralist story of Mandeville reversed: private virtues, social vices, here in the form of recessions. Note that we do not need any irrationality; on the contrary, the paradox is based on the perfect functioning of the price mechanism that responds to lower demand, when goods are actually bought and sold for money payments.
The money payments are important, not a detail that can be left out as in the neoclassical direct exchange economy. The Keynesian reading of the ‘paradox of thrift’ suggests that even if, or exactly when, the microeconomy works as intended, with rational savers, flexible prices and broadly correct anticipation of demand by firms, the outcome is determined by features of the macroeconomy. These features are the constraints on the microeconomy (non-consumption by households must be equal to demand for non-consumption goods by firms; money is used in exchange for goods and services) or coordination problems (absence of a Walrasian auctioneer who prevents all transactions until the market clearing prices have been found).
These constraints and coordination problems capture the essence of a capitalist monetary economy. But economists have given up on doing research on these inherent systemic features while they spend lots of time studying behavioral market imperfections that can be illustrated by the workings of a baby-sitting co-op (even one of the best, Paul Krugman in a commentary for the New York Times).
New paradigm recognition
Many of the answers given to this question suggest the need for a paradigm shift in current Economic thinking. My greatest concern is that 'New Economic Thinking' will suffer from the usual danger that academic peer reviewers steeped in the old paradigm will naturally tend to continue to propagate that view. My question to this institute is: how will new thinking be recognized?
Academic history shows us that paradigm shifts take decades to become accepted. Ideas that are initially considered absurd, irrelevant or far-fetched can gain recognition, but only after a protracted struggle. Do we really have that much time?
Perhaps accelerating this process is the greatest potential contribution this institute can (/will?) make.
THOMAS ILIN
crisis in economics
Operating in a vacuum - and destroying what it does not want to acknowledge
As long as economics pretend that we are surrounded by limitless resources, instead of respecting the living world as a partner that feeds and sustains us, it will forever be in a crisis - until it may be too late to change course.
Wolfgang Sterrer
Crisis in economics
For me the main issue is that current economic models fail to account for the future effects of today's activities sufficiently well to prevent rash or short-termist behaviours that result in long-term damage. Nor do today's models encourage behaviours and investment that will positively contribute to a genuinely sustainable future. An example is the limited extent to which the price of raw materials reflects their limited supply. True, once something is obviosuly going to run out, its market price escalates but as soon as there is a hint of uncertainty or 'ray of hope' over absolute depletion, everyone reverts back to ingrained behaviours. We value these materials based on what they can do today rather than what they may enable tomorrow for example, we prefer to burn oil today rather than consider its potential use as a recyclable material such as plastics.
Steve
Hidden Normative Bias
Despite constant protestations that the discipline of economics (one cannot call it a science) is not normative but descriptive or positive, there is an unstated but all-dominating normative assumption underlying mainstream neoclassical analysis and that of most other schools. This unstated normative assumption is seen in its constant invocations of Pareto Optimality as an ideal, use of the Coase Theorem to justify property-based policy prescriptions like cap & trade, etc., and has produced a discipline that resembles nothing so much as pre-Keplerian astronomy, with its convoluted mathematics of epicycles futilely trying to reconcile empirical fact with false assumption. The false assumption of pre-Keplerian astronomy was that orbits must be circular. The false normative assumption of mainstream economics is that the enormous inequalities of wealth, income and condition observed in modern capitalist economies, especially the USA, must somehow be justified by economic efficiency, differences in personal merit, the inherent nature of law and order, practical necessity, or some such consideration, and cannot simply be the result of massive, systematic, institutionalized, but wholly unnecessary and in fact economically and socially harmful injustice.
Mainstream economics is in crisis because far from being a descriptive empirical science, it has largely devoted itself to providing rationalizations for institutionalized economic injustice, as Joseph Stiglitz implied in the concluding remarks of his 2001 Nobel Prize lecture, "One might ask, how can we explain the persistence of the paradigm for so long? Partly, it must be because, in spite of its deficiencies, it did provide insights into many economic phenomena. ... But one cannot ignore the possibility that the survival of the paradigm was partly because the belief in that paradigm, and the policy prescriptions, has served certain interests." Economics will never be a genuine empirical science while it remains in thrall to the pecuniary interests of the wealthy and privileged.
- 1 of 9
- ››
