Economics: Where to from here?
On 25 January 2012 there was a panel discussion entitled, “The Future of Economics”, moderated by Martin Wolf. Key outcomes are summarised here.
I am amused at the classifications made by Martin Wolf (saltwater/freshwater economists), but let me not go there.
Key points with which I agree:
“economics suffers from physics envy. It seeks to be an exact science, which is impossible.”
“the world is not computable“
“being a study of complex human behaviour, in which the world is created by human understand and motivations, economics is hard.”
“even though economists get much wrong, they still have much to offer to non-economists who tend to assume that economic problems are far more simple than they actually are“
“there is a great danger that in rejecting the most simplistic pro-market mantras, economists and policymakers will embrace even more dangerous and naïve statism“
“orthodox economics had, in the years leading up to the crisis, become more a cult than a science, particularly with the assumption that what exists in competitive markets has to be the best possible outcome, since, if it were not, it could not exist. So, if crises are not predicted, it is because they cannot be: they are the result of unexpected shocks, by assumption”. This is a criticism of the rational expectations school – a criticism with which I fully agree. But this must also be seen as a criticism of the neo-Keynesian school which manipulates with these “perfections” as if manipulating a recipe, in order to churn out its preferred imperfections. The economy is complex, not amenable to simplistic mathematical analysis, whether of the rational expectations type or neo-Keynesian type. Without understanding institutions and political and historical context, we can’t understand an economy.
“human beings are not rational calculating machines. Their mood and approaches to decision making varies with the circumstances.” This is only partially correct. While humans don’t use rational calculation, their behaviour is best predicted through the assumption that they DO think rationally.
So where should economics go from here?
Well, it should go back to the basics and reset the button. The value-add by economists was astoundingly huge in the first 100 years since Adam Smith’s Wealth of Nations. It increased all the way till Menger came on the scene. Micro-economics, which is largely a deductive discipline, based ENTIRELY on the work of Menger, is still doing fine. But with the advent of Keynes, the “macro-economics” part of economics dropped off like a rock falling off a precipice. The figure below shows what’s happened:
Read more at Sanjeev Sabhlok’s Occasional Blog-Economics
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