In search of original thinking

The global crisis is an intellectual challenge. And the discipline of economics has not risen to the challenge. Why not? The problem lies in its search for a universal model, which is of course unattainable, and in a subsequent distancing from reality. To get our feet back on the ground, we need to rethink (a) the assumptions behind economic modeling and (b) the institutional organization of research and higher education. “Wanted: A new Galileo or Copernicus capable of reformulating economic theory. Please present models to the top twenty economics departments in the world (according to the US News and World Report rankings). If you fail to receive any replies, proceed to the top twenty sociology departments.”

Imagine this ad in an internationally recognized newspaper like Le Monde, the Corriere Della Sera, the Financial Times or the Wall Street Journal.

Today’s world leaders are struggling in vain to shed some light on the economic gloom brought about by the global crisis. Their tool of choice: the dim lantern of a low-amperage Keynesianism. I imagine that they are asking themselves: How can I be the next Franklin Delano Roosevelt? It seems that they are not finding any answers.

The last two years have not been kind to the reputation of economists. For more than two decades, we watched as the profession rose in prestige. Today, however, economists are blamed for failing to note the fundamental fragility of the financial markets and for not anticipating the ensuing crisis. And with the global economy in ruin, these same economists are unable to agree on policy or on the probable course that the crisis will run. In prior issues of Opinión Sur I pointed out the diverse “schools” of economic rescue packages put forth by both mainstream economists and those on the periphery. Each package is distinct, but all of them share two characteristics: They are vague, and they are intellectually mediocre.

Ironically, more economic research has been conducted during the last quarter century than during all of history. Nonetheless, in the midst of this crisis, the most cited economists are the dead ones: John Maynard Keynes, Irving Fisher and Hyman Minskyi, for instance. All of these men belong to past generations.

Since the 1960s, economists have been engaged in a grand pursuit, according to John Kay,ii to establish the microeconomic foundations of macroeconomics. The guiding premise is that policy decisions, such as those affecting growth and inflation, boom and recession, ought to be based on the study of individual behavior. These economists have worked to build models based on the rational behavior of individuals who seek to “optimize” their interests. But this “ideal type,” homo oeconomicus, represents a stylization of a cultural-historic configuration that (1) never existed apart from in one global center of capitalismiii and (2) fails to adequately explain both individual and social behavior even in those places where it is culturally legitimate.

In general, however, economists have embraced this paradigm and believe that their collective efforts have been a success. In leading U.S. universities and indeed throughout the globalized world, the discipline of economics far outstrips the other social sciences in terms of resources, prestige and compensation. Economists occupy a privileged position in the academic hierarchy. iv

Yet, it is worth noting that in today’s research universities laurels are auto-referential. Researchers within each field determine who among their peers will be rewarded for their academic performance. This is the primary obstacle to interdisciplinary research by problem area, as opposed to the prevailing model, intradisciplinary research by specialization. In the social sciences, the highest praise goes to those who apply the most rigorous (read “mathematical”) methodology. And the economists take the cake in this respect. Positioned thus at the pinnacle of the university hierarchy, whose highest level is membership in the coveted Nobel Prize club, economists have effectively barricaded themselves behind a wall of ego and self-inflation. The ivory tower has never been so inaccessible.

There is no denying, of course, that econometrics do demonstrate a great degree of precision. But their formal elegance has little to do with the empirical reality. Those who have to establish and implement public policy and those who have to make concrete decisions for small, mid-size and large businesses, along with the salesman, workers and general public, have little use for these models, despite their precision and formal elegance. What people really want to know is how these models can be applied to advance their interests and, in turn, contribute to national prosperity. They want explanations that illuminate rather than obfuscate. Sadly, in the real world economists seem to behave “lie a dog in bowling lane.”

At times this self-referential arrogance seems limitless. One Nobel Prize winner, professor Robert Lucas – who was recognized for grounding macroeconomics in microeconomics – went so far as to put forth a thesis, known among his peers as the “Lucas critique,” that argued that economic predictions ought not be subject to normal statistical confirmation, as this would jeopardize too many elegant models. This attitude reminds me of an apocryphal anecdote about the great German idealist, Georg Wilhelm Friedrich Hegel. After a conference, Hegel was cornered by a critic who insisted that Hegel’s theories did not accord with the facts. “Too bad for the facts,” Hegel responded (Umso schlimmer fur die Tatsachen!).

I think that the problem lies in the search for a universal model of behavior based on facile premises. Economics, unlike physics, is not a hard science. Physicists have been searching for a “theory of everything” for quite some time. Einstein failed trying: For him, the “theory of everything” involved reducing the universe into fundamental particles located in a unified field. But what is in physics an unattained but possible goal is in economics a futile and almost comic quest: something like the encyclopedic ambitions of Bouvard and Pecuchet, Flaubert’s ridiculous characters. The search for a single theory of everything at the deep ontological level of complex human behavior is foolhardy.

But based on these simplistic premises, economists have reached complex conclusions. The same thing happened five centuries ago in the context of Ptolemy’s theory (which, in fact, originated in the sixth century B.C.) . Accepted as dogma by the medieval Church, this theory held that the Earth was the center of the universe. It adequately explained the apparent movement of the stars, the sun and the planets. And even today Ptolemy’s model provides a sound basis for navigating on the open sea using a sextant, a watch, astronomical charts and a bit of spherical trigonometry. The model enables making precise calculations about particular circumstances despite its underlying flaws. Since the earth is not the center of the solar system, however, the Ptolemaic system is unable to explain certain anomalies in other calculations. To address these anomalies, Ptolemy formulated numerous ad hoc explanations, which incorporated the idea of “epicycles.” In the end, a set of complex, baroque explanations was needed to justify Ptolemy’s estimates. Galileo and Copernicus revolutionized astronomy by changing the underlying premise and shifting the reality. Since that time, we have known that our planet revolves around the sun, though this might not appear to be so when the sun rises and sets. Today, with the global crisis raging, things are not obeying the existing models. And economists are hastily adding cycles and epicycles. What we need is a new Galileo or Copernicus for the field of economics.

The idea that economics can provide a general theory of human behavior rests on two fundamental assumptions: the extreme rationality of actors and efficiency of markets. But these assumptions are themselves irrational. Valid theories have a more modest scope and are based on the formation and evolution of beliefs and the advancement of empirical knowledge about behavioral patterns. This is the way things work in the other social sciences, which have generally been dismissed by economists precisely because they do not offer general theories. Efforts by sociologists, for instance, to formulate a general theory were abandoned after the 1950s, and this paved the way for the advancement of the discipline as a whole.

And yet, there remains an important holdout of “pure” economists who really believe that their models can explain all of human behavior and that realities like values, norms that do not fit in any rational scheme, and all those elements that, loosely speaking, constitute culture are baseless and imprecise speculations – no different than fairy tales. These hardcore economists are the Taliban of the social sciences.

For those of us who live in the real world, these dogmatic theories are nonsense. The premise of rational action and the efficiency of markets are not rocket science. Anyone can understand them. The problem is that they are false. Many of the dilemmas confronting economists today – such as profit generation and the instability of global markets – can be traced to the failure of their existing models in concrete situations. Stock crashes, the incorrect valuation of assets and a lack of information among actors have brought us to where we are today, and economists have little or nothing to say on these themes.

Findings from the social sciences – including economics – are always approximate and provisional. The most useful economics theories are those that consist of mid-range hypotheses and that shed light on particular situations. The best course is to base research on empirical regularities, incorporate advanced statistics and embrace the “grammar” of norms and values that guide behavior. This in itself is no small task. Still, the results from this kind of research are more useful than the search for more ambitious, general theories. The social sciences are part of the same epistemological class as engineering and medicine: They are diagnostic tools that facilitate public and private action. They are pragmatic – not paradigmatic – disciplines.

The global crisis is at once a disaster and an invitation to new ways of thinking. It represents not only an economic crisis but a crisis in the way we organize knowledge. And since most research today is conducted in universities, it is due time to rethink the university itself, with an eye toward dismantling existing academic departments and reassembling them into interdisciplinary teams focused on practical challenges and complex problems. We have tried the path of isolation among the different disciplines and a kind of super-specialization within them. The time has come for inclusive teams comprised of experts from diverse fields laboring on common tasks. As noted by a famous twentieth-century politician from Argentina, the only truth is reality.

———————————————————————————–

Notes:
i)Oft-cited works include John Maynard Keynes “The Great Slump of 1930” (1930), Irving Fisher’s “The Debt-Deflation Theory of Great Depressions” (1934) and Hyman Minsky’s Can “It” Happen Again? Essays on instability and finance (1982).
ii)
iii) For more on this theme, I recommend Danish sociologist Gosta Esping-Andersen’s Social Foundations of Postindustrial Economies, 1999. This author distinguishes between several different homines: homo liberalis, homo familis y homo socialdemocraticus.
iv) v For more on this issue, see John Mankoff and Verónica Montecinos’ article “”El Irresistible Ascenso de Los Economistas,” Desarrollo Económico. Revista de Ciencias Sociales, n. 133, April-June 1994.

Leave a comment

Your email address will not be published. Required fields are marked *