Limits

I don’t understand why people get upset when I say that economics is a waste of time. I suppose it’s because I don’t make a clear enough difference between economics as a general topic and economics as a formal, mainstream, body of knowledge. It’s the latter that is a waste of time. The former is wonderfully interesting.

At its heart economics is a study of human behavior, where that behavior is specific to certain activities. It is thus deeply rooted in psychology, so it is more closely associated with biology than physics. This is not a new idea: some of the greatest economists of the past have argued as much. Trying to transfer in ideas from physics, even metaphorically, therefore tends to lead to dead ends.

Like the notion of efficiency. That’s something of great interest to engineers, but has little to do with economics. You can have an efficient physical system. You cannot have an efficient social system. There’s just too much we don’t know and can never know. Still economists all over the world are obsessed with efficiency. So what do they do? They start to abstract and simplify. They model and fine tune. They test and re-test. And still their ideas run afoul of reality: human beings are not efficiency seeking machines, and so any system filled with humans is likely to be darned near impossible to steer towards efficient outcomes. Nothing daunted economists press on. If humans are unlikely to be efficient the logical next step is to construct a theory to exclude actual humans. That’s what’s happened in economics: the faulty decision to root economics in a physics-like setting rather than in a biology like-setting forced subsequent generations of economists to “refine” their thinking and, eventually, to force real people out of their theoretical world. Voila! Modern economics ends up as a wonderful edifice with extravagant claims as to its ability to understand human behavior precisely by eliminating all contact with humanity. Weird.

Ergo, if your goal is to understand real economies replete with real humans, modern economics is a waste of time.

Go study something else. You can learn a great deal about real economies by reading psychology literature. Behavioral economics — which despite all the press it gets has had only a marginal impact on the mainstream and on textbook economics — is an attempt to do that. The behavioral economics project is in its infancy. Go get involved.

By the way: anything that refers to strategic behavior is also useful. Real humans are constantly trying to outwit each other. That’s when they’re not cooperating, which is another human characteristic economics determinedly overlooks.

Humans are complicated. Too complicated for an economics built on an exclusive belief in relentless rationality.

Furthermore, many psychologists are now challenging the entire premiss that humans are calculating machines in the manner of computers. Our ability to compute sits uneasily with a far more powerful and deeply rooted set of survival skills that are experiential and heuristic. We are not rational information processors. We cobble things together. We try things out. We are really good at pattern recognition. As calculators we, well, suck. Yet economics bases itself on the notion that we are computational wizards. There is nothing in modern psychology to support this idea, but it persists in economics. Indeed economics is proud of its ersatz psychology and exports its “insights” into other social sciences with imperial abandon. It ought not. Its insights are embarrassingly rotten.

Worse: so proud is economics of its [bad] understanding of human behavior that it insists all economic theorizing be based on it. Thus we have the insistence on building macro theory on micro-foundations. At the risk of upsetting thousands of dedicated and well-meaning economists: garbage-in garbage-out just about sums up the micro-founded enterprise.

There is in evolutionary biology, as I am sure you all know, a notion called a “fitness peak”. Roughly speaking, this is the idea that a species refines its survival strategy and succeeds in a certain context. As it does so it “climbs” higher up a successful strategic slope that defines it relative “fitness”. Problems arise when the context subsequently changes. The more superbly refined fitness becomes, there more difficult it is to go back down and climb a different and more relevant slope. Yesterday’s cleverness becomes todays’ ignorance. The advantage of the old peak becomes a hindrance in the newer landscape.

So it is with economics.

It began in the context of the mid and late-1800’s obsession with physics. It’s greatest critique is situated in mid-1800’s industrialization. Economics began its climb up its own fitness peak back then. But the context has changed. Science has moved on. Economics hasn’t kept up. Instead it keeps on refining its obsolescence. It keeps on getting more and more specialized at something that is less and less relevant.

It needs re-doing.

Which is what a lot of people are working on: socio-economics; behavioral economics; evolutionary economics; experimental economics; institutional economics and many other fields are veritable hives of activity, they just haven’t made it into the textbooks.

Meanwhile what we call mainstream economics is, indeed, a waste of time.

Addendum:

This article in Aeon is a good example of the kind of thinking we need to import into the new economics mainstream.