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A New Economics

For a theory to last almost 150 years is a triumph of sorts. For it to last one more decade will be a disaster.
Economyths
Ruud Sies / Rotterdam, Netherlands

Audio version read by George Atherton – Right-click to download

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Neoclassical economics owes its continued existence in large part to university academics, who keep it buffed and maintained and protected for the next generation. This involvement goes well beyond the economics departments. Universities divide subjects into minute specialties and have traditionally tried to keep them separate. (There are signs that this is beginning to change.) Economics decisions affect most aspects of life in one way or another though, so everyone else should at least have an opinion.

Some pending questions:

How does the physics department feel about economic ideas masquerading as laws of nature?

Do the humanities departments agree with the story that society is made up of individuals who act independently? If not, how is that being reflected in the education of future business leaders?

Is the mathematics department OK with the kinds of models used in economics classes? Are assumptions of things like stability plausible?

What do mechanical engineers think of the safety margin used by “financial engineers”?

Is the gender studies department cool with the definition of Homo economicus?

Do sociologists agree that societies always behave rationally? Do neoclassical tools make sense in an increasingly networked society in which one of the most valuable commodities – information – can be distributed at near zero cost?

Are political scientists sure that economics is politically neutral?

Are historians convinced that neoclassical economics is an objective science and not a cultural artifact shaped by a certain period of history? What will be the impact of the rising consumer power of women? Of non-Western countries with different political and economic ideas and agendas?

Do ecologists think the environment is taken seriously enough in economic textbooks? If they seriously believe we are in danger of a huge survival-threatening environmental crisis, is the introductory economics class at their institution increasing or decreasing the risk?

What does the psychology department think about the definition of utility or about the economics of happiness?

Are the philosophers in agreement that markets can make ethical decisions?

And finally, how do elite institutions like Harvard University, Oxford University, Massachusetts Institute of Technology or California Institute of Technology feel about the fact that in 2007, 20 or 30 or more percent of their graduates went straight into the financial sector? Are these institutions being used as a filter to select talented students for this overpaid and socially underproductive area? If that is the case, shouldn’t the universities at least try to revise their teaching to better reflect new theories and approaches, not to mention ethics?

Until university departments break down the artificial divisions that separate their subjects, the Neoclassic Logic Piano will be safe. The best hope for change probably comes not from university administrators but from the ones with the most at stake: the students. They are the ones who are being fed the story about the economy. If they decide not to buy in, then that will be it.

One excuse heard for the lack of progress in economics is that academia changes slowly. But that isn’t true at all. Nothing much happens for a long time, but when change comes, it is often sudden and violent: like an earthquake … or indeed a financial crash. Early in the last century, physics was completely rewritten in the space of a few years. Recent technological advances such as the human genome project have revolutionized biology.

So students, decision time. You live at what many believe is a bifurcation point in human history. You’ve seen all the graphs with lines curving up like a ski jump: human population, gross domestic product, species extinction, carbon emissions, inequality, resource shortages. You know that something has to give. You’ve got an idea that the price isn’t right. Maybe you’re even suspicious that if the world economy does turn out to be a Ponzi scheme, you or your children are a little bit late to the game.

You stand at a fork in the road. You can take the orthodox route – and risk ending up with a qualification as impressive as a degree in Marxist ideology right after the fall of the Berlin Wall. Or you can take a chance on a regime shift by speaking up, questioning your teachers, being open to disruptive ideas and generally acting as an agent of change.

You can insist that the economy is a complex, dynamic, networked system – and demand the tools to understand it.

You can point out that the economy is unfair, unstable and unsustainable – and demand the skills to heal it.

You can tell the oracles they have failed.

You can go in and break the machine.

And then you can do something new.

A New Economics

Of course there’s a risk to taking such a path. But it is no bigger than the one taken by those maverick outsiders Jevons, Walras and Pareto when they developed neoclassical economics.

For a theory to last almost 150 years is a triumph of sorts. For it to last one more decade will be a disaster. It was perhaps the right story for a certain period of history, or the one that people wanted to hear, but it has far outlived its usefulness.

Since the credit crunch, the world economy has sprung back quite well in most places. Stock markets have made back much of their losses. Unemployment has apparently stabilized, as has the US housing market. Bank profits have recovered. However, at the time of writing, no such rebound has been seen in the bee population. There is less oil in the ground and more carbon in the sky. Private sector debt has been replaced by public sector debt, raising the specter of sovereign default in some countries. The financial sector is more concentrated than before. The real problems haven’t gone away, only intensified slightly.

Where there are plenty of green shoots appearing is in the new economic ideas being developed by a range of scientists and thinkers and practitioners. Their theories may look scattered and unrelated, but they are all part of a semi-coherent movement. Instead of seeing the economy as an efficient, deterministic machine running on automatic, they see it as a living thing that we can consciously influence, for better or worse.

The world economy has grown up, and the ancient myths are losing their power. The new story that’s emerging isn’t simple or particularly flattering – we’re less rational or efficient or fair or good in this version. It turns out that we’re not all superheroes with the ability to look far into the future and make perfect decisions. (Which is a shame, because those powers would be quite useful right now.)

We will never be able to perfectly model the economy or eliminate the chance of another financial disaster. But we’re living in a bubble, and we need to address our debt. I’m loath to make predictions, but in my opinion the next big crash won’t be about money. It won’t be triggered by bankers or mathematicians. It will be about something much more real. We have a line of credit with the rest of the planet and it’s flashing red. Soon it’s going to get called in. We can’t grow our way out or work more hours. We can’t hand back the keys and walk away. It’s our home.

We need some household rules. We need a new economics.

From Economyths: Ten Ways Economics Gets it Wrong by David Orrell. Orrell obtained his doctorate from the University of Oxford. His books include Apollo’s Arrow: The Science of Prediction and the Future of Everything and the forthcoming Introducing Economics: A Graphic Guide (with graphics by Borin Van Loon). Visit him online at davidorrell.com.