American Autumn

The New Spirit of Economics

Full of magic, mystery, and animal spirits once again.
The New Spirit of Economics

Rafiqur Rahman - Reuters

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

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Economics wasn’t always the science it now claims to be. In fact, not so long ago what now is called big E economics was once magical, mysterious and altogether profound. John Maynard Keynes, the architect of America’s recovery from the Great Depression and champion of the welfare state, believed that at its core, economics is ruled by “animal spirits.” That is to say that the free, equal and rational mind of consumers in the Locke/Smith economic paradigm does not sufficiently explain human action in the market place; that economies operate more according to Freudian animal heritage, or esoteric and emotional impulses, than reason. Other thinkers from this formative economic era, like Joseph Schumpeter, sensed that a violent, warlike impulse of “creative destruction” lurked at the heart of capitalism. And Karl Marx, the great dreamer, proposed that economic theory, rather than empowering and rewarding the selfish gene, could instead create a better social realm in which every person gave according to his abilities and received according to his needs.

But around the 1950s, when the logical positivists were strutting their philosophy of strict rationality, applying scientific method to social phenomena, economists started distancing themselves from psychological and sociological considerations. They liked to think of themselves as real scientists, and over the next few generations they rationalized human behavior, sanitized their theories and models, and tried to transform economics into a mathematically driven exact discipline on the model of physics.

Today, as Gregory Mankiw’s widely used first year university economics textbook, Principles of Economics, shows, the “common weal” discipline has been reduced to a dry, boring, amoral and inhuman study full of pseudo formulas and cumbersome equations with little connection to ethical questions or social desirability. Graph upon graph on page after page of Principles of Economics reveal just how far economics has drifted from the poetry and prose of its roots – that often misread bible of global finance, Adam Smith’s The Wealth of Nations – to the purposely obtuse and elite math of today.

Along the way, a host of radical (though not really radical – just traditional) thinkers tried to warn the logic freaks of economics that their profession was heading into a dead end. Nobel Prize winner Wassily Leontief said: “Departments of economics are graduating a generation of idiot savants, brilliant at esoteric mathematics yet innocent of actual economic life.” Author of The Origin of Economic Ideas, Guy Routh wrote: “The standard economic texts are powerful instruments of disorientation; for confusing the mind and preparing it for the acceptance of myths of growing complexity and unreality.” And the great American economist and historian Robert Heilbroner, famously warned: “Before economics can progress it must abandon its suicidal formalism.”

But to no avail… for half a century, these warnings have fallen on deaf ears.

So here we are. Great Depression 2.0 and finally the mystery of economics is again awakening from its long logical slumber. In the panic of escalating financial and ecological meltdown, the old certitudes are crumbling and the logic freaks are everywhere in retreat. In 2008 Bush-era Federal Reserve Chairman Alan Greenspan, the man who oversaw much of America’s financial nose dive, told the public “those of us who have looked to the self-interest of lending institutions to protect share-holders’ equity, myself included, are in a state of shocked disbelief.” That’s putting it mildly. As the top economist in the nation for two decades, groomed in 50 years of rigorous positivism, such naïvety was as appalling as it was telling of the false science being sold to people. What Greenspan’s reflections show is that the Newtonian law of positivist economics – the self-interest principle, the "rational maximizer" at the heart of economics – is profoundly flawed. It should now go without saying that carrying on with business as usual in economics would be equivalent to physics without relativity or thermodynamics.

For a scientific experiment to cross the threshold from speculation to truth it must pass the repeatability test. For an outcome to be considered true, one must be able make it happen again. In their quest to be regarded as real scientists (lab coat and all) rather than ideologues, the positivist economic theorists so far have only been able to reproduce one major economic phenomenon – Depression. This is a sign that the only provable thesis in their pseudo inquiry is that unrestrained market liberalism leads to short term financial gain for the wealthiest members of society followed by periods of economic collapse.

As the global economic and ecological crises bear down upon us, positivists are being forced to admit that their understanding of nonlinear, real-world systems is frail at best and that their mathematical models have very limited value. Today every aspect of economics, right down to its fundamental tenets and axioms – growth, freedom, progress, happiness, self-interest – are now being rethought. The economic profession is entering an almost Nietzschean period of creative destruction.

This is the perfect moment to give the logic freaks one final push into the dustbin of history. We the heterodox economists, ecological economists and not-so-radical professors and students at universities around the world can kick over the old neoclassical paradigm and pave the way toward a new kind of economics – a psychonomics, a bionomics, a barefoot economics – a wide-ranging, multifaceted, human-scale discipline full of magic, mystery and animal spirits once again.

Kalle Lasn and Darren Fleet

98 comments on the article “The New Spirit of Economics”

Displaying 1 - 10 of 98

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Chris Honeycutt

Dislike the slight "well, it's the mathies fault" tone to this. First? Compelling all math to be applied math is like making all art have a purpose.

Second? A massive percentage of the time it appears to be a misapplication of the math, or poorly accounting for error bars, or even just not accounting for assumptions (which is where the whole "human nature" thing comes in. Black Scholes is brilliant, without a doubt, but only so long as the system is truely random and doesn't have a half a million machines pegged to Black Scholes.) Li's Gaussian Coupla Function is an example of "don't blame the mathematician, blame the a-holes that didn't accurately account for the error and accept the answer 'I don't know.'"

Would love to know where that Leontief quote came from, as input-output matrices are elegantly simple (if static) descriptors of economic systems. Uses low enough matrix algebra that the calculations could be done by most anyone in Excel.

I'd say more than the economists using math rather than people sciences (anthropology, psychology, etc.), it's the complete inability to see the dominant forces in the system - forests and trees.

If you stir a cup of hot coffee with a spoon, technically the friction from the spoon will heat the coffee ever so slightly. But the net effect is to cool the cup of coffee, not heat it. Too often they focus on an interesting "spoon friction" problem, and then make declarations about the whole system.

Chris Honeycutt

Dislike the slight "well, it's the mathies fault" tone to this. First? Compelling all math to be applied math is like making all art have a purpose.

Second? A massive percentage of the time it appears to be a misapplication of the math, or poorly accounting for error bars, or even just not accounting for assumptions (which is where the whole "human nature" thing comes in. Black Scholes is brilliant, without a doubt, but only so long as the system is truely random and doesn't have a half a million machines pegged to Black Scholes.) Li's Gaussian Coupla Function is an example of "don't blame the mathematician, blame the a-holes that didn't accurately account for the error and accept the answer 'I don't know.'"

Would love to know where that Leontief quote came from, as input-output matrices are elegantly simple (if static) descriptors of economic systems. Uses low enough matrix algebra that the calculations could be done by most anyone in Excel.

I'd say more than the economists using math rather than people sciences (anthropology, psychology, etc.), it's the complete inability to see the dominant forces in the system - forests and trees.

If you stir a cup of hot coffee with a spoon, technically the friction from the spoon will heat the coffee ever so slightly. But the net effect is to cool the cup of coffee, not heat it. Too often they focus on an interesting "spoon friction" problem, and then make declarations about the whole system.

Anonymous

Interesting, but neither of you are economists so I'm skeptical. While I agree the rational actor is an unhelpful construct, I disagree with your apparent call to do away with a scientific or at least mathematic approach to understanding the economy. After all, we would have no way of knowing Keynes was the architect of America's recovery from the depression without a means of measuring the impact of policies based on his theories. Weren't Keynes and his progeny among the first to apply math to economics? I think so. So, don't blame math. It's the rational actor who's to blame. It's a complete fabrication allowing for, and justifying a dehumanized understanding of the economy. It is an attempt to remove people from understanding a system that exists only to serve... People!

Anonymous

Interesting, but neither of you are economists so I'm skeptical. While I agree the rational actor is an unhelpful construct, I disagree with your apparent call to do away with a scientific or at least mathematic approach to understanding the economy. After all, we would have no way of knowing Keynes was the architect of America's recovery from the depression without a means of measuring the impact of policies based on his theories. Weren't Keynes and his progeny among the first to apply math to economics? I think so. So, don't blame math. It's the rational actor who's to blame. It's a complete fabrication allowing for, and justifying a dehumanized understanding of the economy. It is an attempt to remove people from understanding a system that exists only to serve... People!

Chris Honeycutt

Are you an economist?

Personally, I loath Keynesian solutions. They range from "I wanna make the ocean saltier. Let's dump a truck of salt in the ocean! A... really big truck!!!" to "Let's make borrowing money really cheap so that when we can't sustain it anymore, it'll be like the little surprise in the flaming bag on the porch."

I like Leontief because (1) I've used it in ecology and it's very simple to understand - very useful for flows. and (2) it's more a description than a method of screwing with the economy.

I question any "solution" to economic problems that isn't structural in nature. For example, if your economy is based on luxury services, then when those luxury services are no longer affordable or someone else can provide them more cheaply, then your economy will implode.

As far as "rational actors":

http://i1179.photobucket.com/albums/x391/seraphimfire69/Slide1.jpg

Do you see any pattern there? Supposedly radically different economic policies were implimented over that timeframe.

Chris Honeycutt

Are you an economist?

Personally, I loath Keynesian solutions. They range from "I wanna make the ocean saltier. Let's dump a truck of salt in the ocean! A... really big truck!!!" to "Let's make borrowing money really cheap so that when we can't sustain it anymore, it'll be like the little surprise in the flaming bag on the porch."

I like Leontief because (1) I've used it in ecology and it's very simple to understand - very useful for flows. and (2) it's more a description than a method of screwing with the economy.

I question any "solution" to economic problems that isn't structural in nature. For example, if your economy is based on luxury services, then when those luxury services are no longer affordable or someone else can provide them more cheaply, then your economy will implode.

As far as "rational actors":

http://i1179.photobucket.com/albums/x391/seraphimfire69/Slide1.jpg

Do you see any pattern there? Supposedly radically different economic policies were implimented over that timeframe.

Anonymous

No, Chris, I'm not a economist. I take it from your response that you aren't one either. I was questioning the authors' expertise. I'm afraid I don't know how to respond to your comment. Mostly because I don't follow you. Ok... You don't like Keynes but Leontief favored a quantitative approach to economics. My point was: don't blame econometrics. Also, you miss the point about the role the rational person plays in economic theory. Put simply, it's an assumption that people will make rational choices to maximize gains. Makes sense, right? That part does, but it also assumes people have equal access to information and markets. It also assumes away human factors that often inhibit rational decision making. The authors seem to suggest and I agree that those factors should be studied and possibly incorporated into the study of Econ.

Anonymous

No, Chris, I'm not a economist. I take it from your response that you aren't one either. I was questioning the authors' expertise. I'm afraid I don't know how to respond to your comment. Mostly because I don't follow you. Ok... You don't like Keynes but Leontief favored a quantitative approach to economics. My point was: don't blame econometrics. Also, you miss the point about the role the rational person plays in economic theory. Put simply, it's an assumption that people will make rational choices to maximize gains. Makes sense, right? That part does, but it also assumes people have equal access to information and markets. It also assumes away human factors that often inhibit rational decision making. The authors seem to suggest and I agree that those factors should be studied and possibly incorporated into the study of Econ.

Chris Honeycutt

No, I'm not.

I think there's far more fundemental problems than not accounting for human variables - or maybe not alone.

These systems are not designed to be complex. I doubt you could have a "real" model of an economy any more than you could have a "real" model of an ecosystem.

I like Leontief because it's essentially just a way to balance the tables - determine external and internal demands from certain sectors. It's simple, but it's a great way to organize information.

The problem with these more complex models is that they can't really account for what you're describing. But even if we studied them, they still couldn't be accounted for, imho.

The best way to describe what I'm talking about is to use another brilliant yet simple ecological model - Lotka-Volterra:

http://mathworld.wolfram.com/Lotka-VolterraEquations.html

No ecosystem in the world behaves that perfectly. Yet it's a wonderful explaination for some simple predator and prey relationships.

The problem is economists try to make their subject "useful," rather than simply observational and descriptive. They therefore are compelled to try and suggest they can make predictions or describe behaviors that they really don't have the data to back up.

But, unlike watching boom-bust cycles of lemmings, there's a real force in econ to say "Oh yeah, I TOTALLY know what's going on..." Even though I suspect it's literally impossible in the short term.

Maybe I'm still being obtuse. Let me think of a better way to explain it.

Chris Honeycutt

No, I'm not.

I think there's far more fundemental problems than not accounting for human variables - or maybe not alone.

These systems are not designed to be complex. I doubt you could have a "real" model of an economy any more than you could have a "real" model of an ecosystem.

I like Leontief because it's essentially just a way to balance the tables - determine external and internal demands from certain sectors. It's simple, but it's a great way to organize information.

The problem with these more complex models is that they can't really account for what you're describing. But even if we studied them, they still couldn't be accounted for, imho.

The best way to describe what I'm talking about is to use another brilliant yet simple ecological model - Lotka-Volterra:

http://mathworld.wolfram.com/Lotka-VolterraEquations.html

No ecosystem in the world behaves that perfectly. Yet it's a wonderful explaination for some simple predator and prey relationships.

The problem is economists try to make their subject "useful," rather than simply observational and descriptive. They therefore are compelled to try and suggest they can make predictions or describe behaviors that they really don't have the data to back up.

But, unlike watching boom-bust cycles of lemmings, there's a real force in econ to say "Oh yeah, I TOTALLY know what's going on..." Even though I suspect it's literally impossible in the short term.

Maybe I'm still being obtuse. Let me think of a better way to explain it.

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