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”

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Anonymous

It all depends who's defining a "failed state". If Rev. Martin Luther Jr. had been alive - he would have called USA "a failed state".

The 2011 projection shows that 75% of Black children will born to poor single-mothers. More than 56% of Afro-Americans cannot dream of home ownership. 20% of Afro-Americans have no health insurance while 60% of all American women with AIDS are Black.

The US Census Bureau says that one out of every eight American lives in poverty. The poverty rate among Blacks is three times higher than Whites.

http://rehmat1.wordpress.com/2011/08/29/martin-luther-king-and-his-shattered-dream/

Anonymous

It all depends who's defining a "failed state". If Rev. Martin Luther Jr. had been alive - he would have called USA "a failed state".

The 2011 projection shows that 75% of Black children will born to poor single-mothers. More than 56% of Afro-Americans cannot dream of home ownership. 20% of Afro-Americans have no health insurance while 60% of all American women with AIDS are Black.

The US Census Bureau says that one out of every eight American lives in poverty. The poverty rate among Blacks is three times higher than Whites.

http://rehmat1.wordpress.com/2011/08/29/martin-luther-king-and-his-shattered-dream/

Anonymous

First, I'm not an economist. So I apologize if any of my thoughts are misconstrued. I thought this was a good article, but overall I'm hesitant to accept it's premise.

I believe economics is a pseudoscience because of it's inability to carry out controlled experiments, unlike it's scientific counterparts (except for micro-econ). However, I don't believe contemporary economics is a failure in itself. I believe there has been progress under capitalism, although there are definitely major setbacks as well. As I understand, the industrial age was a product of capitalism, which was based on an advanced system of property recognition spurred by the US in the 19th century. Which in turn, greatly increased our life expectancies, comforts of living, and the like. We may have reached the same prosperity with another system, but my guess is not as quickly.

Lastly, market failures do continue to exist, and will always it seems. But unlike the models of evolution, the human species will not let it's own die off for the greater good, in which more socialistic models play a crucial role.

My late night ramblings.

Anonymous

First, I'm not an economist. So I apologize if any of my thoughts are misconstrued. I thought this was a good article, but overall I'm hesitant to accept it's premise.

I believe economics is a pseudoscience because of it's inability to carry out controlled experiments, unlike it's scientific counterparts (except for micro-econ). However, I don't believe contemporary economics is a failure in itself. I believe there has been progress under capitalism, although there are definitely major setbacks as well. As I understand, the industrial age was a product of capitalism, which was based on an advanced system of property recognition spurred by the US in the 19th century. Which in turn, greatly increased our life expectancies, comforts of living, and the like. We may have reached the same prosperity with another system, but my guess is not as quickly.

Lastly, market failures do continue to exist, and will always it seems. But unlike the models of evolution, the human species will not let it's own die off for the greater good, in which more socialistic models play a crucial role.

My late night ramblings.

Chris Honeycutt

The ability to carry out controlled experiments doesn't define a science.

Many sciences are observational rather than laboratorial.

Astronomy, for example, is an observational science: you can't bring planets and stars back home to your lab and run experiments. Many branches of physics, as well as geology and evolutionary biology, are the same way.

However, the test of economics needs to be played out. That means you may build your theories in mathematics, but when it comes time to test it you need to (1) look at history and (2) attempt to predict the system at various timepoints.

So, right now the European Union is attempting to reduce borrowing rates for the dollar to improve the immediate credit crunch. Under Hayek's theories, that will ultimately lead to a new crash when the unsustainably low interest rates rise again.

Most technological advancements that have improved human comfort occured in the 19th century or pre-WW2 20th century. That includes lengthening human life expectancy - predominately driven by the germ theory of disease, and the advancement of water clorinization and antibiotics - as well as reducing world hunger through artificial fertilizers.

Chris Honeycutt

The ability to carry out controlled experiments doesn't define a science.

Many sciences are observational rather than laboratorial.

Astronomy, for example, is an observational science: you can't bring planets and stars back home to your lab and run experiments. Many branches of physics, as well as geology and evolutionary biology, are the same way.

However, the test of economics needs to be played out. That means you may build your theories in mathematics, but when it comes time to test it you need to (1) look at history and (2) attempt to predict the system at various timepoints.

So, right now the European Union is attempting to reduce borrowing rates for the dollar to improve the immediate credit crunch. Under Hayek's theories, that will ultimately lead to a new crash when the unsustainably low interest rates rise again.

Most technological advancements that have improved human comfort occured in the 19th century or pre-WW2 20th century. That includes lengthening human life expectancy - predominately driven by the germ theory of disease, and the advancement of water clorinization and antibiotics - as well as reducing world hunger through artificial fertilizers.

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