The Gold Standard | The state of economics: brilliant essay

John Kay (ht: Paul Kedrosky) has written a brilliant essay on the state of economics. It is an indirect critique of the Nobel Award to Thomas Sargent. TGS is pleased to find it and share it. No surprises there. Some choice sentences from that piece:

The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need.  For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial.  It is probably no accident that economics is by far the most male of the social sciences.

Economic behaviour is influenced by technologies and cultures, which evolve in ways that are certainly not random but which cannot be described fully, or perhaps at all, by the kinds of variables and equations with which economists are familiar.

Economists who assert that the only valid prescriptions in economic policy are logical deductions from complete axiomatic systems take prescriptions from doctors who often know little more about these medicines than that they appear to treat the disease.  Such physicians are unashamedly ad hoc; perhaps pragmatic is a better word. With exquisite irony, Lucas holds a chair named for John Dewey, the theorist of American pragmatism

Believing that economics is like they suppose physics to be – not necessarily correctly – economists like Becker regard a valid scientific theory as a representation of the truth – a description of the world that is independent of time, place, context, or the observer. [TGS believes that economic theories are starting points at best, points of departure and thoroughly misleading, at worst].

Properly conducted science is always provisional, and open to revision in the light of new data or experience:  but much of modern macroeconomics tortures data to demonstrate consistency with an a priori world view or elaborates the definition of rationality to render it consistent with any observed behaviour.

Economics is not a technique in search of problems but a set of problems in need of solution.  Such problems are varied and the solutions will inevitably be eclectic.

More eclectic analysis would require not just deductive logic but also an understanding of processes of belief formation, anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses, and governments actually do. You could learn nothing about how these things influence prices if you started with the proposition that deviations from a specific theory of price determination are ‘too small to matter’ because all that is knowable is already known and therefore ‘in the price’.  And that is why today’s students do, in fact, learn nothing about these things, except perhaps from extra-curricular reading.

The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation. [The full essay is here]

One must mention here that TGS is amazed (well, he should not be) at how the US academic-economists close ranks in hailing the Nobel Economics Prize for one of their own.

Many people – who hate Europe’s inaction and abstract intellectualism leading to inaction – are in love with the US for its relative raw energy, innovation and ‘just do it’ attitude. They are failing to account for this danger that has gripped the US as is the case with empires that are in their terminal stages: hubris and groupthink.

P.S: Emanuel Derman would have loved to include this essay or cite it in his book, ‘Models behaving badly’.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.