Eric Beinhocker has a long piece on how economics can become a better subject. He says we need to make economics more realistic and that should be a good thing.
The idea is to move from the traditional camp based thinking to new thinking which is more flexible.
Traditional economists often respond that the limitations of orthodox theory are well recognised and there is much work being done to relax restrictive assumptions, introduce more realistic behaviour, heterogeneity, institutional effects, dynamics, endogenous innovation and so on. They are correct and this work is a very positive development for the field. However, much of this work introduces just one element of realism to an otherwise standard model – a bit of behaviour here, a bit of institutional realism there, and so on. It is very hard or even impossible to relax all of the assumptions at once without throwing out the whole structure of the model – in particular without abandoning the core idea that the economy is an equilibrium system.
The radical challenge the new economists have accepted is to relax all of the unrealistic assumptions at once, move to the right column of the above table, and create an economics that has much greater fidelity to the real world. It is an enormous challenge and it requires a new toolkit and methodologies. But there is growing evidence that it is possible. That evidence comes from work in economics itself, but also from other fields that successfully model highly complex distributed systems that have many similarities to the economy – for example climate and weather, biological ecosystems, the brain, the internet and epidemiology.
Thus what has come to be referred to as new economics is not a single theory, or even a coherent body of work. It is a broad research programme best characterised by its unifying desire to embrace the messy reality of the economy. To accept human behaviour, imperfect institutions, and the complex interactions and dynamics of the economy as they really are rather than what an idealised model says they should be.
As policymakers and politicians often rely on the advice of economists and use their theories and ideas to frame their views and debates, this move towards realism in economics should be a good thing. If one thinks of economists as like biologists and policymakers as like doctors, then just as better biology has led to more effective medicine, so too should a more realistic economics lead to more effective policy.
In the rest of this essay I will outline three ways in which new economics may impact policy and politics. First, new economics may offer better tools for policy development and analysis – I will discuss an example from the financial crisis. Second, new economics has the potential to change the way we think of the role of government and policy itself, yielding new ways of designing policies in general. Third, new economics offers the intriguing possibility of developing new political narratives – this is the least developed aspect of new economics, but perhaps the one with potential for greatest long-term impact.
The third bit is really interesting. He says it is high time we move from camps to realising that there are both advantages and limitations with these camps. We need to be more flexible and pick our choices:
Perhaps the most intriguing, but least developed, potential impact of new economic thinking could be on politics itself. The tradition of splitting politics into left and right camps dates back to the layout of the French National Assembly in the Revolution of 1789. Over the two and a quarter centuries since, both left and right have seen their political narratives evolve. The left has travelled an arc from Marx and Rousseau, through Victorian social reformers, to Keynes, the New Deal and to modern European notions of social democracy. Meanwhile, the right has travelled from Smith and Hume, through the Austrians, the Chicago revolution, Thatcher-Reagan, and to today’s European centre-right parties and America’s radicalised Tea Partiers. At the heart of both narratives have been differing views on the nature of the economy, the roles of the individual and the state, and notions of freedom and social justice.
New economics has the potential to significantly reframe these debates. It isn’t merely a matter of centrist compromise, of just splitting the difference. Rather it is a different frame that agrees with the right on some things, with the left on others, and neither on still other areas. For example, new economic work shows that Hayek was ahead of his time in his insights into the power of markets to self-organise, efficiently process information from millions of producers and consumers, and innovate. But new economic work also shows that Keynes was ahead of his time in his concerns about inherent instabilities in markets, the possibility that markets can fail to self-correct, and the need for the state to intervene when markets malfunction. Likewise, new economics research shows that humans are neither the selfish individualists of Hume nor the noble altruists of Rousseau, rather they are complex social creatures who engage in a never ending dance of cooperation and competition. Humans are what researchers such as Herb Gintis and Sam Bowles (2005) call ‘conditional co-operators and altruistic punishers’ – our cooperative instincts are strong and provide the basis for all organisation in the economy, but we also harshly punish cheaters and free-riders, and compete intensely for wealth and status.
Traditional economics tends to frame things in terms of market efficiency versus market failure, and those on the right emphasise the efficiency part and those on the left the failure part. This leads to differing views on the justice of market outcomes. The right generally believes that if markets allocate resources in the most societally efficient way then any interference in that process is morally suspect. Market outcomes may be unequal, but that is because the distribution of talent and hard work in the economy is also unequal – in general people get what they deserve. The left on the other hand tends to see unequal outcomes as an injustice in and of itself, and emphasises how powerful interests use markets to their benefit and can abuse or leave behind the less powerful. People often don’t get what they deserve and the state must intervene to protect the vulnerable, and correct both unfair processes and unfair outcomes.
Pretty dense but exciting stuff.