Introduction
We require societies and democracies that are more sustainable, inclusive, and prosperous. Yet, we seem to be going backwards, both by objective performance indicators and by perceptions in many countries.
There is renewed, growing pressure on policy-makers, citizens, and the private sector to ‘do something, and do it differently, a pressure that has been building since the global financial crisis (GFC) and remains unresolved in many ways unaddressed.
In South Africa, some of the ground gained under democracy has been lost. The South African economy remains only partly transformed, remains highly unequal, and is constrained by poor skills, high public debt, and low business confidence.
At the same time, there may be a unique window of opportunity in the current COVID-19 and post-COVID crisis to shape new economies.
An essential dimension of shaping new economies must be the recrafting of economics itself to produce a different kind of economist.
Over the course of the twentieth century, economics has become a discourse with a uniquely strong claim on public thinking and policy-making. There are few, if any, current social, political, or environmental issues where the mainstream economic perspective does not play a decisive framing role.
Indeed, in much of the world, the economic perspective, closely allied to the language of business, not only shapes governance but functions as a central element of the meaning-making of societies, how success is defined and evaluated, of how citizens understand their identities and the choices available to them to achieve a fulfilling life.
At the same time, the mainstream model is facing serious internal and external critique. The internal critique is associated in part with developments in behavioural economics but goes beyond that to include all sorts of necessary broadenings.
The external critique relates to the serious loss of credibility of economic discourse and economic expertise in the broader awareness since the global financial crisis, which is about perceptions around economics and economists and expertise more generally.
How we define people economically determines the kind of economic change
How we define people economically determines our sense of what is and what isn’t possible by way of economic change.
Mainstream economics has always acknowledged that the ‘homo economicus’ of its models is a simplification that lacks realism in many ways but has defended it as a useful idealisation, an approximation that is fit enough for its purpose.
In a seminal essay, Lionel Robbins pointed to the ubiquity of scarcity and the necessity of choice as the fundamental dimension of life that generates the economic mode of thinking.
The bracketing of individual and social psychology, of the reasons underlying specific preferences, is done explicitly in economics to produce a core method that is scientific, in the sense of being value-neutral (since it can be used to think through and evaluate any means-end relation defined by scarcity).
Robbins did not think that it is necessarily greed or any one particular motivation, that is to be understood as the engine of human behaviour. For Robbins, economic man is an expository device rather than a thesis on ‘how people are.’ Along similar lines, Milton Friedman refuted the idea that the agent of economic thinking and modelling needed to be realistic in order to be useful.[1]
An economic person, then, can be understood as a rational optimizer of his own expected utility. If we understand him in this light, the thesis goes, we understand enough about him to explain and predict his economic behaviour.
It is as if, looking forward, we held all our preferences in mind, together with their ‘costs’ and the probabilities associated with them, and continuously and instantaneously solved optimization problems for ourselves.
In one sense there is nothing to fault in the effort to make economics as effective as science by stripping away those factors that are harder to formalise, predict and model. However, both Robbins and Friedman also required that the models be tested and found adequate against economic reality, in the simple, familiar sense that they explain economic phenomena, and on the basis of this accurately predict how specific exogenous changes might lead to changes in variables like price, supply, and demand in a given market.
It is not clear that economics is still fully up to this task, and there are three broad critiques of the mainstream model.
Behavioural economics has emphasised ‘supposedly irrelevant factors’ that cause choices to depart from expected utility assumptions in ways that are significant and predictable, but not rational in the homo economicus sense.
For example, humans are highly susceptible to priming: in games requiring trust between two players, outcomes differ significantly depending on whether, at the outset, participants are assigned labels such as ‘players’ or ‘buyers and sellers, with the latter leading to far less trust and cooperation (and thus to different economic outcomes).
We might say that mainstream economics has, ironically, assumed a free lunch when it comes to deliberation: it implicitly assumes an economic agent for whom thinking itself is costless, in that the agent is assumed to think ‘comprehensively’ about economic choices.
If thinking economically (ie optimizing) is not free and effortless for humans, if it takes time and energy, then we would expect human beings to economize on it: we might expect a heavier reliance on experience (whether justified or not), on intuition, on what others think, on mental short-cuts (‘heuristics’) than economists would posit.
A second dimension of critiquing the mainstream economic agent goes beyond the BE focus on how we do things ‘predictably irrationally’ to note that, in fact, we do very well as thinkers, given the radical uncertainty that defines much of economic reality.
Economics tends to assume that choice takes place within a probabilistic horizon where we know the fundamental context well enough to assign weights to various outcomes and risks. If uncertainty rather than risk is the norm, however, then ‘seeing right’, establishing what is going on, is crucial: the context is not given but must be established correctly.
In Radical Uncertainty, eminent British economists John Kay and Mervyn King follow others in suggesting that we speak of ‘evolutionary rationality,’ to make it clear that we are not dealing with mere irrationality, whether predictable or not, but with effective shortcuts and rules of thumb ways of making decisions given uncertainty and constraints of information, time and energy.
A third critique of the mainstream agent concerns the areas of identity, norms, and values, and the important role they play in what we prefer and how we choose. The core mainstream model generally treats them as exogenous and therefore diminishes their relevance when compared to the endogenous factors (price, income, preference, and the availability of substitutes).
Ethics, for example, matters not only as ethics, but also because ethics (like social values) strongly determine the preferences people hold, and thus also positive economics itself.
Stiglitz and Hoff write of the ‘enculturated actor’ who is open to change, for better or worse, based on culturally available models of behaviour; she is also open to learning from experience (again, for better or worse). Stiglitz and Hoff note that: “Just as economists have had to come to terms with the fact that individuals act in ways that are markedly different from those predicted by the economic actor model, an economist will have to come to terms with the fact that preferences and cognition are shaped by those surrounding us, and that these social interactions may be as important determinants of economic outcomes as the variables upon which economists have traditionally focused.” [2]
Akerlof and Kranton note that people experience a loss of utility when deviating from the norms associated with the social category (ies) where they find their identity and gain utility, conversely, not only from individual preferences but also from identifying with the norms of a group.
The evidence also appears quite clear that human beings do behave pro-socially and with genuine altruism, [4] certainly more so than the standard self-oriented theory of economics would posit, but that altruistic behaviour depends in part on perceptions of whether others are also participating fairly in the economy.
Altruism and pro-social behaviour are malleable and can be corroded or reinforced by the outcomes of interactions: the relative weight of social norms, as opposed to free-rider behaviour, is not a given. We can respond to cues, switch on and off this sense of fairness, and apply different models of what behaviour is needed in a given context, depending on our own longer-term social development and in response to previous outcomes of similar situations.
Mainstream economics is not as scientific as claimed
The perception of scientificness that economics has cultivated matters a great deal for the kind of legitimacy bestowed on the discipline: even when its dominance is resented, its authority is recognised.
However, as various crises have revealed and are revealing, mainstream economics may not be as accurate or rigorous as was once thought in understanding, predicting, and managing broader economic patterns, and its failure to do so is partially explainable through our changing views of what kind of system a modern, knowledge- and the finance-based system is.
The economic reality that economics treats, and that mainstream economic models are comfortable treating, is assumed to be 1) unchanging in its fundamentals and 2) stable.
‘Unchanging in its fundamentals’ does not mean that particular variables’ values remain unchanged, but that economies consist of atomistic, discrete building blocks and interactions between these building blocks. This is presumably the case for the natural sciences: the activities of human beings do not change the rules and basic components of the physical realm itself.
Economic systems, however, differ: because they are composed of reflexive entities that learn and behave strategically and interactively (that is to say people and their meanings), and because this learning and this strategic interactive behaviour is economic reality,[5] we cannot think in terms of an immutable reality that is ‘out there and simply needs to be ‘mirrored’ by a model. [6]
Learning takes place, bias features, participants are aware of each other, strategies change over time. These phenomena drive emergence: outcomes that cannot be determined in advance from the properties of the interacting entities. Systems with emergent phenomena are sometimes described as being adaptive complex systems: such systems may be stable, but they are not necessarily stable. Specifically, they do not necessarily exhibit negative feedback loops, countervailing or offsetting forces which tend to bring the system back to stability in the face of shocks.
These are not new ideas, but they have lost currency in the course of recent decades. Keynes recognised the added dimensions of complexity (beyond only price and preference) that arise around investment decisions such as picking a stock and used the analogy of a beauty contest, where the aim is to correctly judge who others on average will regard as the most beautiful. Such games (and they may be prevalent in all sorts of economic contexts) allow for 2nd and 3rd order effects, where adept players will integrate some sense of how other players who are confronted with the same problem as them are likely to think.
Second and third-order effects also mean, as in a financial crisis, that ‘animal spirits’ can enter a market, that the tendency for the system to self-regulate through negative feedback loops (the price mechanism in economics) can be eclipsed by a ‘herd mentality which moves outcomes remarkably far from the socially optimal ones.
Economics must be aligned with economic reality
An economics that is not aligned with economic reality, whether micro- or macro- reality, is unlikely to provide appropriate guidance and may impede the articulation and development of approaches that are more fit for purpose.
A simplistically rendered story of the superiority of markets regardless of context (ultimately grounded in a simplistic model of the agent as we touched on previously) and of the failure of collective provision, regardless of context, leads to biased democratic conversations, to the detriment of policy.
If the claims of economics are not claims beyond space and time, beyond history and power, but particular stories, then we can assess them for their usefulness, for the vested interests they serve.
In its alleged neutrality, its insistence on positive economics, and the impersonal working of the market, mainstream economics has also more or less completely eliminated ways to think constructively about ways power and history may have shaped it. At best, this can mean a narrower sense of things than we think is ideal; at worst, it amounts to a deep conservativeness that essentially legitimates whatever ‘market outcomes’ happen to be the case.
A risk is that economics dooms itself to a kind of irrelevance, a detachment from, for example, the ‘real world’ of policy-making if it hangs on too tight to a specific method (mathematical modelling) and specific assumptions (rational self-interest and the unproblematic aggregation of the social or macro from the individual or micro).
Experts help ensure that talk doesn’t veer off into mere rhetoric, they hold the facts or the best guess facts at a given point in time. Similarly, and partly in response to the rise of democracy in Europe and the demand for governance through knowledge rather than governance through power, economics sought to move from the shifty, ‘merely interpretive’ ground of language and verbal argumentation and anecdote (bundled under the term ‘political economy’) to mathematics, model-building and statistics.
On the other hand, governance only by expertise and via specialised language is not desirable. Economics is a key form of expertise in the service of governance and democracy, but it has become too technocratic, too narrow and inflexible, too ‘one size fits all,’ to serve democracy in the way that is required.
The economist, and economics, measure what is easy to measure, which often means what is already monetised or can be credibly and quickly monetised; even in advanced market societies, a great deal of what reproduces the economy, makes one economy perform better than another, is not monetisable at all, but rooted in social relations and norms, political cultures and the like.
Conclusion
Economic practitioners are sent out into the real policy world with a narrow set of tools and the conviction that these tools are powerfully explanatory in all contexts the practitioner may encounter; it should not be surprising, then, that economists typically adopt a ‘one size fits all approach to policy advice: they have been indoctrinated to do so, and the absence of systematic reflexivity in economics means there is very little doubt and very little humility in the mind of the practising economist.
It is also questionable whether economics training, particularly post-graduate training in typical economics departments, provides the right kind of preparation for what institutions like a reserve bank or a treasury actually need, which may be more ‘engineers’ and less pure theorists.
As in the well-known ‘shovels in a blizzard’ experiment, [7] it seems it is only economics or business students who do not see an ‘ethical’ problem with raising the price of shovels the day after a destructive blizzard, for example. This is economics training as enculturation, and indeed potentially toxic enculturation that combines authority with insulation.
Similar themes are raised in The Econocracy – The Perils of Leaving Economics to the Experts. Here the critique goes beyond the narrowly technical (that the workhorse neoclassical model of the economy was found to be lame when it came to running a real crisis race) to concerns that the technical language that accompanies the models has played a disproportionate role in policy and society, disproportionate relative to our state of knowledge, and disproportionate because these frameworks have placed an excessive degree of policy power in the hands of the technocrats wielding them. [8]
How should our revisioned economists think and conduct themselves, given a world of adaptive complexity rather than immutability and equilibrium, and a world that has seemingly grown more vulnerable to populist-style resentments against the Enlightenment values of reason and universality?
One shift would be to give less weight to the model and more weight to ‘locating oneself,’ the interpretive problem found in contexts where uncertainty (rather than only risk) exists. One could argue that just about every significant policy debate and decision is defined largely by the ‘locational-interpretive’ problem rather than a probabilistic one.
This point echoes Keynes on the need for both ‘art’ and ‘science’ in economic analysis: one can apply the science (the formal model, say) only when the art of correctly determining the context has been completed.
Further: if the economist is a kind of high priest of the journey to prosperity, even a modern-day ‘shaman’ – as suggested in a recent article by an EU MP[9] – then the training she receives should probably do far more to align her under-pinning values and normative reference points with the actual and needed values and interests of people and societies in which she ends up working.
Kate Raworth, in Doughnut Economics, expresses the problem well: “Humanity’s journey through the twenty-first century will be led by the policymakers, entrepreneurs, teachers, journalists community organizers, activists, and voters who are being educated today. But these citizens of 2050 are being taught an economic mindset that is rooted in the textbooks of 1950, which in turn are tooted in the theories of 1850… The twenty-first century demands that we make those assumptions explicit and those blind spots visible so that we can, once again, rethink economics.”[10]
Practically, this also implies more focus on inter-disciplinary studies, changes in economic curricula that put more weight on non-mathematical economics, economic history, and the philosophical foundations of economics, and a further rebalancing towards non-neoclassical approaches.
References
1. An Essay on the Nature and Significance of Economic Science, Lionel Robbins, and Essays in Positive Economics, Milton Friedman
2. ‘Striving for Balance in Economics: Towards a Theory of the Social Determination of Behaviour’, Karla Hoff & Joseph Stiglitz
3. Identity Economics, George Akerlof & Rachel Kranton
4. Altruism is behaviour that comes at a personal cost and benefits someone else.
5. George Soros articulated the notion of reflexivity to describe this property of economic systems.
6. Bookstaber in his post-global financial crisis (GFC) evaluation, The End of Theory, notes for example that: “Groups of people display patterns and structures of behavior (namely, emergent behavior) that are not present in the behavior of the individual members…For contemporary economics, this suggests that the pursuit of micro foundations for macroeconomics is futile. Even if individual behavior were perfectly understood, it would be impossible to draw useful conclusions about macroeconomics directly from that understanding, due to the aggregation problem.”
7. Richard Thaler discusses this in Misbehaving, his accessible account of behavioural economics.
8. The Econocracy: The Perils of Leaving Economics to the Experts, Joe Earle, Cahal Moran, Zach Ward-Perkins
9. ‘The economist as shaman: revisioning our role for a sustainable, provisioning economy’, Molly Scott Cato.
10. Doughnut Economics, Kate Raworth.
