To a large extent Economics may be considered a victim of its success. No other branch of the social sciences has such marketability. No one takes their PhD in Sociology or Paleoanthropology to a six-figure job at Chase. Unfortunately, firms might fare just as well hiring sociologists, or for that matter astrologers, to build predictive economic models. In short, Economics doesn’t work.
New ways of viewing economic activity are beginning to make an impact on Economics, but they are not really new, nor are they based on Economics. The assumptions that underlie the rest of the biological world are beginning to seep into our understanding of both economic and political activity. Whether Economists will be able to incorporate these insights before the discipline implodes is an open question with a lot of money at stake.
We’ve generally understood since the ‘50’s that Economics doesn’t work as a method for predicting outcomes. It’s a problem that Milton Friedman wrestled with to an infamous conclusion. The problem is this – the assumptions traditionally necessary to reduce the complexity of human interaction into a manageable predictive model are so absurdly reductive that the model itself will always be flawed.
Friedman confronted and recognized this problem. By then, economists were coming to understand that the discipline was useful as a general social science or philosophy, but lacked the capacity for precision necessary for it to be treated like engineering or physics. Then, in the manner of a man born for politics, Friedman waved a rhetorical hand over the problem and declared that the flaws in the models didn’t matter.
Why don’t the flawed assumptions that lay at the foundations of our economic models necessarily invalidate any calculations based on them? Because they don’t, so shut up.
He used more words than that, and then added some equations on top, but that’s about what it amounted to. Here’s the relevant quote, “Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions.” So, yea, all my conclusions are based on assumptions I dreamed up in order in to reach those conclusions, but look how cool those conclusions are!
It took a very long time for this approach to take hold in academia, but over time the gullibility of many business executives helped tip the scales. By pouring money into economic modelling without much concern for the quality of the predictions that emerged, business helped build an Economics establishment that embraced Friedman’s assumptions.
Corporations provided a unique breeding ground for this kind of chicanery. It was (is) an atmosphere in which rewards are highly concentrated and failures are diffused. Whatever guesses looked prescient brought stupendous rewards while the penalties of dumb bets were spread so widely as to slow accountability to a crawl. Even at a crawl, accountability will arrive in time. The longer it takes the more pain it tends to deliver.
As businesses have begun looking outside Economics for more reliable economic insights, Economics is increasingly being exposed to the rigor, standards, and methods of the hard sciences. Scientists from outside the discipline are increasingly looking to evolutionary theory to explain market processes.
We are beginning to discover that building better economic models is not merely a matter of introducing a few lessons learned from biology. Introducing the dynamics of natural selection into Economics does not merely disrupt the mathematical models. Nor does it stop at disrupting the theoretical models. To incorporate evolutionary mechanics into Economics potentially changes our assumptions of what Economics is.
An example can be found in an old MIT talk from Paul Krugman. His wrestling with evolutionary theory, taken from 1996, lays out this problem perfectly. Economics, according to Krugman, is “about what individuals do, not classes, not correlations of forces, but individual actors.” This was the crux of Krugman’s concern at the time with introducing evolutionary mechanics into economic models. The two disciplines simply did not deal with the same subject matter.
Economics treats economies as the sum total of all the decisions made by self-interested individuals engaged in transactions with each other. Evolution on the other hand deals with complex processes that operate at levels ranging from the molecular to the cultural and technological, of which the decisions of a rational self-interested individual are merely a component, and a rather tiny one.
More to the point, one might argue in evolutionary terms that the actions of a self-interested individual are not merely a small factor in understanding an economy, but a resultant factor. Intelligent, considered, self-interested individual decisions may not deserve anything approaching the level of importance economists assign them. Individuals may not be driving an economy, but riding on one. This is not Economics, but it might be what replaces Economics.
Where Economics starts from a set of reductive assumptions drawn from a philosophy – individual human decisions are what matters – then sets a complex series of tottering conclusions on top, sciences that deal with evolutionary processes start from complexity and retain their respect for complexity, building less ambitious predictive models with more fidelity to reality. What they leave out which is essential for Economics as it currently exists is deference to a set of precious philosophical notions about the role and importance of individual autonomy in complex biological processes.
Evolutionary Economics has potential to break the tension between the invisible hand and the regulatory state, looking to more complex models for organization and regulation that can protect us from some of the failures of raw capitalism while preserving our autonomy. By examining what works in the natural world it seeks to build more sophisticated social models that could help us evolve around the obstacles we are creating for ourselves. Getting there will require some philosophical leaps and a lot more scientific work.
Can Economics evolve? Maybe, though so far it remains deeply resistant to the process. Money may once again be the deciding factor. Fifty years of unreliable models are slowly taking their toll. The lure of money that once brought people into the department may be weakening as Wall Street seeks to hire physicists and even biologists.
The uncomfortable philosophical demands of more reliable modeling may require researchers to move the entire subject matter out of the Economics department and into some new field. That transformation may one day relegate what’s left of the Economics department to a windowless space in the basement where they’ll share cramped quarters with that weirdo who teaches Latin. Caveat emptor.