I am currently reading “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. In this and next posts I will collect my comments, chapter by chapter. Here I discuss Chapter 2.
This chapter reiterates the book’s main theme that economics is tainted by inherent problems:
Inherent error, the inability to soundly and properly combine a theory of value with a theory of growth. This is due to the nature of the subject area of economics, namely that the theories affect the matters NE consideration. Hence, economists are fully embedded and their theorising affects the subject studied. So, any theory of value affects the conditions of growth and vice versa. In particular, value can never be independent of the distribution of social power over the surplus produced by human labour and ingenuity. As such the value of things is determined socially through power structures. This in turn affects how an economy develops and grows. Hence, economic theory is directly affecting its subject of study.
Inherent error leads to lost truths. Past theorists understood certain basic truths better than later theorists; knowledge was lost in the development or history of economic theorising. Authors point to Aristotle’s “telos” as the perceived goal of an action. If the goal is socially just, then the action is valuable; if the action has no perceived socially productive or useful goal, the action is not justifiable. (Similarly, I remark that the classical economists’ notion of a social division of labour as a source of wealth creation has been lost in contemporary economics.)
The authors make an interesting error by linearising history as so many other economists do as well. History is a progression from hunter-gatherer via agricultural to industrial economies. That ancient empires from the Mesopotamian Empire (Uruk), China, Egypt, and to the Roman Empire signify a much more non-linear development line is neglected. I refer to Ian Morris’s development index that shows the quality of life in ancient Rome to be equivalent to that in Victorian London.
Also, the history of financial instruments has the common economists’ mistakes: barter is followed by money and subsequently followed by banking due to complication of short versus long term financing of production processes. There is clear evidence that there first was government and a bureaucracy of registration of debt before money actually came into existence. (Graeber, 2011)
I am currently reading “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. In this and next posts I will collect my comments, chapter by chapter. These notes also form the foundation for a reading club initiated at Queen’s University Management School at Belfast.
This volume consists of two “books”. The first book reports on the theories developed by some of the major historical economic thinkers. Their ideas are discussed in the context of their contemporary socio-economic environment and assessed in the light of the financial crisis of 2007-08 and its aftermath. The second book develops a view of the world that was also debated in the single-authored book by Varoufakis on “The Global Minotaur”. This book was a more popular account of this world view.
The discussion of historical thinkers in Book I is centred around the theme of Inherent Error as the main deficiency of economics. As such economics is not really a science, but more a pursuit that always will remain unfulfilled. The notion of inherent error essentially refers to the impossibility of telling a credible story about how economic values (prices) are determined in a complex growing economy.
Unfortunately, the authors do not really build a convincing explanation why this is the case. Of course, if one knows the cause of this inherent deficiency, then one can remedy it. The main argument seems to be that economists are fully embedded in their subject and cannot take a fully objective external position in relation to its object of study as is the case with the natural sciences. But this remains a rather unsatisfactory argument. Is it really impossible to device a theory of value that would be outside the governance system of the economy without in turn affecting the growth patterns of this economy? I hope to have more insight after reading the subsequent chapters.
Nevertheless it seems true that economic reasoning is subject to this inherent error and its consequences. None of the theories and models developed in economics are fully inclusive and have full explanatory power; there always remain deficiencies and holes that require patching. In this regard economics is subject to its own incompleteness problem in the sense of Goedel. Similarly, it is subject to amnesia, since economists apparently lose valuable insights from previous generations. This is a secondary theme that runs through Book I of this treatise. In that regard economics does not seem to make true progress.
I want to add to this a third deficiency that has been pointed out by multiple authors which is closely linked to the perceived inherent error: Economics is dogmatic and is more akin to religion than science. (Backhouse, 2010) This is actually shown in the absolute lack of responses to the main economic events in the past decades, in particular the financial crisis of 2007-08 and it’s aftermath. Instead of throwing out most of our theories as complete drivel, economists just continue as if nothing has happened. The unresponsiveness of economics shows that it violates the most basic of scientific processes.
I just returned from the meetings of the European Economic Association (EEA) in Glasgow. It was a good opportunity to assess the state of economics (as a science) after the collapse of the global financial system in 2008.
As remarked by Phil Mirowski in a recent article, the state of economics is not very good and the response of economists to the major failure in understanding the basic aspects of the global economy is disturbingly little. This was confirmed in Glasgow, where the overwhelming majority of contributions had no connection to any of the important questions raised by the failure in the global economy. It even seems worse than that; the majority of economists does not seem to be interested in contributing to understanding these questions.
An exception was the invited lecture by Joseph Stiglitz. He delivered the so-called Adam Smith Lecture and asked the question how macroeconomics should change in light of the observed phenomena. Although he is to be commended for thinking about these issues, I do not think that his presentation resolved any of the problems; he was essentially not radical enough in his assessment about economics.
In his presentation, Stiglitz delivered a very long and complicated story of which elements were missing from macroeconomic models that would help understand the global economy, and its financial sector in particular. He reasoned completely from within the paradigm. There is nothing wrong with the foundations of economics; we “only” need to include certain aspects into these models to arrive at a better understanding of the world. The result was a very complex presentation that promoted an extremely complex theory of everything.
According to Stiglitz, there are no serious deficiencies in microeconomics. We just need more complex models. But is this not a standard defense of a failing paradigm? Instead of arguing for fundamental changes in the paradigm as a proper response to its failings, the established elite promotes more of the same to solve all these problems. It is a clear sign that the paradigm is at its end.
Economists act as hard-core ideologists rather than as proper scientists. Failures of the prevailing paradigm are not accepted and simply ignored by the overwhelming majority. In his recent book, Roger Backhouse discusses this aspect of economics in length. The EEA meetings in Glasgow and Stiglitz’s lecture confirm this sad fact very clearly as well.
Over the past months during the current economic recession and financial crisis, there has developed a published opinion as if so-called behavioral economics could explain the crisis. Behavioral economics emanates from observations in economic and game theoretic experiments that human subjects do not behave rationally, but are clearly bounded in their reasoning about decisions. Subjects are now routinely put under MRI scans to see which parts of the brain are used in which decision situations.
The main problem with behavioral economics is that it is staunchly methodological individualistic; the center of decision-making remains the singular individual. I think that consequently it cannot satisfactorily explain the economic world and certainly not the current financial crisis. This crisis has its origin in a failure of trust between contracting parties in the financial sector of the main economies; as argued before, it can be called a true trust crisis. Trust is fundamentally an interpersonal phenomenon and should be explained through sufficiently developed social theories. These theories cannot longer be founded on methodological individualistic arguments, but should rather be based on more interactive and social considerations.
Methodological individualism has as its singular strength that it is particularly open to successful mathematical and statistical modeling. As such economics is the outcome of a long history of methodological individualistic modeling. Its world-view is essentially alien to regular human interaction and more suited to model behavior of decision makers with autistic tendencies as recently pointed out by Tyler Cowen in his discussion of academics. In his Behavioral Economics Cowen takes that a step further and promotes the idea that we essentially should become more autistic, thereby essentially arguing that the world should actually adapt to economic theory rather than the reverse. It fits with a long history of economists trying to fit the world to their limited understanding and promoting individualism as a “good” behavioral mode, thus denying the fundamental sociality of the human condition.
I think that economics should rather adapt to understand the world better and at least soften-up on the issue of methodological individualism. Recently, Paul Romer presented an innovative way to look at history from such a more social perspective. However, to be successful at looking at the economy from such a social perspective, economists need to abandon their trusted methodologies. They should recognize the utter complexity of the economy and allow the use of a wide range of techniques to be used to understand it. This not only implies the use of mathematical analytical modeling, large-scale measurement of economic activities, and simple experimentation in the laboratory, but also the use of simulation models and statistical approximations as used in theoretical physics. As it stands now, economics remains rather irrelevant and marginal a science.