540.
Mutual exclusion: The case of economics and business studies.
This
item is an abridged version of a paper I published in Academia Letters, in
2021. The full version is posted on the page of essays, on the website www.bartnooteboom.nl
Abstract
This
letter narrates the failure of an attempt to integrate economics and business
studies in a joint research institute cum PhD school, analyses the fundamental underlying
differences in basic assumptions and methods, and tells of the recurrence of
the problem in an appoinment procedure at
the Royal Netherlands Academy of Arts and Sciences.
Here I present a case study that happens to be
my personal experience. That may seem cantankerous and vindictive, but it seems
somewhat artificial to pretend that it is the experience of someone else. This
letter may read as a crusade against maintream economics, as a reviewer
suggested, but that is perhaps not so bad, considering the damage
right-libertarianism has caused society, with increasing disparities between
rich and poor.
Exclusion
Lakatos
(1970) proposed that scientists are committed to a ‘research programme’, of
which there may be several, in a discipline, with a series of theories that
share a ‘hard core’ of basic assumptions, with the ‘negative heuristic’ that
they are not to be challenged, shielded
by a ‘protective belt’of subsidiary assmptions. When a theory in the programme
fails, changes are made in this protective belt rather than the core. Theories
that violate the core are ostracised or ignored, and are excluded from journals
or edited books dedicated tot he programme. This makes science inherently
conservative. Tribal culture dominates science.
Conservative as this is, there are
arguments for it. One cannot look at all directions at the same time, and a
certain perspective is needed for focus, coherence and analytical rigour. There
is also an evolutionary argument: if there were no different species, and all
animals could interbreed, in due course no separate species would remain, and
rivalry and evolutionary selection would vanish. This may yield an argument
against interdisciplinarity.
On the other hand, innovation arises from
variety, novel combinations, to generate new forms, genotypes, to be submitted
to evolutionary selection. In nature, such variation is random, by novel
configurations of genes in chromosome crossover, in sexual reproduction,
copying errors of DNA, and mutations of genes. In society, in science and
politics, it is not entirely random, but informed by inference, experimentation,
and artificial selection (in simulation or testing of concepts or prototypes,
in learning systems. This yields an argument in favour of some form of
interdisciplinarity.
Behavioral factors involved are the urge
of scientists, and people in general, to affiliate and congregate with
like-minded people who more easily extend recognition to each other than to outsiders.
They seek like-minded parters to collaborate with, who are prone to recognise
it and refer to it, which furthers careers. It also takes less effort of
understanding ‘out of the box’.
A response to exclusion by a programme,
whereby one cannot gain access to publication channels, is to craft one’s own
association in a new programme, with one’s own proprietary journal, conference
and publishers.
Economics
Programmes
of unorthodox economics emerged from criticism of orthodox economics. An
example is ‘Institutional economics’
(Hodgson, 1998), which instituted its own ‘Journal of Institutional Economics’
and dedicated conferences. Another is ‘Evolutionary economics’ (Nelson and
Winter, 1982), with their own ‘Journal
of Evolutionary Economics’ and the ‘Journal of Economic Issues’. A third is ‘Behavioural
Economics’, though that has been incorporated to some extent in mainstream
economics. Other examples are a programme in studies of trust (Bachmann and Zaheer,
2012), with the ‘Journal of Trust Research’ and studies of ‘Post-Keynesian
Economics’. These examples illustrate that there are also different research
programmes within a discipline.
In Institutional economics, institutions
are ‘rules of the game’ (Hodgson, 1989), with legal arrangements such as
property rights, rules to protect the environment and constraints on
advertising, and beyond those the effects on economic issues of cultural habits
and rules, language, power groups, lobby
groups, network effects, corruption and politics. One type of institutions is
so-called ‘transaction costs’, which are costs of the market, such as the costs
associated with supply and demand finding each other, judgement of quality, negotiation,
crafting agreements and contracts, controlling their execution, litigation in
case of breach, and so-called ‘specific investments’ in contracts or
collaborative arrangements that are lost, not useful in other relations, when
the relation breaks. Those can be used to leverage power of threatening to walk
out if not given a greater share of
jointly produced profits. These costs can yield a reason not to use markets but
integrate activities in a single organisation.
Evolutionary economics looks at the
economy as an ecosystem, governed by the evolutionary principles of variety
creation, rivalry and selection in markets, and transmission of surviving
success in imitation, growth, and education and training. In biology variety
creation arises from chromosome crossover, in sexual reproduction, and copying
errors and mutations of genes, in the economy it arises in entrepreneurship and
environmental and technological change. The key feature of evolutionary theory is
that there is no ‘intelligent design’, as opposed to economic planning and
control. Evolutionary economics has its puzzles: What consitutes the selection
environment; not only markets but also institutions. Who or what is being
selected: firms or ideas and practices, and what does ‘survival of the fittest’
mean, when ideas can be partly adopted from firms that fail? Firms can merge to
survive. Transmission entails communication, and there variety arises from variety of
understanding and interpretation, so that variety generation and transmission
get entangled. Also, institutional effects of lobbying and political influence
can yield ‘co-evolution’, i.e. influence of the units to be selected on the
selection environment, more so than found in biology, and when strong, this effect
can prevent effective selection.
Trust beyond a balance of reciprocal
advantage, in mutual dependence, is not accepted by mainstream economists, as seen
to be in conflict with competition in markets, which enforce breach of trust to
maximise advantage, needed for survival. Trust researchers have objected that a
leap of faith beyond calculable advantage is needed for collaboration in
innovation, which also needed to survive in markets (Moellering, 2009).
Behavioural
economics makes use of insights from social psychology, in the role of
subconscious, routinised ‘decision heuristics’ that limit free will and
rationality. While the heuristics are
non-rational, they can be adaptive, assisting survival, and in evolution have
developed for that reason.
Economics
and business
I
experienced the cliff between economics and business when I was appointed
scientific director of a research institute cum PhD school at a university in Netherlands, by the board of the
university, in the 1990’s, with the task of integrating those disciplines. Such integration stands to reason: business
forms an important part of the economy. I accepted the commission because I saw
parts of economics as promising bridgeheads for making the connection:
Evolutionary, Institutional, Industrial, Behavioural and Transaction Cost Economics.
Unfortunately, it turned out that those parts of economics were not represented
in the Economics Faculty. At the Business Faculty there were practitioners of
Systems Theory, Organisational Behaviour, Personnel Management and Legal
Management who wanted to include
sociology, psychology and law, which was anathema to the economists. I tried to
cross the cliff, but the effort was thwarted by both sides. The rejection was
mutual. I failed miserably, at least substantively, and could only erect a
facade, a stage set, behind which everybody just continued to play his or her
familiar game. After much wasted effort, I left that university, but I remained
intrigued by the failure: what was it that made integration so difficult? After
a time I arrived at the following
analysis.
For mainstream economics the core had,
still has, the following basic assumptions and perspectives:
-
It
is outcome oriented, constructing models that maximise utility or efficiency
(Hodson, 2019), taking that as a goal of policy, regardless of how that outcome
is to be achieved. Indeed, in some areas such an approach is valid and useful,
such as in optimising the scheduling of a refinery or a loading facility for
ships, a stream of goods, conditions for efficient timing and queuing, and
optimal location, to name a few things that are relevant to business. It mostly
misfires in other areas, such as strategic management, personnel management,
leadership, innovation, collaboration, and the development of financial
instruments. An interesting and useful innovation in economics was game theory,
analysing strategic interaction, but it was limited in its assumptions that
players knew all options and their potential ‘pay-offs’.
-
It
is aimed at mathematical models, as the paragon of being scientific.
-
It
assumes rationality in making choices
-
It
uses statistics to calculate risk, where one does not know what is going
to happen, knows what can happen, but cannot deal with ‘real’ uncertainty
of not knowing all that can happen.
Business,
by contrast, requires he following perspectives:
-
It
is process oriented, in designing and guiding processes, of production,
marketing and distribution, organisation, strategy making, and learning.
-
It
is not limited to mathematical models, because the required measurement is not always possible, and it is
not always clear what the available options are.
-
It
cannot assume rationality because people and sytems are often not rational.
-
It
has to face uncertainty, beyond risk, in innovation and strategy.
In
retrospect, in view of these fundamental differences, it is not surprising that economics and business
could not be integrated. They reside in different worlds, with different
perspectives, in different cultures.
Mainstream economics had a
rhetorical comparative advantage, in the eyes of practitioners and policy
makers, in its use of mathematics, and the clarity and simplicity of optimal
outcomes, in comparison with the complexity of evolution, seen as muddling and
yielding no determinate outcomes, in the absence of intelligent design. It was
imposssible to predict the outcomes of evolution. I was member of an advisory
committee for a Max Planck institute for evolutionary economics in Jena, in Germany,
and once we had to defend the institute in front of a visit of board members of
the Max Planck, we failed to make the merit of evolutionary economics clear,
and the institute was abolished and replaced by an institute for mainstream
economics.
The situation has since changed, in the
emergence of ‘Agent Based Simulation’, whereconduct is simulated in a computer on the level of
interacting agents, to model markets and their failures, in evolutionary processes. See T. Klos & B. Nooteboom (2001). This serves to also give a
mathematical, rigorous gloss to evolutionary economics. That method has
problemsof its own, in that complexity explodes as one adds variables
and parameters, and it becomesdifficult to understand what is going on, and to test
models. One option is to compare aggregateoutcomes with available statistics.
Conflict
in the academy
The
cliff between ecoomics and business studies re-emerged many years later, in
2020, in the Royal Netherlands Academy of Arts and Sciences, of which I had
become a member in 2000. This has a section for economics and business studies,
and the problem arose on the occasion of the nomination a new member. Someone
submitted a proposal, which I seconded, for the nomination of a scholar with a
background in applied psychology, with a wealth of publications in excellent
journals in the area of organisational leadership. The proposal was waylaid by
the economists, on the ground that she had not published in top economic
journals. I came up in arms, on the ground that economics and business had been
combined in the academy not because of some common method or theory, but because
of being related phenomena in the economy. I sent around a brief statement of
the differences between the disciplines, along the lines indicated above, with
a proposal for a debate on it. The only response I received was a thank-you for
‘offering these personal reflections’. No one responded to my suggestion for a
debate. I went to he presidency of the Academy with the suggestion for a
separate section for the programme of business studies, but was fobbed off with
the assurance that the current leadership of the joint section would attend to
the issue. That is the last I heard of it. The mutual exclusion of economics
and business studies, to the point of refusing debate, but this was accepted
without debate, even in the Academy.
References
Bachmann, R, and A. Zaheer (eds.), Advances
in trust research, Cheltenham UK: Edward Elgar, 2012.
Hodgson,
G. (1998), ‘The approach of institutional economics’, Journal of EconomicLiterature,36 March, p. 166-192
Hodgson, Geoffrey, (2019), Is
there a future for heterodox economics?,Cheltenham UK:Edward Elgar.
Kahneman, D. and
A. Tversky 1979, ‘Prospect theory: an analysis of decision making under risk’, Econometrica, 47: 263–91.
Kahneman, D., P.
Slovic and A. Tversky (eds) 1982, Judgment
under Uncertainty:Heuristics and Biases, Cambridge: Cambridge University
Press.
Klos,
T. and B. Nooteboom 2001, Agent-based computational
transaction cost economics, Journal of Economic Dynamics and Control, 25: 503-26.
Lakatos,
I. 1970, 1978, The methodology of
scientific research programmes, Cambridge: Cambridge University Press
Moellering, Guido 2009, ‘Leaps and Lapses
of Faith: Exploring the Relationship Between Trust and Deception’, in: B.
Herrington (ed.) Deception: From Ancient
Empires to Internet.
Nelson, R.R. and
Winter, S. 1982, An evolutionary theory of economic change, Cambridge: Cambridge University Press.