385. A series on economics

Here I start a series of critical philosophical reflections on economics, as a phenomenon and as a scientific discipline. In earlier pieces in this blog I was critical of current capitalism and globalization, which with their perversities have sown seeds for the present populist uprising. I have been involved in an attempt at a fundamental change of economic theory, in a project of my own and in collaboration with others. I published a book on it in 2014, with the title ‘How markets work and fail, and what to make of them’, and I will tap from it for this series. I will also make extensive use of previous items in this blog, on self and other, ethics and morality, knowledge and truth.

           

My approach is shaped by my background as a mathematician, a long career in the economics and organization of learning and innovation, and more recent work on philosophy, in this blog, among other things. I have given up, at least for the time being, on the attempt to get economists along in a fundamental change of their discipline. What is needed is too fundamental to expect them to go along. It goes against their fundamental and combined assumptions of rational choice, calculation of optima, and their ‘methodological individualism’: the principle that everything should be deduced from choices by autonomous individuals.

It is no coincidence that in economics my background lay in innovation and learning. One cannot adequately deal with those without accepting radical uncertainty, i.e. uncertainty not only concerning what will happen but also on what can happen. That differs from risk, familiar to economists, understood as knowing what can happen, so that one can attach probabilities and calculate optimal choice, with which economists are very familiar. Among great economists, Keynes was an exception in accepting uncertainty, which gives rise to non-rational, non-individualist behaviour, in ‘animal spirits’. Individuals are only limitedly rational, and far from being autonomous, they are affected, indeed constituted, by social interaction.

I do not think that all of economics should go. First, in particular, I still think that markets are needed, though under some control to limit their perversions. It is a major challenge to sort that out. In particular, while economists focus on competition as the essence of markets, there is also, more than ever, a need for collaboration, and it is a major challenge to sort out how they are to be combined. Here, attention is needed to trust, which it is difficult for economists to deal with.

Second, as a science, a method, for calculating the best choice for spending scarce resources among alternative uses, economics still has its place, when the elements of that are known and calculable: goals, resources, effects and outcomes. Often they are not, and that is where the problems start. Economics has grossly overreached itself in affecting policy where the conditions for its validity are not satisfied.    

Third, there is an economic intellectual toolbox with many instruments that remain useful, indeed indispensable. I mention just a few: effects of scale, effects of scope, decreasing marginal utility, supply and demand, substitution, complementarity, transaction costs, entry barriers, information asymmetry, …..

Fourth, there have been attempts to widen the horizon of economics. One useful and influential extension was the use of game theory to clarify and analyse strategic interaction, with the notions of ‘Nash equilibrium’, and ‘zero and non-zero games’. Another, probably the most fundamental one, was ‘behavioural economics’, where insights were brought in from social psychology, about limitedly rational choice. That is flourishing. However, it is a bit of a foreign substance that while it is widely used it also tends to be rejected or adjusted for its violation of the core principle of methodological individualism, or twisted to fit into the optimising framework, neglecting the radical uncertainty involved.    

Fifth, beside mainstream neo-classical economics, there are unorthodox streams of economics that are not the target of my criticism and yield elements that I use for a new unified theory. These are: several forms of institutional economics that are closer to sociology, neo-Keynesian economics that takes uncertainty seriously, and evolutionary economics that replaces optimisation with evolutionary processes of emergence and is more amenable to the analysis of innovation.  

In this series I will deal with all these things, and more.  What is needed is a new science of society that includes elements from economics to deal with rational choice, sociology to deal with the social constitution and interaction of individuals, (social) psychology to deal with limitedly rational heuristics of choice, cognitive science to deal with learning and uncertainty, and philosophy to deal, in particular, with ethics. I have argued, in the book mentioned above, that for this new science the traditional, deeply rooted liberal utility ethics underlying present economics needs to be replaced by a wider virtue ethics that includes utility but also wider issues of morality of goals, and justice of process and outcomes. In these connections, use can be made of the unorthodox forms f economics indicated above.

In this series I will deal with all of this and more. 

However, I will not post only items on economics, and will here and there fit in items on other subjects, as they come up.