399. Old and
new economics
In item 387 in this blog I used Imre Lakatos’[i]
notion of a research programme to characterize mainstream economics. To recall:
such a programme has a ‘core’ of fundamental principles, assumptions and
directions for research, which must be protected from falsification at all
costs, by means of a ‘protective belt’ of subsidiary assumptions that
supplement or implement the core principles. When something comes up that
falsifies the whole, it is attributed to the subsidiary assumptions, and a
replacement is sought there to make the core work better.
That notion arose from
a debate, in the philosophy of science, on the falsifiability of science.
Popper had demanded falsification as the central purpose of scientific conduct,
but then, in a famous article ‘Two dogmas of empiricism’, the philosopher Quine
proposed that a theory is never tested as a single proposition, but as a system
of propositions with main assumptions plus subsidiary assumptions and
principles (e.g. about the direction and method of research, measurement),
which is falsified as a whole. Then the question is which assumption or
principle to consider falsified and in need of replacement. According to
Lakatos’ scheme the core assumptions are to be held on to, and revision is
sought in the ‘protective belt’.
I now present the core
of a new programme of economics, to replace the old one. The cores of the old
and the new are compared in the table below. Criticism of the old and arguments
for the new were presented in preceding items in this blog.
Old and new economics
Old New
Rational actors Limited
rationality, decision heuristics
Autonomous individual Socially constituted
individual Optimal outcomes Processes of adaptation and development
Competition Competition and collaboration
Risk Uncertainty
Utility ethics Virtue ethics
The table shows a virtual reversal of core assumptions,
from the old to the new. That illustrates how fundamental, radical, my proposal
is. The components were discussed in preceding items in this blog. Here I
recall some of the main connections.
A key feature is uncertainty, going beyond risk,
formerly recognised, in economics, by Keynes (and Frank Night). With risk one
knows what can happen, so that one can append probabilities and calculate an
optimum expected outcome. With uncertainty one does not know what might happen,
and options for choice emerge from action rather than being given in advance.
That has a number of implications. Since optimal outcomes cannot be calculated
in advance, that perspective of economics drops out, and one falls into the
need to analyse processes of adaptation, to emerging outcomes, possibilities
and options.
The most interesting and innovative relationships are
the most uncertain. That requires trust, as a leap of faith across a gap of
uncertainty. In contrast with earlier economic thought that trust cannot
survive in competition because it requires giving without being able to count
on receiving, the proposition is that in present economies next to competition
firms also need to collaborate for innovation, which entails uncertainty, so
that to survive one must handle the art of trust (without trust thereby becoming
blind).
A switch is needed from the utility ethic underlying
mainstream economics, looking only at the utility of outcomes, to a virtue
ethics, looking also at virtues, not only of reason, and courage, but also of
justice and moderation. Justice is needed for pressing social and political
reasons, and moderation especially for saving the environment.
Relations also need to have some stability and some
local roots, without falling into rigidity, and without surrendering
international trade, but with necessary regulation of it. That is required for justice,
political recognition of locality, and by an economic need for collaboration
that also requires trust.
How realistic is this shift? I don’t know, but in view of present populist revolt and the climate crisis, something has to change radically, or society will be destroyed.
I do not want to claim that the old economics is always
wrong. It still applies under the following, clear conditions: the values
involved can be measured, preferences and all options for choice are known,
plus the possible outcomes (‘pay-offs’), for oneself and any others one is
dealing with. Then one can calculate an optimum, or equilibrium (in game
theory), and it would be silly not to use that opportunity. If, on the other
hand, one or more of those conditions are not satisfied, under uncertainty, and
preferences, options or outcomes are emergent rather than being given in
advance, then one should shift to the new economics.
This goes back to an experience I had, when working
for Shell in London, in the 1970’s, as a project leader in the computing
centre, where we used optimization techniques for the scheduling of refineries,
routing of ships, location of gas stations, and design of loading stations for
natural gas. For strategic planning, however, given the uncertainties involved,
we developed scenario analysis, where we did not optimise, which was
impossible, but used simulation to analyse the robustness of policies across different possible
futures.
papers volumes 1 and 2, J. Worrall and G.
Curry (eds), Cambridge University Press.
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