Saturday, December 1, 2018

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.

[i] Lakatos, The methodology of scientific research programmes, Philosophical
  papers volumes 1 and 2, J. Worrall and G. Curry (eds), Cambridge University Press.