457. Issues for change in economics
The criticism of dominant, orthodox economics, and demands for its change, have intensified since the financial crisis in 2008. Sources of those protests are heterodox economics, such as post-Keynesian economics, evolutionary economics, (new) institutional economics. and social economics, and the international movement of young economists with the name ‘Rethinking economics’.
Some of the criticism and proposals for change were given in previous items of this blog, collected in a bundle posted on economics on my website bartnooteboom.nl. They were also elaborated in a recent book[i]. Here I review the criticism and make additions. The order is arbitrary, does not signify priority.
1.
The issue of
uncertainty. Keynes was one the few economists to take it seriously and see its
consequences. Under uncertainty one cannot calculate, and calculative
rationality is a cornerstone of orthodox economics. The results are bandwagon
effects and hypes, as Keynes recognized.
2.
The issue of
maximizing a utility function. People are not only limitedly rational (see
below), but things of value cannot all be subsumed under a single utility. That applies to work, as a source of income
and a source of satisfaction, in giving pleasure or a sense of accomplishment,
and social recognition. It applies, in particular, to moral values that one
does not always practise for their utility, but because they constitute what
one feels one should practise, and that is who one wants to be. That can apply also to trust, which can be
useful, as a ‘lubricant for relations’ but also has intrinsic value. Another
problem of utility is that it is purely conceptual, and cannot be observed
directly. Utility maximization is unfalsifiable: one can always conceive of
some utility function whose maximization reproduces observed behaviour. That unfalsifiability
makes it scientifically dubious.
3.
The ‘preferences’ that underlie choice are partly
formed, or adjusted, in the process of choosing and acting upon them.
4.
Due to the role of
subconscious processes of choice, as taught in social psychology, people are
limitedly rational: do not always make rational choices. That can be very
effective, in routine conduct, but it does not satisfy the assumption, in
economics, of rational choice.
5.
Transaction costs,
such as caused by imperfect information, cause ‘market failures’, of misjudging
quality and reliability, the incompleteness and cost of collecting information,
making contracts or other agreements and controlling their execution.
6.
The condition that
relations require ‘specific investments’ that have value only, or mostly, in
that relationship, which make one dependent, and create a need for the
relationship to last some minimum time, to recoup that investment. This pleads
for ‘optimal’, not maximum flexibility.
7.
The human need for
local roots, which obstruct the economic credo of maximum mobility of
resources, including labour, which in globalisation erode local communities and
work relations, and sources of respect and reputation.
8.
The self is not
autonomous, as assumed in economics. One does not only need the other for the
advantage of division of labour, but one is constituted in action in the world, in interaction with
others. Opposition by others yields the highest form of freedom: freedom from
prejudice.
9.
The need for trust,
for agreeable relations and the economy. Some economists claim that trust
cannot survive in markets, due to competition, but competition is not always so
strong as to prevent some slack for sacrifices for trust, and, more
fundamentally, in so far as survival requires innovation, that brings
uncertainty, which requires the ‘leap of trust’, and therefore I turn it
around: in markets one needs trust.
10. In so far as economists take into account issues of
information and knowledge, they take it for granted, tacitly most of the time,
that in relations there should minimum of ‘cognitive distance’, difference in
ideas. But such difference also has value, as source of innovation. Rather than
minimum difference there should therefore be ‘optimal distance’, in a trade-off
between distance as an obstacle for understanding and as a source of difference
for innovation.
Most of these points entail a ‘paradigm shift’, and one can ask if this is still economics. That is probably why they tend to be ignored or neglected by economists.
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