500 Economics and business studies

I was once asked to institute and lead a PhD school and research institute where economics and business studies were to be combined. That succeeded formally, but the arrangement was a facade, behind which economists and business scholars continued to play their different games I felt I had failed, but it was an interesting failure. Why was the coupling of the two so difficult? In business studies the following features are essential:

-          Conduct is limitedly rational, and not everything can be calculated. As I noted before, in a discussion of J.S.Mill, not everything is commensurable; not everything can be included in an objective function.

-          As discussed before, there is uncertainty in Man and society, beyond risk. One often does not know all that could happen, and what all possible consequences of an action are. There is environmental uncertainty, epistemic uncertainty about the truth of what you think you know, and behavioural uncertainty, also concerning yourself.

-           Not only outcomes are important, but also the processes by which you may or may not achieve optimal outcomes It is in the process that policies intervene.

-          The human being is not only self-centred and autonomous. He develops himself in interaction with others, and in evolution has developed a sense of benevolence and altruism, up to a point.

 In the mainstream of economics only some of those features come in: man is assumed to be rational and self-serving, calculating his optimal benefit. It is about efficient outcomes, hardly the process towards them, and mathematical models for calculating optimal outcomes form the core of that economics. In early economics, e.g. that of Adam Smith, and utilitarians more generally, the aim was prosperity for as many people as possible, but optimality is still.key.

 In some areas economics has broadened its perspective, especially in so-called behavioural economics, derived from social psychology. There, non-rational, unconscious decisions play a role. Evolutionary economics is process-oriented, without prior ‘intelligent design’, but is outside mainstream economics It is much more difficult to model evolutionary processes than calculate optimal outcomes. In evolution, outcomes depend on a complicated interaction between a shifting selection environment of markets and institutions, the inventiveness of entrepreneurs, and a variety of ways in which what survives is transmitted. As a result, evolutionary economics has difficulty in making concrete predictions, which makes it impopular with policy makers. In a crucial meeting with a supervisory committee of a Max Planck institute for evolutionary economics in Germany, where I sat on an advisory committee, for that reason evolutionay economics lost out to mainstream economics, and the institute was abolished. However, with so-called ‘agent based simulation’, processes are now being modelled. That has its own methodological problems, but it is there.

 Game theory to some extent is oriented towards decision processes, in taking into account the possible response of rivals, but it does not systematically include the uncertainty concerning the set of possible strategies, their stability, and the possible outcomes.(‘pay-offs’). Strategies are often not given a priori, but develop in the process of strategic interaction. The same applies to the preferences needed for calculating optimal conduct. Rather than being given beforehand, they develop or shift in the process of decision making. There is a heuristic of finding optimal choice as if it is a search for the highest top in a hilly landscape in the mist But sometimes it is as if treading on the landscape causes earthquakes.

At the fringe of economics, uncertainty is dealt with by means of scenario analysis, where some possible futures are identified, though not all possible ones, and for each of those the best policy is determined, and then those are evaluated acoording to which policy is most robust, in giving a reasonable but not necessarily optimal outcome across those futures. Robustness here is seen as more important than optimality.

These differences come up in the Netherlands Academy of Arts and Sciences, where in a section on economics and business they are uneasy partners. However, because of these differences between economics and business studies, they can learn from each other.

This item is no. 500 in this blog. It is time to stop this routine of one piece every week. I may still post a piece now and then, but no longer every week  The blog has now been visited some 95.000 times, in 106 countries. On my website bartnooteboom.nl I still have collections of posts bundled according to theme. I want to thank readers for their interest.