540. Mutual exclusion: The case of economics and business studies.
This item is an abridged version of a paper I published in Academia Letters, in 2021. The full version is posted on the page of essays, on the website www.bartnooteboom.nl
Conservative as this is, there are arguments for it. One cannot look at all directions at the same time, and a certain perspective is needed for focus, coherence and analytical rigour. There is also an evolutionary argument: if there were no different species, and all animals could interbreed, in due course no separate species would remain, and rivalry and evolutionary selection would vanish. This may yield an argument against interdisciplinarity.
On the other hand, innovation arises from variety, novel combinations, to generate new forms, genotypes, to be submitted to evolutionary selection. In nature, such variation is random, by novel configurations of genes in chromosome crossover, in sexual reproduction, copying errors of DNA, and mutations of genes. In society, in science and politics, it is not entirely random, but informed by inference, experimentation, and artificial selection (in simulation or testing of concepts or prototypes, in learning systems. This yields an argument in favour of some form of interdisciplinarity.
Behavioral factors involved are the urge of scientists, and people in general, to affiliate and congregate with like-minded people who more easily extend recognition to each other than to outsiders. They seek like-minded parters to collaborate with, who are prone to recognise it and refer to it, which furthers careers. It also takes less effort of understanding ‘out of the box’.
A response to exclusion by a programme, whereby one cannot gain access to publication channels, is to craft one’s own association in a new programme, with one’s own proprietary journal, conference and publishers.
In Institutional economics, institutions are ‘rules of the game’ (Hodgson, 1989), with legal arrangements such as property rights, rules to protect the environment and constraints on advertising, and beyond those the effects on economic issues of cultural habits and rules, language, power groups, lobby groups, network effects, corruption and politics. One type of institutions is so-called ‘transaction costs’, which are costs of the market, such as the costs associated with supply and demand finding each other, judgement of quality, negotiation, crafting agreements and contracts, controlling their execution, litigation in case of breach, and so-called ‘specific investments’ in contracts or collaborative arrangements that are lost, not useful in other relations, when the relation breaks. Those can be used to leverage power of threatening to walk out if not given a greater share of jointly produced profits. These costs can yield a reason not to use markets but integrate activities in a single organisation.
Evolutionary economics looks at the economy as an ecosystem, governed by the evolutionary principles of variety creation, rivalry and selection in markets, and transmission of surviving success in imitation, growth, and education and training. In biology variety creation arises from chromosome crossover, in sexual reproduction, and copying errors and mutations of genes, in the economy it arises in entrepreneurship and environmental and technological change. The key feature of evolutionary theory is that there is no ‘intelligent design’, as opposed to economic planning and control. Evolutionary economics has its puzzles: What consitutes the selection environment; not only markets but also institutions. Who or what is being selected: firms or ideas and practices, and what does ‘survival of the fittest’ mean, when ideas can be partly adopted from firms that fail? Firms can merge to survive. Transmission entails communication, and there variety arises from variety of understanding and interpretation, so that variety generation and transmission get entangled. Also, institutional effects of lobbying and political influence can yield ‘co-evolution’, i.e. influence of the units to be selected on the selection environment, more so than found in biology, and when strong, this effect can prevent effective selection.
Trust beyond a balance of reciprocal advantage, in mutual dependence, is not accepted by mainstream economists, as seen to be in conflict with competition in markets, which enforce breach of trust to maximise advantage, needed for survival. Trust researchers have objected that a leap of faith beyond calculable advantage is needed for collaboration in innovation, which also needed to survive in markets (Moellering, 2009).
Behavioural economics makes use of insights from social psychology, in the role of subconscious, routinised ‘decision heuristics’ that limit free will and rationality. While the heuristics are non-rational, they can be adaptive, assisting survival, and in evolution have developed for that reason.
Economics and business
I experienced the cliff between economics and business when I was appointed scientific director of a research institute cum PhD school at a university in Netherlands, by the board of the university, in the 1990’s, with the task of integrating those disciplines. Such integration stands to reason: business forms an important part of the economy. I accepted the commission because I saw parts of economics as promising bridgeheads for making the connection: Evolutionary, Institutional, Industrial, Behavioural and Transaction Cost Economics. Unfortunately, it turned out that those parts of economics were not represented in the Economics Faculty. At the Business Faculty there were practitioners of Systems Theory, Organisational Behaviour, Personnel Management and Legal Management who wanted to include sociology, psychology and law, which was anathema to the economists. I tried to cross the cliff, but the effort was thwarted by both sides. The rejection was mutual. I failed miserably, at least substantively, and could only erect a facade, a stage set, behind which everybody just continued to play his or her familiar game. After much wasted effort, I left that university, but I remained intrigued by the failure: what was it that made integration so difficult? After a time I arrived at the following analysis.
For mainstream economics the core had, still has, the following basic assumptions and perspectives:
- It is outcome oriented, constructing models that maximise utility or efficiency (Hodson, 2019), taking that as a goal of policy, regardless of how that outcome is to be achieved. Indeed, in some areas such an approach is valid and useful, such as in optimising the scheduling of a refinery or a loading facility for ships, a stream of goods, conditions for efficient timing and queuing, and optimal location, to name a few things that are relevant to business. It mostly misfires in other areas, such as strategic management, personnel management, leadership, innovation, collaboration, and the development of financial instruments. An interesting and useful innovation in economics was game theory, analysing strategic interaction, but it was limited in its assumptions that players knew all options and their potential ‘pay-offs’.
- It is aimed at mathematical models, as the paragon of being scientific.
- It assumes rationality in making choices
- It uses statistics to calculate risk, where one does not know what is going to happen, knows what can happen, but cannot deal with ‘real’ uncertainty of not knowing all that can happen.
Business, by contrast, requires he following perspectives:
- It is process oriented, in designing and guiding processes, of production, marketing and distribution, organisation, strategy making, and learning.
- It is not limited to mathematical models, because the required measurement is not always possible, and it is not always clear what the available options are.
- It cannot assume rationality because people and sytems are often not rational.
- It has to face uncertainty, beyond risk, in innovation and strategy.
In retrospect, in view of these fundamental differences, it is not surprising that economics and business could not be integrated. They reside in different worlds, with different perspectives, in different cultures.
Mainstream economics had a rhetorical comparative advantage, in the eyes of practitioners and policy makers, in its use of mathematics, and the clarity and simplicity of optimal outcomes, in comparison with the complexity of evolution, seen as muddling and yielding no determinate outcomes, in the absence of intelligent design. It was imposssible to predict the outcomes of evolution. I was member of an advisory committee for a Max Planck institute for evolutionary economics in Jena, in Germany, and once we had to defend the institute in front of a visit of board members of the Max Planck, we failed to make the merit of evolutionary economics clear, and the institute was abolished and replaced by an institute for mainstream economics.
The situation has since changed, in the emergence of ‘Agent Based Simulation’, whereconduct is simulated in a computer on the level of interacting agents, to model markets and their failures, in evolutionary processes. See T. Klos & B. Nooteboom (2001). This serves to also give a mathematical, rigorous gloss to evolutionary economics. That method has problemsof its own, in that complexity explodes as one adds variables and parameters, and it becomesdifficult to understand what is going on, and to test models. One option is to compare aggregateoutcomes with available statistics.
The cliff between ecoomics and business studies re-emerged many years later, in 2020, in the Royal Netherlands Academy of Arts and Sciences, of which I had become a member in 2000. This has a section for economics and business studies, and the problem arose on the occasion of the nomination a new member. Someone submitted a proposal, which I seconded, for the nomination of a scholar with a background in applied psychology, with a wealth of publications in excellent journals in the area of organisational leadership. The proposal was waylaid by the economists, on the ground that she had not published in top economic journals. I came up in arms, on the ground that economics and business had been combined in the academy not because of some common method or theory, but because of being related phenomena in the economy. I sent around a brief statement of the differences between the disciplines, along the lines indicated above, with a proposal for a debate on it. The only response I received was a thank-you for ‘offering these personal reflections’. No one responded to my suggestion for a debate. I went to he presidency of the Academy with the suggestion for a separate section for the programme of business studies, but was fobbed off with the assurance that the current leadership of the joint section would attend to the issue. That is the last I heard of it. The mutual exclusion of economics and business studies, to the point of refusing debate, but this was accepted without debate, even in the Academy.
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Hodgson, Geoffrey, (2019), Is there a future for heterodox economics?,Cheltenham UK:Edward Elgar.
Kahneman, D. and A. Tversky 1979, ‘Prospect theory: an analysis of decision making under risk’, Econometrica, 47: 263–91.
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Klos, T. and B. Nooteboom 2001, Agent-based computational transaction cost economics, Journal of Economic Dynamics and Control, 25: 503-26.
Lakatos, I. 1970, 1978, The methodology of scientific research programmes, Cambridge: Cambridge University Press
Moellering, Guido 2009, ‘Leaps and Lapses of Faith: Exploring the Relationship Between Trust and Deception’, in: B. Herrington (ed.) Deception: From Ancient Empires to Internet.
Nelson, R.R. and Winter, S. 1982, An evolutionary theory of economic change, Cambridge: Cambridge University Press.