How to rebuild a shamed subject
By Robert Skidelsky
August 5 2009
(...) the Queen's question was wrong, because it accepted at face value the
predictive claim of economics - a feature that has distinguished it from all
other social sciences. Karl Popper produced a famous argument against the
possibility of prediction in human affairs: one cannot anticipate a new
invention because, if one could, one would already have invented it.
However, this objection can be overcome if one assumes a stable and
repetitive universe in which rational actors make efficient use of the
information available to them. In this environment, uncertainty disappears
to be replaced by calculable risk. Shocks and mistakes may occur but these
will cancel each other out, so that, on average, people get what they
expect.
An important implication of this view is that shares are always correctly
priced. This is the basis of the so-called efficient market hypothesis that
has dominated financial economics. It led bankers into blind faith in their
mathematical forecasting models. It led governments and regulators to
discount the possibility that financial markets could implode. It led to
what Alan Greenspan called (after he had stepped down as chairman of the US
Federal Reserve) "the underpricing of risk worldwide".
It has also led to the discrediting of mainstream macroeconomics. The
efficient market hypothesis is simply an application of the recently
triumphant New Classical school, which preaches that a decentralised market
system is always at full employment. In their obsession with getting
government out of economic life, Chicago economists claimed that any
consistent set of policies will be learnt and anticipated by a population,
and will therefore be ineffective. Since people - apparently including the
10 per cent or so unemployed - are already in their preferred position
because of their correct anticipations and instantaneous adjustment to
change, "stimulus" policies are bound to fail and even make things worse.
Recessions, in this view, are "optimal".
Most of those unversed in New Classical economics assume that John Maynard
Keynes exploded these fallacies 70 years ago. Their re-emergence is not just
the result of the failure of Keynesian macroeconomic policy to anticipate or
deal with "stagflation" in the 1970s. It reflects a persistent bias in
economics towards an idealised account of human behaviour; what Joseph
Schumpeter called the "Ricardian Vice" of excessive abstraction. It is only
by imagining a mechanical world of interacting robots that economics has
gained its status as a hard, predictive science. But how much do its
mechanical constructions, with their roots in Newtonian physics, tell us
about the springs of human behaviour?
One of the most interesting contributions to the FT.com debate was the
argument that, after Keynes, economists should have aligned their discipline
with other social sciences concerned with human behaviour. Keynes opened the
way to political economy; but economists opted for a regressive research
programme, disguised by sophisticated mathematics, that set it apart. The
present crisis gives us an opportunity to try again.
The reconstruction of economics needs to start with the universities. First,
degrees in the subject should be broadly based. They should take as their
motto Keynes's dictum that "economics is a moral and not a natural science".
They should contain not just the standard courses in elementary
microeconomics and macroeconomics but economic and political history, the
history of economic thought, moral and political philosophy, and sociology.
Though some specialisation would be allowed in the final year, the
mathematical component in the weighting of the degree should be sharply
reduced. This is a return to the tradition of the Oxford Politics,
Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.
Beyond this, the postgraduate study of macroeconomics might with advantage
be separated from that of microeconomics. Courses in microeconomics should
concern themselves, as at present, with the building and testing of models
based on a narrow set of assumptions. Their field of applicability lies in
those areas where we have reliable views of the future. Macroeconomics,
though, is an essential part of the art of government, and should always be
taught in conjunction with subjects bearing on this. The obvious aim of such
a reconstruction is to protect macroeconomics from the encroachment of the
methods and habits of the mathematician. Only through some such broadening
can we hope to provide a proper education for those whose usefulness to
society will lie as much in their philosophical and political literacy as in
their mathematical efficiency.
http://www.ft.com/cms/s/0/dfc9294a-81ef-11de-9c5e-00144feabdc0.html
(It seems very much in vogue now to bash mathematics, which is wrong; the
point is that quantitative inquiry cannot substitute for the forming of
theory, or suffice in understanding the reflexive interaction between human
life and the theoretical orientations which guide it - JB).
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Received on Fri Aug 7 19:58:25 2009
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