VOX - The Student Journal of Politics, Economics and Philosophy
The Future of Economics By Leoni Marie Linek
T
he unprecedented financial turmoil and the current
recession have provoked much talk about the world’s economic outlook. This article, however, shall not be concerned with the future of our economy – but with that of the discipline economics. 10
In order to understand the status quo, both of the field of study and its real world counterpart, one must consider the course that economics has taken over the past decades. When, in light of the stagflation of the 1970s, the untenable assumption of a trade-off between inflation and unemployment
Issue X - Autumn 2009
made Keynesianism lose its credibility, a neoclassical approach to macroeconomics emerged in its place. The rational expectations revolution and the real business cycle theories of the 1970s and 1980s promoted the belief in market clearing, perfect information and rational agency. The reinstating of classical theory, however, seemed more convincing this time, because it was now clad in mathematics. The “sophistication” of economics, which came hand in hand with the advent of the neoclassical school, gave rise to the conception that economics is a precise science akin to the natural sciences. As Harvard professor Gregory Mankiw explains in his renowned textbook: “Economists ... approach the subject of the economy in much the same way as a physicist approaches the study of matter and a biologist approaches the study of life.”1 This view puts the economy among matter and life as something given by nature, not made by humans. Such an understanding of economics has posited market forces as something inevitable, like gravity. Noticeably in current debates, this naturalistic notion of economics has prompted us to mistakenly speak of the financial crisis as an “earthquake” or a “hurricane”: a natural catastrophe, which has come upon us and is seemingly beyond the reach of our influence. This fallacy has lead to perplexity and apathy towards the challenges that we are facing. Indeed, the credit crunch has shaken the
economy tremendously and wiped out the jobs of many. Yet the crisis was not caused by some mysterious mechanism of the natural laws of economics but has its roots in the decisions of human beings. The events since September 2008 have refuted the predictive claims that had been ascribed to economics. “Why did no one see the crisis coming?” Queen Elizabeth asked an economics professor at the London School of Economics in November of last year, and a group of prominent economists wrote to her this summer to point out that many had in fact foreseen parts, yet no one the whole of the crisis. Unfortunately, they missed the point.
Such an understanding of economics has posited market forces as something inevitable, like gravity.
The crisis has corroborated, once more, that economics is a social science, as it deals with human behaviour. The economy is not a part of nature but a product of human interactions. As even Alfred Marshall, the father of neoclassicalism, knew: “economics cannot be compared with the exact physical sciences for it deals with the ever-changing and subtle forces of human nature”2 . Although the contrary 11
VOX - The Student Journal of Politics, Economics and Philosophy
has often been assumed (usually in sentences beginning with “Let us assume that”), human behaviour is thus everything but mechanistic or uniform, and its prediction is confronted with great uncertainty. This uncertainty, it must be acknowledged, cannot be calculated with absolute accuracy. The crucial difference between the behaviour of humans and that of particles or cells is the concept of volition. “Everything in nature works in accordance with laws. Only a rational being has […] a will“, Immanuel Kant discerned3 . Natural sciences collect statements about certain phenomena, which help to describe and predict these. Whilst matter always (or almost always) behaves the same way and scarcely ever deviates from the laws governing it (note, however, that Kant had no clue about Quantum Physics yet), humans act upon their wills, which do not follow a simple rule.
...economists must also give up their predictive pretensions and should be more reserved about detailed mathematical forecasts.
However, free will should not be misemployed as a reason to reject social science in general. Although human behaviour may not follow strict laws, there are evident regularities in human actions, and it is the task of so12
cial science to examine and identify these. Yet caution is to be exercised. Humans are fallible. Unlike particles, they make mistakes and they fail to recognize things. Economics should therefore depart from the assumptions of mechanistic rationality and perfect information. This entails that economists must also give up their predictive pretensions and should be more reserved about detailed mathematical forecasts. Instead, they should focus on what they are good at: explaining the past, examining the present and guessing at the future. Moreover, much of neoclassical thinking tied macroeconomics increasingly to its microeconomic foundations to make the subject more rigorous. Yet the financial crisis has highlighted the need to examine ‘market sentiments’ more closely- there is a certain “madness of the crowds”. Mainstream economics can currently account neither for collective moments of euphoria nor for mass phenomena of panic. However, the whole is bigger than the sum of its parts. If macroeconomists wish to shed light on the economy in its entirety, they must attempt to model these phenomena, even if this is a very difficult task. Redefining economics as a social science with moderated claims and attempting to account for mass phenomena would furthermore urge us to strive for a more comprehensive picture of economics, embracing its inextricable links to related fields. Just
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as the concept of an economic sphere separate from and alien to the rest of social life is fallacious, the belief that economics can be studied on its own is pure delusion. While mathematics is crucial to the field, economics, particularly macroeconomics, should not be taught merely as a device for operating complex mathematical systems. University degrees in economics should also encompass the study of philosophy, sociology, political economy and the history of economic thought. Such vision of a broadly educated economist seems to coincide with Keynes’ idea of a mathematician, a historian, a statesman and a philosopher in one. Many may object that this is too much to ask for. Yet the formation of economists is so utterly important, because their ideas “both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else”.4 After all, economics as a discipline cannot carry on ‘business as usual’. Economists in the public eye have shown their willingness to be self-critical, and economists at universities should follow their example both by refining and broadening their teaching of economics, bearing in mind that their students will soon assume responsibility in the real world economy. By embracing philosophical, sociological and historical components, while still teaching the necessary mathematical competence and efficiency, they would also
remind aspiring economists of the indeterminism of economics – and thus of the significance of their own actions.
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Bibliography: 1. Mankiw, N.G. (1997) Principles of Economics (Ft. Worth: Dryden Press), p.18 2. Marshall, A. (1961) Principles of Economics (London: MacMillan), p. 32 3. Kant, I. (2002) Groundworks for the Metaphysics of Morals Ed. and tr. by Allen W. Wood (New Haven: Yale University Press) AK 4:412 4. Keynes, J.M. (1964) The General Theory of Employment, Interest, and Money (New York and London: Harcourt, Inc.) p. 383
_____________________________ Leoni Marie Linek is a second year undergraduate student reading Economics and Philosophy currently studying at Columbia University.
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