Training in Economics is a Serious Handicap

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Or the Logical Bubble of Economists.

  • Economists decided to increase the maximum number of babies in a nursery to make the industry more profitable.
  • Economists advised to pay math teachers more, because of the shortage of them.
  • Economists recommended that employment projects for the disabled and mentally retarded should be closed… because they are not profitable.

Economists view the world in terms of supply and demand. If the supply equals the demand, the market has found equilibrium by some magical mechanism – the invisible hand. But often it is forgotten that for proper functioning there should an abundance of providers and consumers, who will act rational and not influence each other, and the prices should be known to everyone. As lot of governmental privatization projects has shown recently (hospitals, railways, home care, electricity companies) this assumption is debatable.

Traditionally, political leaders have turned to economists when the need has arisen to change behaviour, like increasing GDP, reducing unemployment, sustaining Social Security, making sure people are financially prepared for retirement, or stabilizing the financial sector. However, the poor results of deliberate policies suggest that hidden assumptions in economic theory itself cause the recurring problems. Barry Swarts in the Atlantic suggests that lawyers and economists need some help in predicting behaviour or getting people to change it. He suggests having a Council of Psychological Advisers working beside the Council of Economic Advisers.

Would that help? Or should we classify it as fighting the symptoms, instead of solving the underlying causes? The ineffectiveness of many policy interventions seems nagging, and it could point to a nine-dot problem. Could it be that the solutions are sought within the conditions and limits it imposes on itself in solving the problem?

David Orwell has dissected the paradigm of neo-classical economics.

Within economics is taken for granted:

  • The economy can be described by economic laws
  • The economy is made up of independent individuals
  • The economy is stable
  • Economic risk can be easily managed using statistics
  • The economy is rational and efficient
  • The economy is gender-neutral
  • The economy is fair
  • Economic growth can continue forever
  • Economic growth will make us happy
  • Economic growth is always good

In his book “Economyths” Orwell shows flaws in all these assumptions.

Economics gains its credibility from its association with hard sciences like physics and mathematics. Fundamentally, it is a mechanistic approach for modelling complex systems, dating back to Newton’s theories about the behaviour of independent particles, in timeless and unchanging conditions. In the 19th century, when neoclassical economics was invented, the assumption of stability was required because it would have been impossible to solve equations using the available mathematics tool. This is a known phenomena in the field of Operations Research, where a situation is modelled by using the available mathematical tools. As a result, economic data is sampled and interpreted in terms of the model, in all its neat perfection, as such creating myths about households and investors or firms that act independently and are immune to herd behaviour.

However, the “madness of crowds” could possible better described by positive feedback loops. Turning to applying modern complexity theory and system dynamics to the stock market could be more appropriate and providing instruments to make the market more robust.

But by continuing to propagate these myths, our universities and business schools sow the seeds for future financial catastrophes.

The ten pending questions by David Orwell cannot be played down as a harmless scientific debate among scientists about the foundation of  economic theory. The situation is far worse. In fact, the doctrine of the economic theory has seeped into all levels of society. Every student, not only in economics, but also in law, sociology, business, and technical studies are indoctrinated by the same inadequate theory of independent agents who transact rationally.

  • Recently a judge decided that a cardiologist, who was fired as head of the department because he revealed fatal flaws in his hospital, should not complain, because. . . he still got paid. So what is his problem?
  • Lawmakers think that if they tax the amount of kilometers a car uses, the total sum of driven kilometres in a country will decrease. However, the costs of mobility are not rational calculated.
  • To sell your home to the most likable new inhabitant, who treated you with respect and had great plans for your home, instead of the highest bidder, seems for most people absurd. This is not rational, yet not irrational.
  • It is widely assumed that traffic violations can best be countered by higher fines, but is it?

However, there are some optimistic signs that the dominance of neo-classical economics will cahnge. Some new scientific theories are emerging, like ecological economics, which takes into account the costs of using natural resources, and behavioural economics. Recently some promising social innovations were designed, as by the Nudge.

It addresses the idea of Kahneman  that humans posses two systems. System 1, the fast, effortless system that does the automatic thinking and a slow System 2 that monitors and controls system 1, but is lazy and effort-full. Also, that there are two forms of parallel species: Humans, who live in the real world, and need some protection against weaknesses and exploitation, and Econs who live in a theoretical world and do not make mistakes. Humans and Econs are reflected in the two selves: the experiencing self who does the living and the remembering self that keeps the score and makes choices.

For now, mistrust standard economic reasoning, even it is from non-economists.

See also the blog about Concept Maps and Reasoning and Intuition.

Go here to Buy our  eBook.

Photo: “Business Graph” by digitalart

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8 thoughts on “Training in Economics is a Serious Handicap

  1. Pingback: Thinking Patterns in Science | thinkibility

  2. Pingback: The West Wing of the Thinkibility University | thinkibility

  3. Pingback: Ways Concepts Are Camouflaged – Thinkibility Boost | thinkibility

  4. When Adam Smith wrote that all our actions stem from self-interest and the world turns because of financial gain he brought to life ‘economic man’. Selfish and cynical, economic man has dominated our thinking ever since and his influence has spread from the market to how we shop, work and date. But every night Adam Smith’s mother served him his dinner, not out of self-interest but out of love.

    Today, our economics focuses on self-interest and excludes all other motivations. It disregards the unpaid work of mothering, caring, cleaning and cooking. It insists that if women are paid less, then that’s because their labour is worth less – how could it be otherwise?
    http://www.amazon.co.uk/Who-Cooked-Adam-Smiths-Dinner/dp/1846275644

  5. Complexity theory and financial regulation
    Stefano Battiston1,*, J. Doyne Farmer2,3, Andreas Flache4, Diego Garlaschelli5, Andrew G. Haldane6, Hans Heesterbeek7, Cars Hommes8,9,†, Carlo Jaeger10,11,12, Robert May13, Marten Scheffer14

    Full text: http://science.sciencemag.org/content/351/6275/818.full

    Summary

    Traditional economic theory could not explain, much less predict, the near collapse of the financial system and its long-lasting effects on the global economy. Since the 2008 crisis, there has been increasing interest in using ideas from complexity theory to make sense of economic and financial markets. Concepts, such as tipping points, networks, contagion, feedback, and resilience have entered the financial and regulatory lexicon, but actual use of complexity models and results remains at an early stage. Recent insights and techniques offer potential for better monitoring and management of highly interconnected economic and financial systems and, thus, may help anticipate and manage future crises.

  6. Pingback: Patterns in Medicine | thinkibility

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