Economics in need of a re-think

24 Mar, 2014 at 11:10 | Posted in Economics | 3 Comments

AS THE old joke goes, the questions in economics exams are the same every year; only the answers change. Just 40 years ago, the emergence of stagflation was prompting the monetarists to challenge the disciples of John Maynard Keynes, but after the crisis of 2008 the enthusiasm for Keynesian stimulus was discovered all over again.

money-blood-and-revolutionIn a new book George Cooper, a fund manager, suggests that the economics profession is itself in a state of crisis. It needs the kind of shift in thinking that Copernicus brought to astronomy, or Charles Darwin to biology, Mr Cooper argues. He cites Thomas Kuhn’s theory of scientific revolutions …

Economics fits the pre-revolutionary template, he argues. It has fractured into many incompatible schools of thought. It has created complex models without noticeably improving the accuracy of its predictions. And many of those models ignore features of the real world.

Neoclassical models, for example, are built on the assumptions that individuals make their own decisions based on self-interest, that they seek to maximise their welfare and that the result is a stable system that tends to equilibrium. Yet as behavioural studies have shown, individuals are not always rational optimisers. Mr Cooper suggests that neoclassical economists treat evidence that humans are not rational as “problematic, inexplicable and annoying—but also ignorable.”

Instead, he thinks people act as competitors, not maximisers … The logic of competition helps to explain, in his view, why there was so little economic growth before the Industrial Revolution. This lack of growth is a problem for those who believe that the West’s modern difficulties are caused by excessive government regulation and high taxes; the world before 1700 had minimal government and low taxes …

Today’s problems, according to Mr Cooper, are caused by the high debts built up by those lower down the social scale; debt transfers money from poor to rich. What is needed is thus an injection of money at the bottom of the pyramid, via fiscal stimulus, rather than “quantitative easing”, which pushes up asset prices and benefits the rich.

Whether mainstream economists will take Mr Cooper’s ideas seriously is doubtful; his book has no formulae (and few statistics) … But for those with an open mind his criticisms of the economics profession, and suggestions for new ways forward, will be extremely welcome.

Buttonwood/The Economist

I started out reading this book with high expectations, since Cooper’s earlier book The Origin of Financial Crises with its well-argued attack on today’s economic orthodoxy had been such a rewarding and enjoyable must-read. After having read the new book I, however, reluctantly have to concur with The Economist review  — it’s doubtful if economists will take Cooper’s argumentation seriously. The categorization of economics used by Cooper is from a doctrinal point of view — to say the least — problematic. The proposed new alternative framework is also far to vague to really have a bite. It in fact also resounds a lot of the theories of positional goods that we connect with Fred Hirsch and Robert Frank — good, interesting theories to be sure, but in no way self-evidently to be considered non-mainstream.

If anything, this underlines how important it is to realize that there are no short cuts in science. Or as a noted German philosopher once famously wrote:

There is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits.


  1. […] mathematics. As a result I have come in for the same sort of criticism levelled at Minsky – both Lars Syll and Dimitrios Diamantaras have accused me of being too vague (though both avoid criticising the […]

  2. I haven’t read Cooper’s book yet, but based on the passages quoted above, I would agree that economics is in a pre-revolutionary stage, much as classical physics was immediately prior to relativity and quantum mechanics. Nineteenth century physicists actually sounded a lot like today’s conventional economists that dominate the field and have declared the methodological debate over. Perhaps economics will get its Einstein, Bohr and Plank, et al.

    And perhaps we see some the early work having already emerged in Keynes, Lerner, Minsky, Tobin, and Godley, as well as in philosophy, life sciences, psychology, and social sciences. I lead with philosophy there with a reason — economics is foundationally normative and economic institutions are not based on nature as much as they are on custom and law. The just so stories that economists since John Locke and Adam Smith tell about the origins of property, markets, money, utility, and motivation are just that — made up. There has been little serious examination of these key elements in conventional economics in light of the disciplines that actually study these matters empirically and historically.

    A large stumbling block for conventional economists is “lack of formalization” that enables precise predictions. Well, that was a huge stumbling block in the acceptance of quantum theory as well. Even Einstein objected that God does not play dice and he never really accepted the stochastic nature of physical reality at its core. Maybe, just maybe, the subject matter exceeds the degree of precision that economists holding on to traditional econometric models admits — as Keynes, who knew something about probability, told Tinbergen.

  3. “It needs the kind of shift in thinking that Copernicus brought to astronomy, ”

    The heliocentric model existed since 2500 BC. People were just forced not to accept it by religion. Copernicus did not discover the heliocentric model; he just appeared at the fringes of a change, when the paradigm shift could take place. So is the case with economic models that exist already but people are forced to accept other ones that suite the establishment.

    “Today’s problems, according to Mr. Cooper, are caused by the high debts built up by those lower down the social scale; debt transfers money from poor to rich. ”

    Debt is effect of the problem. Debt transfer money from poor to rich only in low inflation periods and assuming the rich want to undertake new assets. Debt transfers money from rich to poor if inflation rises. The EU is a wealth transfer mechanism from poor to rich because of its single mandate of zero inflation and architecture of banking system. I have not seen the book but if the author does not understand that dept transfers wealth both ways someone should let him know.

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