The dismal trouble of economics

The author is not an economist. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, February 19, 2007  edition, page S1/4.

The story of Antaeus in Greek mythology sees him as an invincible giant who draws his strength from contact with his mother, Gaea, the Earth.  He is killed by Heracles (the Romanic Hercules) who finds out the source of his strength. In their wrestling match, Heracles crushes Antaeus to death while lifting him up from the ground.

Is economics going the way of Antaeus?

Flashback.
The December 2, 1996 issue of The New Yorker carries a lengthy piece, titled “The Decline of Economics.”  It’s an account of economics losing contact with the real world and becoming irrelevant, and the signs that say so.

It cites instances that all show US business finding less and less need for economists, students going into other majors, or economists of the realm (including one that has just won a Nobel) dismissing their own theories as obscure, inaccurate, or removed from improving human welfare.

John Cassidy, the author, concludes his piece with a suggestion to remove the Nobel Prize for Economics altogether, for “foster(ing) a professional culture that values technical wizardry above all else.”

It’s a good piece for the readers, but bad press for the “beautiful minds” of economics, coming at a time when the community seemed at its tipping point for the article to cause a stir. It did stir a controversy, US wide. But there’s apparently more to it than the effect of putting economics in a bad light before an already skeptical public.

The article, for example, also notes the progress made in other branches of science, like physics and biology, but none to the same degree in economics.  The implied assertion: economic theory is the backwater of science. So while the controversy has blown over, economic theory has continued taking a serious beating from many quarters.  In fact, some nine years back from our The New Yorker article, an entirely new front was opened.

Heracles. Santa Fe Institute in New Mexico, USA, is a nonprofit organization dedicated to doing research on “complex systems.” It started out in 1984 with a modestly radical aim – to offer another method of science that takes real account of a system as a whole, in its complexity, as the starting point of study. A complex system behaves in a way that you cannot derive from the behavior of its individual parts, unless you take into account how they relate between and among themselves. The whole is more than the sum of its parts.

The prevailing, “reductionist” method, attributed to Descartes and Newton, breaks down (reduces) the whole into its simplest parts, studies them individually, and draws conclusions about the functioning of the whole.  For the whole is no more than the sum of its parts.

The Santa Fe scientists credit the reductionist method for taking science to where it is now. But they argue that “complex systems,” like the economy, are far too complex and dynamic to lend themselves well to it, so they require a bottom-up, holistic approach.  Besides, the world is way, way past the Cartesian age of quill and parchment, and well into the age of supercomputers, to allow a complex system method of inquiry.

Santa Fe hosted in September 1987 a workshop on its chosen theme – “The economy as an evolving complex system.” It thought “that new ideas bubbling in the natural sciences might stimulate new ways of thinking about economic problems.”

en big names in theoretical economics were invited, including Nobelist Kenneth Arrow (he of “General Equilibrium” theory).  Another team of 10 scholars in the physical sciences – physicists, biologists, computer scientists – headed by physics Nobelist Philip Warren Anderson (the computer owes its memory to his theory), matched the luminary lineup, following the event’s cross-disciplinary aim.  For 10 days they traded thoughts around the theme.

In The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics (Harvard Business School Press, 2006), author Eric D. Beinhocker calls the meeting the “clash of the Titans” and gives an amusing and insightful account. Take this quote from his source:

“The physicists were shocked at the assumptions the economists were making – that the test was not a match against reality but whether the assumptions were the common currency of the field. I can just see Phil Anderson, laid back with a smile on his face, saying, ‘You guys really believe that?’

“The economists backed into a corner would reply, ‘Yeah, but this allows us to solve these problems. If you don’t make these assumptions, then you can’t do anything.’

“And the physicists would come right back, ‘Yeah, but where does that get you – you’re solving the wrong problems if that’s not reality.’”

What do physicists know about economics to cast doubt on the age-old assumptions of economics?  Nothing much maybe, except that the point in this case is about method of science.

Abstraction is a tool used in science to model reality.  You drill down to the simplest by abstracting from, or assuming away, some parts or features of the whole you think are not yet relevant to your analytical purpose. In high school physics, you do experiments in a vacuum, allowing you to abstract from friction and gravity.  To classify is to abstract, because you focus on what’s common among otherwise unlike items and ignore apparent differences.  Abstraction is making assumptions.

What you assume is a judgment call, and critical.  (Filipinos know intuitively it could be fatal, too – as in, marami ang namamatay sa maling akala.) You’ve heard of that old joke about three castaways – an engineer, a physicist, and an economist – figuring out how to open a sealed can of beans:  the engineer suggested, force it open with a rock; the physicist, heat the can in the sun until it bursts.  The economist proposed a way: “First, let us assume we have a can opener….”  Before logic, the sound-test of assumptions is reality itself.

Presumably, what our physicists in Santa Fe know more about is physics, and there is physics in economics. So, one is likely to expect economics to know its physics, too.  Here I find Beinhocker‘s insights intriguingly interesting.

The notion of equilibrium applied to, say, markets is the (utopian) point where supply meets demand, price settles, the market clears, and everybody is happy. It’s yin and yang in Eastern thought settling in happy harmony. It’s physics, originally. The notion and its math found their way into economics in the 1870s, imported straight from physics textbooks by Leon Walras and Stanley Jevons.  “Equilibrium” has since embedded itself as a key concept in economic orthodoxy.

But the physics of Walras’s and Jevons’s time was one whose “guinea pigs” were closed systems in equilibrium – in balance, or at rest. Non-equilibrium, complex systems started to figure only in the early 20th century by way of biology and thermodynamics. By borrowing heavily from the tools of physics of their time, Walras and Jevons were unwittingly taking with them its assumptions as well.

For example: A fixed quantity of energy in an equilibrium body translates into a fixed amount of value and wealth in the equilibrium models of Walras and Jevons. Energy is conserved, not destroyed, anyway, following the First Law of thermodynamics. A body at rest inspires in Walras a static model that abstracts from creation of new wealth and growth. Or, if the body is ever to move at all, the push can only come from an outside force, not within. All these and more are now part of orthodox theory.

If the economy is an equilibrium system, remember the Second Law. A postulate says:  entropy — a measure of decay, degradation, dissipation or death — reigns at the maximum in systems at or near equilibrium. Non-equilibrium systems, like living ones, slow down entropy process through complex adaptation, living off the energy of the world outside through cycles. This part of physics is the big reality that economics misses.

Antaeus  is “unground”.

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