Would post-crash economics be a step backward?

Finance and MarketsDiscussion of the need for the reform of economics in the post-crash world continues to gather momentum and prominence in parts of the econosphere. Wendy Carlin set out a case for change at the FT (£) on Sunday, while a group of post-Keynesian economists stuck their head above the parapet in a letter to the Guardian on Monday.

The thrust of the post-crash economics argument is not that mainstream economic approaches should be rejected in favour of an alternative. Rather it is the more modest plea that economics should be taught more pluralistically and contextually. Mainstream approaches should be set alongside alternative bodies of thought. Economics students would benefit from rediscovering economic history, genuinely institutional analysis, a dose of philosophy, and the history of economic thought. It’s an agenda with which I have a lot of sympathy.

We are seeing bits and pieces of a backlash. That is inevitable.

If one embraces the belief that economics is a science characterised by the ongoing accumulation of knowledge then these calls for recognising pluralism and a historical sensibility will seem highly peculiar. To accept that there might be something to be gained from studying Friedman, Keynes, Knight, Marshall, Ricardo or Smith – genuinely studying what they had to say not just invoking their names – would be to concede the possibility that, in fact, the discipline isn’t accumulating knowledge but, somewhere along the line, took a wrong turning.

To depart from what might be considered the historical thread of the mainstream and seriously consider Samuels, Galbraith, Straffa, Commons, Veblen, Marx and the like would be more like admitting the possibility that we are on the wrong track altogether.

What a pluralist and contextual economics education would or should look like is an intriguing question. There are plenty of people now working on it. Who might be in a position to teach it is an equally interesting question, given that part of the problem is that the discipline is suffering from amnesia.

But, of course, pluralism doesn’t necessarily mean the curriculum has to become more backwards looking. A couple of weeks ago I suggested that a focus upon ethics and the unavoidable ethical commitments of all economic theorising would inject a valuable contemporary critical dimension to economics education. Another possibility is, rather than simply looking backwards, to explore alternative economics perspectives that are currently active research programmes.

I’ve just scooted through Brian Arthur’s Complexity economics: a different framework for economic thought. Complexity economics is an obvious candidate for an alternative paradigm. Arthur argues it is a fundamental reconceptualisation of the economy. Equilibrium and substantive rationality are rejected as the starting point for analysis. The economy is algorithmic and evolving:

A picture is now emerging of the economy different from the standard equilibrium one. To the degree that uncertainty and technological changes are present in the economy – and certainly both are pervasive at all levels – agents must explore their way forward, must “learn” about the decision problem they are in, must respond to the opportunities confronting them. We are in a world where beliefs, strategies, and actions of agents are being “tested” for survival within a situation or outcome or “ecology” that these beliefs, strategies and actions together create. Further, and more subtly, these very explorations alter the economy itself and the situations agents encounter. So agents are not just reacting to a problem they are trying to make sense of; their very actions in doing so collectively re-form the current outcome, which requires them to adjust afresh. We are, in other words, in a world of complexity, a complexity closely associated with nonequilibrium.

Arthur neatly encapsulates how embracing complexity changes the perspective. It transforms the focus of analysis in a way that addresses the weakness of classic comparative static analysis. Rather than focusing on equilibrium states and telling informal stories about how we get from one to the other, the analysis focuses on the movement:

Until now, economics has been a noun-based rather than verb-based science. It has pictured changes over time in the economy function as changes in levels of fixed noun-entities—employment, production, consumption, prices. Now it is shifting toward seeing these changes as a series of verb-actions—forecast, respond, innovate, replace—that cause further actions.

If equilibrium is achieved it is temporary and more or less transient. Structures emerge as mesolevel phenomena. From a complexity perspective time and history matters.

To some extent complexity economics is rediscovering themes that economics has forgotten. The argument is that when economics decided to model itself on nineteenth-century physics the focus narrowed to questions of allocating fixed resources. Had economics instead chosen biology as its model then the focus would have been on the formation of the economy and its evolution: how the economy emerges in the first place and how it changes structurally over time. These are not questions that can be satisfactorily answered in an equilibrium framework.

Hodgson How economicsThese are, however, themes that early classical economists were entirely comfortable addressing. Indeed, they were thought to be the core of economic thought. But they are themes mainstream economics rather misplaced after the late nineteenth century. They nonetheless continued to preoccupy many flavours of non-orthodox economics. The story of how economics came to expunge historical time and its implications from its core theoretical concerns is fascinating in itself. For anyone interested, Hodgson’s How economics forgot history: The problem of historical specificity in social science provides a valuable intellectual history.

Arguably complexity economics simply allows a return to old questions using new tools. Tools which, though computational rather than analytical, may not be written off as irredeemably “ad hoc” by mainstream economists.

Complexity economics is, of course, not new. It started to develop some momentum in the 1980s through the work of the Santa Fe Institute. But it is now gaining broader interest and acceptance. That has probably been helped by the fact that it has been effectively popularized. Indeed, perhaps the best place to encounter complexity economics for the first time is Beinhocker’s The origin of wealth: Evolution, complexity and the radical remaking of economics.

the_origin_of_wealthThe complexity economics research programme is by no means unproblematic. It raises all sorts of interesting ontological and epistemological questions, particularly about the scope for transferring learning from computer-based simulations to real world economies. It could be argued that it represents no more than a way of taking the concerns of Austrian economists with uncertainty, knowledge, and the entrepreneur and draping them in a new more ‘scientific’ garb. It is susceptible to similar criticisms. Institutional economists, for example, would highlight that complexity economics can lead to some quite conservative conclusions about the wisdom of market mechanisms and a similarly inadequate understanding of social structures and social power.

My aim is not to advocate on behalf of complexity economics specifically, but rather to observe that there is plenty going on within contemporary economics – broadly conceived – that is grappling with some of the major social questions that mainstream economics barely touches upon. Of course this resonates with classical economics. It could be no other way. To address these questions is not to succumb to an unhealthy and unproductive preoccupation with historical curiosities that the truly enlightened have long moved beyond.

Questions of co-ordination, learning and change over time are at the heart of social life. That hasn’t changed. And it isn’t going to. They need to be at the heart of an education in economics.

Image: © Eisenhans –

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4 replies »

  1. I like complexity economics too, or at least computable agent based economics. But whilst everybody loves to pick holes in mainstream economics, people have spent less time thinking about the drawbacks of those approaches (this is not a comment on your Alex, just a general observation). And students complaining about maths won’t like it, especially if they are to avoid computable agents that follow ad hoc rules with model predictions very sensitive to choice of these.

    It’s not obvious to me what calls for pluralism, or to turn every economics degree into a PPE degree, have to do with the crisis. I think people are kidding themselves if they think having universities teach the history of economic thought or post-keynesian theories (whatever they are) would have averted the crisis, because pre-crisis the bits that could have helped about financial instability weren’t especially emphasized and heterodox critics had other hobby horses.

    An obvious response would be to take the wealth of things mainstream economics has to say about financial crises, and add that to the curriculum. Funny how post-crash types aren’t asking for that.

    But it’s much easier to call for things to be added than to say what should be excluded. Are we going to stop teaching economics students the basics of pricing and competition, asymmetric information, game theory, econometrics, development, labour economics, public economics etc.?

    There can be a lazy idea that “complexity” and “disequilibrium” is inherently more realistic than simplicity and equilibria. Again, I’m all for it, but too many people insist on thinking along the lines of this approach is right, this one wrong. People also forget that mainstream economics has things to say about innovation, reaction, learning etc. and has plenty of models in which time and history matter.

    As for Milne …

    “The free marketeers are now being market-tested, and the customers don’t want their product.”

    Some students saying they don’t want the product does not tell us most students do not want the product. Economics departments are not short of applicants Students can go to SOAS or Leeds if they want.

    “Most mainstream economists have carried on as if nothing had happened.”

    just false. Written by somebody with no idea what most mainstream economists do or think, but just reads other articles in the Guardian saying the same thing.

    “even if it struggles to say anything meaningful about crises, inequality or ownership”

    well I might give him ownership,but again the idea the mainstream has nothing to say about crises or inequality just reveals the man is merely describing his own ignorance prejudices.

  2. Great to see this. Complexity definitely has a lot to offer. There’s a simulation that Beinhocker talks about that is very powerful, because it illustrates how even small changes to initial conditions can result in huge inequalities of outcome. It’s so important because, in essence, mainstream economists spend a lot of time not grappling with that reality.

    Still, I’d go further than your guarded institutional critique – complexity economics is prone to naive Darwinism and naive naturalism. All the more so because some practitioners (Paul Ormerod springs to mind in particular) seized on network and complexity economics as a way to bolster their extreme atomised/deregulated/Thatcherite model of economic life.

  3. Thank you both for your thoughtful comment. There is a huge amount in both to reflect upon. I agree that the Guardian articles are just in danger of becoming self-referential and attacking a straw man. But I also think there is something in the critique. It is true that the leading edge of conventional economics may well be grappling with some of these key issues, but that doesn’t necessarily percolate down to what the students get to hear about. There is some sense that they have to jump through lots of hoops – the basics – before the get to the relevant stuff. But the relevant stuff that recognises the problematic nature of real world complexity may be saved until graduate level – in which case many students never get there. So their view of what constitutes ‘economics’ may be rather jaundiced. This raises important questions about where you start an economics education, as well as what you leave out to make room for alternatives etc.

    I don’t think the idea of pluralism in education would necessarily have stopped the financial crisis. I think it is more a case of trying to protect against hubris. If it were appreciated that economic analysis were tentative/contested/provisional then confident prescriptions of the benefits of doing X, Y or Z action would be treated more cautiously.

    There is much more in your comments that I need to reflect on. For example, I think we need to unpack what we mean by “time” in economic analysis to determine whether, even in principle, the sort of criticisms that are directed at mainstream analysis on this point can be neutralized effectively by theoretical and empirical refinement. Different perspectives are seeing “time” in rather different ways.with rather different implications. But that is an argument to be developed further on another day.

  4. “If one embraces the belief that economics is a science characterised by the ongoing accumulation of knowledge then these calls for recognising pluralism and a historical sensibility will seem highly peculiar. To accept that there might be something to be gained from studying Friedman, Keynes, Knight, Marshall, Ricardo or Smith – genuinely studying what they had to say not just invoking their names – would be to concede the possibility that, in fact, the discipline isn’t accumulating knowledge but, somewhere along the line, took a wrong turning.”

    It doesn’t sound like you’re necessarily agreeing with that, but it’s not true of the physical sciences, is it? Einstein supersedes Newton; people still study Newtonian physics. The same goes for classical ideas about atoms that break down at the quantum level – entirely useful still.

    Accumulation of knowledge doesn’t mean casting off everything previously learned – in fact, I’d say the opposite was true. In a discipline where knowledge genuinely accumulates, studying antecedents is the best way to provide a solid foundation for what comes later.

    Maybe you just said exactly that and I read it wrong…!