Nate Silver, the American statistician and writer, points out in The Signal and the Noise (2012), that forecasts of GDP growth since 1968 by the Survey of Professional Forecasters have been right only 50 per cent of the time—no better than tossing a coin. After the global financial crisis, Queen Elizabeth asked, at the London School of Economics, why hardly any economist had predicted the crash. British economist Adair Turner, delivering the 2010 Lionel Robbins Memorial Lectures, said the time has come to reconstruct economics. The question is, why is economics theory behind the curve, when many, including some economists, know that economics must change?
Economics is experiencing the pains of a paradigm shift. In his classic treatise, The Structure of Scientific Revolutions, Thomas Kuhn explains why paradigms are hard to change. In each science, whether physics, chemistry, biology, or astronomy, a core idea is adopted by its community, and all its experiments and theories are built around this idea. There are long periods of what Kuhn calls ‘normal’ science during which it is heresy to challenge this core idea. Anyone who does is ostracized by the scientific community. Revolutions occur, he explains, when after many decades of accumulation of contrarian evidence, this idea is let go off and a new one replaces it. The process of learning of new paradigms must go along with the unlearning of old ones. For example, acceptance that the earth is not at the center of the universe, that matter has wave-like properties, and that species evolve, required the letting go of core beliefs to the contrary. Unlearning is not easy because vested interests in the established order will resist changes that diminish their importance.
Turner says, with a twist of Keynes’ famous statement, that ‘practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist’. Turner warns that ‘the great danger lies with the reasonably intellectual men and women who are employed in the policy-making departments—who tend to gravitate to the dominant beliefs of economists who are still very much alive.’ Economists have acquired greater power than any other academic discipline to shape national and international policies. They are sitting on a pedestal they do not want to get off.
James Galbraith says, in The End of Normal: The Great Crisis and the Future of Growth, that economists have redefined human experience into a special language limited to concepts that could be dealt with inside their established model. A core idea of the prevalent paradigm of economics is: humans are rational, self interested beings. Another core idea driving economic policies is: markets must be made free to enable self-interested individuals and corporations to fulfill their material aspirations and produce more economic growth. Galbraith says, ‘Any refusal to shed the larger perspective—a stubborn insistence on bringing a broader set of facts or a different range of theory to bear—identifies one as “not an economist”. In this way, economists need only talk to one another. Enclosed carefully in their monastery, they can speak their code, establish their status rankings and hierarchies, and persuade themselves and one another of their intellectual and professional merit.’ Thus, echoing Kuhn, Galbraith describes symptoms of a science stuck in an old normal.
Economists, envying the power of physicists, who develop theories with which they can make very accurate predictions, have become too much enamored of numbers. Robert Lucas, who received the Nobel Prize in economics for expounding the ‘rational expectations’ view of human behavior, referred to a theory as something that can be put on a computer and run. Many economists insist on equations and numbers because that is all that computers can compute, whereas economists should study human behavior as it is, not as as they find easy to model.
Isaiah Berlin says in his treatise, ‘On Political Judgement’:
“All socially engineered systems of formal order are in fact subsystems of a larger system on which they are ultimately dependent, not to say parasitic. The subsystem relies on a variety of processes—frequently informal and antecedent—which alone it cannot create or maintain. The more schematic, thin, and simplified the formal order, the less resilient and more vulnerable it is to distortions outside its narrow parameters.”
Human beings and social systems are driven by emotions, egos, and desires for dignity and power—drivers that are not easy to quantify, but must figure in any accurate model of reality. Historians and other social scientists have been studying these forces for a hundred years and more. Economists had stripped them out of their computable models, and were slipping behind other social disciplines in their ability to explain reality. Now some economists, with their recent treatises on the roles of identity and emotions in the decisions that people make (e.g. George Akerlof’s Identity Economics and Richard Thaler’s Misbehaving: The Making of Behavioral Economics), are stirring up uncomfortable debates amongst economists.
Economists are behind the curve because, as Kuhn explained, the letting go of an established paradigm in any science in the face of new evidence is not easy. Shifts in power, and egos and emotions, make it hard for rational people to endorse new ideas even when there is enough evidence. Perhaps some economist should try to model all the forces at play amongst economists, as economics lets go of its old ‘normal’ and struggles to acquire a new paradigm that can describe a world of normal humans.