Why is economics a load of rubbish?

OK, it isn’t really. But an event at City Hall today threw up some difficult lessons for economists from other academic disciplines. After a massive crisis in the global financial system, which was triggered by and hugely deepened a cyclical recession, it’s a pretty easy time to have a dig. So here they go!

Paul Ormerod kicked off with lessons from physics. The big one was: use empirical evidence and discovery to test, falsify and improve theories. In economics, evidence has very little status whilst most theory is developed in ignorance of evidence. His pet example was the work done on networks and effects such as herding (e.g. fashions and fads), which has barely scratched the surface of classical economic theory.

Luc Bovens gave a fascinating dissection of the financial crisis using Aristotle’s Nicomachean ethics. Who is morally culpable for the crisis, he asked? In the tradition of all good philosophers he gave a number of different accounts and arrived at four possible conclusions for one example theory – rational choice theory. Either it needs relaxing, because it was interpreted too strictly; or it fails to model real-world risk so should be supplemented; or it fails to model the way people really act, so should be supplemented; or it actively destroys public virtues by encouraging us to follow selfish vices instead, so should be junked.

Next, Avner Offer told us about three different historical perspectives. The first is economic history, the main lesson from which is that particular theories are developed in particular epochs, and that they may be applied in new epochs where things have changed and so may not be empirically justified. The second is from conventional history, which assumes that most human attempts fail in contrast to the centrality of equilibrium in economics. Historians also understand the importance of narrative, or story telling, to understand and communicate contextually complex things, which challenges the economist’s over-reliance on deterministic algorithms. Finally, the history of economics tells us that theories should, and generally do, change all the time. But Adam Smith’s invisible hand is a sad example of an as-yet-unproven aside becoming doctrine, an article of faith.

Finally, Neil Stewart rounded proceedings off with a psychological smackdown. Assume, he advised, that the brain is basically stone age in its approach to economic decisions. We are fundamentally irrational, and so the idea that we “maximise utility” is a load of nonsense. Ouch. He described some brilliant experiments his team have carried out to find out the weird and wonderful ways that our brains defy rational expectations and suggested economists should heed the influence of memory, perception, emotion, attention, and social and environmental influences. Above all, he pleeded, conduct experiments to test assumptions!

So there you have it, folks. If you understood any of that hopefully you’ll be as perplexed and excited as the audience, whilst mindful of the folly of following one economic perspective as though it were gospel.