Economists are always wise after the event

Keith Hudson

Apart from a few general rules of thumb that have been perennially true — such as “there is no such thing as a free lunch” or “demand matches supply” or “stick to doing what you’re best at” or “division of labour . . . is more efficient” or “necessity is the mother of invention” — the present canon of economic scholarship was of no use in anticipating the credit-crunch of 2008 nor is it of any use in explaining how the big trading blocs of the world — America, Japan, Europe and China — can be set going again in a way that would give us any sense of assurance and continuity.

The basic problem is that although economics is about man’s activities, most economists have only a simplistic idea about man’s basic nature.  In her article in this week’s New Scientist, “After the crash, can biologists fix economics?”, Kate Douglas describes this succinctly:

“The problems start with Homo economicus, a species of fantasy beings who stand at the centre of orthodox economists.  All members of H. economicus think rationally and act in their own self-interest at all times, never learning from or considering others.”

Kate Douglas’ article was, in fact, an attempt at a summary of a recent conference but the best she could do is to quote conversational apercues.  The conference was at an Ernst Strungmann Forum at the Frankurt Institute for Advanced Studies earlier this year to which had been invited a few dozen of the leading anthropologists, ecologists and evolutionary biologists in the world, together with some eminent economic mavericks such as Daniel Kahnman, Richard Thaler and Alan Kirman,  The last co-chaired the conference along with David Sloan Wilson, arguably the world’s leading evolutionary expert of how man acts at different levels of collectivity.

Nevertheless, despite the undoubted brilliance of those invited to the forum, no alternative ‘school’ of economics emerged from their discussions.  And the reason is that man is nowhere near as simple as is assumed in the Homo economicus model.  He is selfish but will also act generously on other occasions even at a loss to himself. He will not necessarily buy goods for rational reasons but frequently only because his social superiors are doing so.  He will be easily carried away by the emotions of large collectives but would express quite different views if in a small group.  For almost every powerful instinctual feeling he might display in some situations, he will express its opposite in a different one.

In short, man’s nature can hardly be described at all, except as a compendium or repertoire of contradictory instincts from which only one response is displayed at any one time according to speciific circumstances and also according to the interests of the particular group he happens to be associated with at that time.  To make any forecast that doesn’t leave him twisting in the wind with embarrassment afterwards, an economist will have to take into account a great deal more detail than those he does now with broad financial figures and a simplified list of motivations and incentives

In short — in my view — the whole subject of economics might as well be left to attenuate and ultimately atrophy in much the same way as sociology, philosophy, political ideology, and literature are all wilting at the present time in academia — in their heyday all plausible enough in retrospective discussion but not sophisticated enough to give future guidance — and all to be subsumed in the coming years in the far more powerful subject of evolutionary studies because every detailed tenet there has to be subject to testing and possible disproof.  Economics, sociology, philosophy, political ideology, and literature are all wise after the event but can’t act as relevant commentary in the present and for the imminent future.

2 thoughts on “Economists are always wise after the event

  1. The inability of economics to forecast accurately the future is to be expected for the very simple fact that all economic models, just like any other model, are based on a set of axioms. Unfortunately for economics, these assumptions end up describing a ficticious world i.e. a set of circumstances that is different from the actual ones. That cannot be avoided since economics deals with human behaviour and such behaviour changes quite often.

  2. I agree about economics and social sciences, but Philosophy is different. (I majored in it in the 60s, and took graduate courses in the early 70s) There are various branches of philosophy, and various ‘schools’ of thought (approaches/assumptions) to those branches. If one is in speculative philosophy including theology and approaches positing absolutes as given, then I would classify that as akin to Social Sciences. However, there are analytic schools which are at base skeptical of assumptions of absolutes. I argue in that realm about assumptions of definitions in language, about fallacies including internal inconsistency and demands for evidence of non-existence. (The Negative Fallacy) The disciplines involved in this realm are more like mathematic and science than traditional social science.

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