Complexity and Community are crucial for rethinking economics

What could society look like if we do economics better?

Do mine eyes deceive me? I came across this post by Evan Davies on the BBC website, where he blogs about the changes taking place in economics. For those fond of the TL;DR, he says that economics has been, and still is, in need of a radical overhaul, given that most economists did not foresee the 2008 financial crisis, and that economics has not addressed its flaws in the decade since. Davies sets out the “two Cs” that make “neoliberal” or orthodox economics models risky (to put it mildly), and these are Complexity and Community. The short version is that people are Complex souls who live in Communities. Well, duh! Some of us have a been banging on about this for a while now.

Davies is clear not to make a straw man of mainstream economics though. And this is an important point. Microeconomics – the small-scale interactions between actors – has been remarkably successful in boiling down our collective lives into theories, formulae, and models that guide economists towards understanding how we act (and then nudging us in the right direction to make better decisions). But macroeconomics – the larger scale stuff that includes GDP, interest rates, international trade and investment and so on – tends to draw on the microeconomic theories and scale them up. But as we all know from experience, the more people you include, the more complicated it becomes to plan anything. And that’s before you start on complex interaction patterns across communities and societies.

Why have things started to change now? As I wrote in a previous post, change occurs gradually. Many successful careers have been built on the status quo of neoliberal or neoclassical, orthodox economics. The core of the academic economics community has developed, advocates, practices and teaches this approach. So revolutions, as in most areas of life, tend to be the exception. When we start to question the entire shape and direction of a discipline, there are myriad interests at play that all need to be reoriented. The mainstream journals, senior economists, and general momentum is geared towards neoclassical theory, and its implementation as neoliberal economic policy. In short, we are steering an oil tanker rather than a Mini Cooper.

Secondly, neoliberal economics is plugged into and reflected in the political mores of the day, and neoliberalism in politics remains in the ascendancy. A theory of economics that retreats from and questions this is bound to raise eyebrows. Perhaps then, eleven years might be a relatively short timespan for the reorientation, or evolution, of a discipline.

So what changes are actually happening now? The past decade has seen a wave of literature questioning the type of society we want to live in, both locally and globally, and the type of economics that might realise this.

But there are more recent projects turning explicitly to the way we do economics and its role in society that are much more exciting. The NIESR has a project underway Rethinking Macroeconomics, which is ESRC funded. The IFS is launching a project looking at inequality in the UK and targeting questions like the kind of society we want (a particularly timely question in the light of the most recent UN Report citing poverty as endemic in the UK). And then there are the centres rethinking traits of orthodox economic theory like the Paul Woolley Centre at LSE, the full title of which is “The Paul Woolley Centre for the Study of Capital Market Dysfunctionality”. The Centre essentially asks what happens if the frictionless markets featured in economic models suffer from, well, friction.

But what alternatives are there? If you’re familiar with some of my previous posts, you’ll know I’m a fan of socio-economic and econo-socio-legal approaches that take economics back into the social sciences. There are myriad alternatives though within these disciplines, including relational work, actor-network theory, community lens, network analysis, systems analysis, and many more. Zooming out somewhat, historical, geographical, psychological and anthropological approaches can also contribute to an understanding of economics as it really is performed in the real world.

But, why should we care? To make a bold, and controversial statement, economics is usually one cause of most social issues facing us today. What do I mean? The rise of populist politics caters to the anger and frustration of the “have nots” in society (economics). Austerity as a response to the financial crisis enacts neoliberal economic theories (economics). The lack of living wages and the rise of insecurity, the precariat, and the gig economy has resulted from technology and a reluctance of government to intervene based on neoliberal economic theories about the free market (economics). Climate change and global warming continue unabated because of the economic consequences of actions to tackle environmental issues head on (once again, economics).

In short, if we want to get society right, we need to get economics right. And that means a retreat from the belief that there is one “right” way of “doing economics”. It means recognising (or re-recognising) that economics is about how people act and interact. And that we do not always act rationally, or even in our best interests. Until economics models and formulae reflect this, we are left with a hollowed-out version of economics that cannot reflect the full complexity of real life. And this is something we all pay the price for. A broader, richer understanding might help us spot the next financial crisis looming on the horizon.

The Science of Economics? What Works, and How Much…

We do seem to be talking more about economics – what it should do and look like. But there is still a whiff of revolution about calls for the discipline to be more evidence-based and, well, scientific. This article, by Philip Aldrick in the Times yesterday, argues for more careful scientific approaches, and this is worth noting. Of course, in the natural sciences, this would be taken as read. Drugs need to be extensively trialled before they are sold and used to treat disease in humans. But for some reason, in the social sciences, theory and ideology have the ability to shape policy just as much as evidence.

Aldrick’s piece cites two studies launched by Nesta, a UK Innovation think tank, roughly seven years ago. The first was a retrospective review of the effectiveness of business clusters; do small businesses do better when they are closely located and can share location and labour advantages? The second was a randomised controlled trial on whether tax relief for small creative companies worked. The results of the studies were not their most important findings however.

For the sake of finishing a story, the first study proved relatively inconclusive, and could not find any clear correlation between clusters and growth. The second study found that tax and financial incentives were helpful in the short term for small creative businesses, but after 12 months any advantage had faded.

So, what was the main impact? The reason these two studies are remarkable are for their illustration of research methods. While retrospective reviews – generally the majority of most empirical work in the social sciences – can only look for correlation, randomised controlled trials (RCTs) can go deeper, further, and can identify causative factors. In other words, we can target specific factors and identify why things happen. This is important because it means we can be more scientific about what works, how it works, and why. And this means we can begin to base policy on evidence rather than theory. RCTs also offer a way of measuring the extent of policy impacts. By having a test group and a control group, we can gauge the extent to which a policy really makes a difference. And that means we can evaluate whether a policy is financially and economically viable. So, RCTs offer a way of seeing not only what works, but how much.

Why is this news? Similar to other recent posts on here, there is increasing discussion of economics and how the discipline can be improved in the mainstream media. Aldrick’s argument is that economics – both the research and the formulation of policy – can and should be more scientific in its approach. And to this end he calls for more RCTs and longer term studies testing causation before policy is enacted. The government has launched the Business Basics Fund with Nesta to carry out trials investigating, among other things, productivity. UK productivity lags behind that of other countries, attributed generally to poor management practices. But how can management practices be altered to improve productivity?

Questions like this lend themselves readily to RCTs where different techniques can be trialled in comparison with a control group. Nevertheless, there are questions of macroeconomics that are not suitable for trials. We cannot test interest rates or tariffs, for example, against control groups. And this remains a problem for the larger questions tackled in macroeconomics, where theory remains a significant influencer of policy.

Calls for greater use of careful empirical data in shaping economic, legal and social science policy is not new though. Economic sociology, economic sociology of law, and sociolegal approaches have long stressed the need for analysis and understanding to be based firmly in the real world, on real data, and about real people. Increasing access to big data and AI could enhance this. As Aldrick states, “Economics is a social science. Why not make it more scientific?”

A call to arms? Or just another wave of frustration with the status quo?

In the years following the 1929 crash, economists responded with a flurry of new and innovative ideas to better understand the bigger questions of how the economy works. Keynesianism, over the decades, came to be shaped more by the political mores of the time than any true adherence to what Keynes actually wrote, while Hayek’s free market theories present questions that we are still grappling with.

There have been other flurries of activity calling for “better economics” over the decades, and the 2008 financial crisis sparked another wave of calls for a deeper and more accurate understanding of what is actually going on. Clearly, while microeconomics might have given us the answers to some questions, macroeconomics has a way to go in understanding how the world works. But really, since 2008, what has actually changed?

“Very little” appears to be the general answer to this. There are several reasons here. In academia, the way your research is assessed and the way that promotions are awarded tends to come down to publications that support, rather than challenge, the mainstream (more on this later). In business, monopolies are unlikely to campaign for better antitrust regulation and enforcement. And we have a generation of politicians who have been taught (indoctrinated in) orthodox, mainstream economics and have been told that this is the only way to do economics and that it works. But there are calls for diversity, plurality and different approaches appearing.

I thought it might be helpful to set out some of the institutes and organisations that have appeared since the financial crisis calling for a rethink of economics. In the UK, Promoting Economic Pluralism (PEP) aims to change the way economics is taught in universities, and sets out an ambitious accreditation for pluralist economics teaching that it aims to have up and running by 2020. The blog for the group can be accessed here, and charts some interesting developments, seminars, and movements that have the common purpose of changing the way we do economics.

Other research programmes include “Rethinking Macroeconomics” at the National Institute of Economic and Social Research (NIESR) in London, which has secured ESRC funding for a project looking at how we could do macroeconomics better.

In the US, the Institute for New Economic Thought sets out to challenge the dominance of mainstream economics by funding research, engaging in public dialogue and driving forwards a new way of thinking about economics. Their goals are listed on this page.

Both institutes are engaged in highlighting and tackling the crisis of conformity in economics – in the way it is taught, the way it is practiced, and the way it is thought about in academia. The conformity within academic thought is more of an institutional problem, as this touches on publication, promotion, and professionalism within academia.

The problem here is that to progress as an academic you have to publish, preferably in the “top” or most prestigious journals. Obviously, if you’re trying to do something innovative or outside of the mainstream box, or even worse trying to tear down the existing box and build a new one, it is unlikely the more prestigious mainstream journals will accept your paper for publication. They have strict criteria for what they accept, and usually this means conforming to mainstream standards and not challenging or undermining the entire field. The publication industry actually reinforces the mainstream way of doing things, and in economics, that means reinforcing methodologies and frames that led us to the financial crisis.

As I mentioned in the previous post, there is a lot to be said here for greater education. Not just in universities on macroeconomics 101 courses, but more generally and broadly. We need a much higher level of economic literacy across the board, so that society is able to engage with – and more importantly challenge – economic ideas, plans, models and conclusions. This needs to happen hand in hand with an expansion of economics methodologies and approaches, and an appreciation of economics as a social science that is about perfectly imperfect and irrational people.

We all need to hope that the voices currently calling for diversity and plurality are more successful this time than previous waves of soul searching have been.

Is “economics” society’s operating system?

Is economics society’s operating system?

Is economics now society’s default, or de facto, operating system? And what does this mean? I heard this mentioned in passing on the radio the other day in another context. But it struck me as a really useful and interesting analogy to the role of economics in society, and the values and goals that we subconsciously prioritise.

An operating system is system-wide software that manages computer hardware and software resources, and which provides common services for computer programmes. It operates as a base on which all other functions rely for resources and access – it sets the rules of the game. Similarly, we can see economics, in particular neoclassical economics, as performing a similar function within society, although widely unrecognised and largely subconsciously. It does this, as I suggest below, through setting the rules of the game as well as providing the vocabulary and grammar that we use to talk about the game.

Kathleen Fitzpatrick’s piece in the Times Higher Ed this morning, on the impact of competition and marketization in higher education, perfectly summed up some of the issues of economics-as-operating-system, but in the specific context of higher education.

Fitzpatrick writes that while friendly competition can be helpful, “when the competitiveness that fuels excellence and prestige becomes based in the logic of the market, universities lose sight of their true purpose”. In a detailed and thoughtful piece, she argues that excellence in academia and higher education has embodied the norms of the market, and competition between academics, between faculties, between institutions and between fields of research has become the main means of determining achievement, excellence, and promotion. The metrics that are used to determine success – publication in the right place, impact, and so on – are based on orthodox, or neoclassical economics and the assumptions, biases and norms contained therein.

Fitzpatrick asks what we could achieve instead if we moved from competition to collaboration within faculties and within higher education more generally. What could we achieve by articulating our goals and values and determining excellence in relation to the achievement of those goals and values rather than against one another?

Fitzpatrick’s argument relates to higher education, which is in a state of flux at the moment given the questions surrounding its funding and the role of higher education in society more broadly. The answer is, of course, not quite so simple, as to challenge or step outside of the mainstream competitive framework inherently makes oneself “uncompetitive”. Funding and prestige are therefore potentially sacrificed – a leap into the unknown that so far, only the University of Ghent has been prepared to take.

In other words, the system perpetuates and reproduces itself, while being almost impossible to step outside of. However, within the sphere of higher education, there is some level of awareness of the metrics, competition, and implications of this on career progression, wellbeing and industry more broadly, even if there is no clear or simple solution.

But the article raises broader issues that relate to my research, and the comment about economics – particularly neoclassical economics – functioning as a de facto operating system throughout society. The difference here is the general lack of awareness about the way that neoclassical economics shapes the way that society functions. Even within economics as a field of study and research, there is a generalised monoculture.

We can point to economics notions like competition and a belief in the free market, ways of measuring (GDP, for example), profit maximization, and so on, as having pervaded social consciousness and public discourse to such an extent that they guide and influence policy making even tacitly. By effectively fixing the rules of the game, and even the way we talk about the game before playing it by supplying the vocabulary and grammar, economics functions as a social operating system. And the sooner we are more aware of the impact of this, the sooner we can begin to challenge its effects.