Failed Economics: Tyranny of Mathematics and Enslaved by the Wrong Theory

The strange world of modern economics

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By David Sloan Wilson

When it comes to my economics training, I’m a late bloomer. My primary training is in evolutionary theory, which I have used as a navigational guide to study many human-related topics, such as religion. But I didn’t tackle economics until 2008. I had just helped to start the Evolution Institute, the first think tank to formulate public policy from a modern evolutionary perspective, and one of our benefactors asked me what evolution might have to say about the financial crisis that had broken upon the world.

At the time I had no way to answer this question. Economic jargon mystified me—an embarrassing confession, since I am fully at home with mathematical and computer simulation models. Economists were very smart, very powerful, and they spoke a language that I didn’t understand. They won Nobel Prizes.

Nevertheless, I had faith that evolution could say something important about the regulatory systems that economists preside over, even if I did not yet know the details. After all, financial markets and other regulatory systems are products of cultural evolution, based on psychological processes that evolved by genetic evolution. That’s my area of expertise. If I can’t connect the dots between my area of expertise and economic theory, then something’s wrong—and it might be on their end, not mine. I therefore took up the challenge of answering our benefactor’s question, although I must admit that I felt like the gentle hobbit Frodo making his way toward Mordor.

Fortunately, I had a Fellowship of the Ring to rely upon. The study of human genetic and cultural evolution has become a wonderful blend of scientists from all disciplines, including economics. Some of my closest colleagues are highly respected economists, Herbert Gintis, Samuel Bowles, and Ernst Fehr, who have acquired an advanced knowledge of evolution, publishing widely in the best scientific journals in addition to the best economic journals.

I already knew from their work that the main body of modern economics, called neoclassical economics, was being challenged by a new school of thought called experimental and behavioral economics. Proponents of the new school had captured the public imagination with books such as Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein, Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely, and Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by Nobel laureates George Akerlof and Robert Shiller. Sunstein had recently been appointed President Obama’s regulatory czar, so the new school of thought was having an impact on public policy.

According to the new school, neoclassical economic theory is based on a false conception of human nature and must be replaced with a more realistic conception. As Thaler and Sunstein put it in Nudge, economic theory and policy needs to be based on “Humans”, not “Econs.” I cheered when I first read these lines and looked forward to learning about the new improved conception of human nature, which presumably would be informed by evolutionary theory. I was disappointed. My colleagues such as Herb, Sam, and Ernst confirmed my own impression: They appreciated the relevance of evolution but were a tiny minority among behavioral and experimental economists, who in turn were a tiny minority among neoclassical economists. Modern evolutionary theory was having virtually no impact on currently economic theory and policy.

The more I learned about economics, the more I discovered a landscape that is surpassingly strange. Like the land of Mordor, it is dominated by a single theoretical edifice that arose like a volcano early in the 20th century and still dominates the landscape. The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory. Yet, efforts to move the theory in the direction of common sense are stubbornly resisted.

There is plenty of dissent among economists, and some of the best are working the hardest for change. The folks who award the Nobel Prize in economics don’t like the edifice that much either, and often add their weight by awarding the prize to the contrarians. Yet, even with all that talent, effort, and the prestige associated with the Nobel Prize, the edifice remains standing in one spot like a volcano adding to its own height and spewing out toxic policies. Why does it resist change? One reason is ideological, as we shall see, but another reason involves path dependence. Neoclassical economics provides an outstanding example of the “you can’t get there from here” principle in academic cultural evolution. It will never move if we try to change it incrementally. It must be replaced wholesale with a more realistic conception of human nature.

Economists were much more closely attuned to common sense and evolutionary theory before the volcano erupted. Adam Smith (1723-1790) observed that people following their narrow concerns somehow combine to make the economy work well, as if guided by an invisible hand. Today we use terms such as emergence and self organization to describe this phenomenon. It is spectacularly demonstrated by social insect colonies. The fabled honeybees and ants definitely don’t have the welfare of their whole colony in mind. They’re just responding to local environmental cues in ways that makes their colonies work well as a whole. They could respond in an infinite variety of ways, most of which would not contribute to the success of their colony, but natural selection has winnowed the responses that work at the colony level.

The same point can be made for the cells in our bodies. They don’t have the welfare of our whole body in mind; they don’t even have a mind. They’re just responding to local environmental conditions by switching genes on and off in a way that leads to the welfare of the collective. There is an infinite variety of ways that cells might respond to local environmental conditions, but natural selection has winnowed the ones that work at the level of the whole organism. When Adam Smith invented the metaphor of the invisible hand, he was saying that human economies are like bodies and beehives in this regard.

Smith did not say that people are entirely self-interested. That would come later, from his followers and disciples. He had a sophisticated and nuanced conception of human nature that he described most fully in his book The Theory of Moral Sentiments. According to Smith, people have genuine concern for others in addition to themselves. They have a sense of right and wrong that leads to the establishment of norms enforced by punishment. They are interested in their reputation as much as their monetary income, and so on. Shakespeare would have felt comfortable with Smith’s conception of human nature. People still responded primarily to their local social environment, so the invisible hand metaphor remained apt, but their preferences couldn’t be collapsed into a single generic concept of self-interest.

Charles Darwin and Alfred Russell Wallace were influenced by Smith and other economists, most famously Thomas Malthus (1766-1834), in their formulation of evolutionary theory. Economists, in turn, were influenced by the new theory of evolution. Thorstein Veblen (1857-1929) even wrote a paper in 1898 titled “Why is Economics not an Evolutionary Science?” At the dawn of the 20th century, economics was both closely attuned to common sense views of human nature and receptive to the new theory of evolution that it had influenced. Then the volcano erupted.

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The volcano was the laudable attempt to place economics on a mathematical foundation using physics, not biology, as the inspiration. There was nothing sinister or self-interested about this effort. It made perfect sense at the time. Physicists such as Isaac Newton (1642-1727) had succeeded in describing the laws of physical motion in the precise language of mathematics. Wouldn’t it be magnificent to do the same thing for the laws of human society? That became the goal of Leon Walras (1834-1910) and other economists, as recounted by Eric Beinhocker in his excellent book The Origin of Wealth: The Radical Remaking of Economics and What it Means for Business and Society. Here is how Eric describes the zeitgeist of the times:

Following Newton’s monumental discoveries in the seventeenth century, a series of scientists and mathematicians, including Leibniz, Lagrange, Euler, and Hamilton, developed a new mathematical language using differential equations to describe a staggeringly broad range of natural phenomena. Problems that had baffled humankind since the ancient Greeks, from the motions of planets to the vibrations of violin strings, were suddenly mastered. The success of these theories gave scientists a boundless optimism that they could describe any aspect of nature in their equations. Walras and his compatriots were convinced that if the equations of differential calculus could capture the motions of planets and atoms in the universe, these same mathematical techniques could also capture the motion of human minds in the economy.

It’s easy to imagine the allure of this goal. If economics could be placed on a mathematical foundation comparable to physics, it would achieve a status greater than any other human-related discipline such as sociology, anthropology, psychology, or philosophy. Biology held no appeal as a source of insight because it wasn’t mathematical. Walras appeared to achieve this goal in his masterwork titled Elements of Pure Economics published in 1872.

Walras’s main challenge was to provide a mathematical demonstration of the invisible hand. If individuals maximizing their local concerns really do self-organize into well-functioning economies, then top-down regulation by government leaders is unnecessary. The government merely needs to stop meddling and the economy will run itself. Walras succeeded in providing a mathematical proof of this possibility, but only by making certain assumptions–lots of them.

Anyone who builds theoretical models, as I do, knows how many simplifying assumptions must be made for a model to be mathematically tractable. The world described by the mathematics becomes detached from the real world, not because of any ideological bias, but just so that you can grind through the equations. It was at this point that economists began to rely upon a conception of human nature that defies the dictates of common sense, even before we get to the more refined dictates of psychology and evolutionary theory.

The people who inhabit the economic models, often referred to as Homo economicus, are driven purely by self-regarding preferences. Mathematically, this means that they care only about maximizing their own interests without reference to anyone else’s interests. What I want cannot depend upon what you want. Exactly what I want can be broadly interpreted but operationally it is usually assumed to be my monetary economic interests. The single assumption of self-regarding preferences banishes a large fraction of real-world human preferences from the mathematical kingdom.

Next, people who inhabit the mathematical kingdom are infinitely wise in pursuit of their self-regarding preferences. Lest you think that I am creating a straw man, here is how Richard Thaler and Cass Sunstein, two economic insiders, describe it in Nudge: “If you look at economics textbooks, you will learn that Homo economicus can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi. Really.”

Once again, these absurd assumptions were driven not by ideological bias but by the tyranny of mathematical tractability. The theory couldn’t be pushed in the direction of common sense because it would become impossible to grind through the equations. Yet, the theory commanded enormous prestige because it represented the ideal of a science of economics comparable to the science of classical physics. Abandoning the ideal would knock economics off its pedestal and back among the ranks of the other human-oriented sciences such as sociology, psychology, political science, and anthropology. Heaven forbid!

As I delved deeper into the history of economics, I saw it as a struggle between those who pledged allegiance to the mathematical edifice and those who chafed against its rule, including Thorstein Veblen way back in 1898.

Here is a tale of three Nobel laureates to illustrate what I mean.

Nobel laureate #1 is Maurice Allais, a French economist who received the prize in 1988 and is most famous for a paradox that he discovered in the 1950’s. As an example, imagine that you can choose between getting one million dollars with certainty vs. one million with a 89% chance, nothing with a 1% chance, and five million with a 10% chance. If you’re like most people, you’ll opt for the sure bet. Now you’re given a second choice between nothing with an 89% chance and one million with an 11% chance vs. nothing with a 90% chance and five million with a 10% chance. If you’re like most people, you’ll go for the 5 million, even though you have a slightly higher chance of getting nothing. These decisions reflect the fact that when real people make decisions, they are sensitive to both the average outcome and variation around the average. So are other animals. My evolutionist colleagues have performed dozens of experiments on birds and other creatures showing that they will choose either risky high-payoff options or safe low-payoff options depending upon how well fed they are. Their flexible behavior with respect to risk makes perfect sense from an evolutionary perspective.

If people behave the same way, then where’s the paradox? The mathematical edifice of economic theory needs the assumption of mean expected utility to remain tractable. For those who have pledged allegiance to the mathematical edifice, risk sensitivity becomes a paradox. Never mind that real people behave that way, it seems like common sense, and also makes perfect sense from an evolutionary perspective!

Let’s pause to savor the irony of the situation. A purely fictional world defined by mathematical equations acquires so much authority that it becomes the real world for its adherents. Aspects of the real world that cannot be related to the imaginary world are so dumbfounding that they are labeled paradoxes by the faithful. Here is how Allais described his struggle with the faithful in a 1987 essay:

For nearly forty years the supporters of the neo-Bernoullian [expected utility] formulation have exerted a dogmatic and intolerant, powerful and tyrannical domination over the academic world; only in very recent years has a growing reaction begun to appear….[The Allais paradox] is fundamentally an illustration of the need to take into account not only the mathematical expectation of cardinal utility, but also its distribution as a whole around its average, basic elements characterizing the psychology of risk.

Does this seem a little bit like religion?

Nobel laureate #2 is George A. Akerlof, who received the prize in 2001 and was elected president of the American Economic Association in 2007. His presidential address was titled “The Missing Motivation in Macroeconomics”. The missing motivation was norms. When I first encountered this paper, I rubbed my eyes in disbelief. Norms? Economists have been primary advisors on public policy and they’re only newly discovering a little thing called norms? What planet do they come from?

Norms don’t exist in the mathematical kingdom because they violate the assumption of self-regarding preferences. When you’re Homo economicus, your preferences don’t depend upon anyone else’s. Norms are all about the coordination and enforcement of preferences among members of a group. Adding norms would require a massive restructuring of the edifice.

Here’s Akerlof’s own diagnosis of the problem from his presidential address, starting with John Maynard Keynes (1883-1946), a giant figure in the field of economics who made the mistake of pledging his allegiance to common sense rather than the mathematical edifice.

But a new school of thought, based on classical economics, objected to the casual ways of these folks. New Classical critics of Keynesian economics insisted instead that these relations be derived from fundamentals. They said that macroeconomic relationships should be derived from profit maximizing firms and from utility-maximizing by consumers with economic arguments in their utility functions. The new methodology …overturned aspects of macroeconomics that Keynesians had previously considered incontestable.

In other words, the mathematical kingdom became the new reality, banishing norms along with risk-sensitive behavior from its conception of human nature. Allais expressed hope in his 1987 essay that the edifice was crumbling but Akerlof was still standing outside the ramparts in 2007.

Nobel laureate #3 is Elinor Ostrom, who was awarded the prize in 2009 and was the first woman to be awarded the prize in economics. I was fortunate to attend a workshop with Lin, as she prefers to be called, a few months before she received the prize, and to work with her up until her death in 2012. If anyone deserves to be called the gentle hobbit who saved the world from Sauron, it is Elinor Ostrom.

To be continued… 

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Adapted from The Neighborhood Project: Using Evolution to Improve My City, One Block at a Time, published by Little, Brown.

2016 January 28

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  • So far – great story. One of my favorite Ostrom quotes is, “if it works in practice it must work in theory”. I am writing a short white paper of the evolution of governance as it relates to sustainability. I can send if interested. Best, Tim

    • X-7

      Greets Tim,
      I’m interested in your paper, can send via contact info found on site below.

      Re “the evolution of governance”; snippet & a link that may interest thee:
      In the transition from hunter-gatherer social structures to the exponentially more complex information architecture of city-states, we added alphabet, legal, monetary and etiquette coding structures to the cultural genome of hunter-gatherers.
      To survive, we need to do this again.
      Bryan Atkins

    • Ajiesh Thuvanoor

      Yes please

  • Pingback: Economics — still in the land of Mordor | LARS P. SYLL()

  • It serms to have passed DSW by that Ostrom understood that the reason these institutions could not be created easily, could easily be disrupted, and took careful effort to maintain, is because she did not reject the core economic element of self-interest. It’s always there at the core of her thought, and the question is about how to create institutions which will manage it appropriately. But that’s not easy to do, and she always emphasized that it was not easy to manage self-interest.

    I think DSW is posthumously drafting her as a footsoldier in his own ideological war. But it’s not her war.

    • robertmkadar

      Do you feel better now that you called someone “ideological”? How about resorting to respectful argumentation and then backing it up.

      Elinor and David worked together for a several years. I was involved in many of their discussions. The two of them have published on this matter – you should probably look it up.

      • ViperRum

        Unless it is true. Ostrom cannot speak for herself, she is dead. She was not opposed to rationality, she was not opposed to using mathematical tools such as game theory. No, what Wilson is writing here is not about Elinor Ostrom as she was, but as he wishes she was. She was a founding member of the Public Choice Society.

        Similarly Akerlof and Allais were not at all strangers when it game to math. Hell, Allais most famous example is a math problem, the Allais paradox. He used over-lapping generations models, growth theory, etc. Akerlof one the Nobel, at least in part, for his Lemons paper, and example of game theory.

        This entire essay is a complete mess of half-truths, untruths sprinkled with some truths. For example, Keynes got into trouble for not hitching his wagon to mathematical economics? Holy crap, Keynes died years before that movement took off, but he did give the “thumbs up” to Sir John R. Hicks and Alvin Hansen who developed the MATHEMATICAL IS-LM models. When Keynes wrote EVERYONE writing in economics stuffed the math in the footnotes or didn’t show it all.

        As for norms…again, holy crap, people like Hayek got there well before Akerlof ever did….like by decades. And Hayek pointed out that norms did not arise out of rational purposeful direction, but evolved over time and were the result of a process that most people didn’t even understand let alone realized it existed.

        So after reading all these essays by David Sloan Wilson I have to wonder…why is he not aware of this? Deliberate obtuseness? Maybe the conclusions Hayek and others arrived at are not to his liking?

        Oh and from that article,

        “Any mechanism that causes the most successful strategies to increase
        in frequency results in the same outcome. In this sense, game theory is strongly
        related to evolutionary theory ( Gintis, 2007, 2009 ).”

        Bad news, that is some serious math going on there. This notion about the evil empire of math…total Bravo Sierra.

        I’m sorry, but David Sloan Wilson has really undermined his credibility here. Especially when you look at his book with Eliot Sober and on page 19 and 20 we get the “mathematical model of altruistic behavior”. Elliot Sober is no mathaphobe. Wilson is clearly pushing an agenda here….

        • robertmkadar

          Don’t think you understand the argument. Wilson isn’t opposing mathematics. Wilson and Ostrom were opponents of using neoclassical economic theory to explain collective action and then building fancy math on top of it… So what if Ostrom was a member of Public Choice? Regarding Hayek – Wilson has written about Hayek elsewhere on the site. Regarding Keynes – look at the quote, it’s from Akerlof. Regarding Gintis – again you are not understanding. It’s not an argument against using math. Regarding Sober and Wilson – again you just don’t get it. He’s not arguing against math. He uses mathematical models all the time!

          • ViperRum

            Maybe he should stop with the Bravo Sierra narrative of Frodo and Mordor then. It is entirely a straw man and he knows it thus it is a liar and he is a liar. Get it?

            And where exactly has Ostrom indicated she opposed neoclassical economics, are you sure she was not in favor of adding to the paradigm, extending it? She was certainly a believer in rational choice theory in political science. These claims that economists are a monolithic group is just an outright…well…lie. The fact that Ostrom and Kahneman won Nobels is actually evidence against Sloan’s nonsense rhetoric, not evidence in favor of it.

            If you go look at the wikipedia page for rational choice theory you get this,

            “Rational choice theory has become increasingly employed in social sciences other than economics, such as sociology, evolutionary theory and political science in recent decades.[8][9] It has had far-reaching impacts on the study of political science, especially in fields like the study of interest groups, elections, behaviour in legislatures, coalitions, and bureaucracy.[10] In these fields, the use of the rational choice paradigm to explain broad social phenomena is the subject of active controversy.[11][12]”

            And when you go to the IDEAS website on economic working papers and articles and search of “evolution” you get over 40,000 hits.

            These ideas are not being ignored, in fact they are making in-roads.

  • Egmont Kakarot-Handtke

    The economist’s hajj from Mordor to Mecca
    Comment on ‘My Journey to Economic Mordor, and the Woman Who Saved Us’

    Always, when economics is in the methodological doldrums it looks around for success stories. In the 1890s Newtonian physics fell somewhat out of favor as archetype and the heterodox economist Thorstein Veblen asked “Why is Economics Not an Evolutionary Science?” The next was Marshall with his famous call for a new methodological hajj “The Mecca of the economist lies in economic biology.”

    Now David Sloan Wilson tells economists “The [neoclassical] edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory.”

    Strictly speaking this is an old hat since J. S. Mill: “The science then proceeds to investigate the laws which govern these several operations, under the supposition that man is a being who is determined, by the necessity of his nature, to prefer a greater portion of wealth to a smaller … Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed.” (1874, V.38)

    The first thing every layman recognizes is that there is something wrong with equilibrium economics in general and with the axiom of constrained optimization in particular. Hence, there have been countless attempts to borrow from Darwinism which seems to be more conversant with Human Nature than economics. Closer inspection, though, showed quickly that all suggestive resemblances between natural and economic evolution remain on the surface.

    “In a recent series of publications, ‘Generalized Darwinism’ has been proposed as a new overarching research strategy that is based on the assumption of a fundamental homology between evolution in nature and the evolution of the economy. The principles of variation, selection, and retention that have been distilled from evolutionary biology by isolating abstraction are claimed to be generally valid. It is suggested to apply these abstract principles as a unifying framework for all evolutionary theories. By a brief reconstruction of the different historical forms of Darwinism we have shown that the identification of these abstract principles with Darwinism is misleading. Moreover, on a priori grounds other principles — non-Darwinian or even anti-Darwinian ones like, e.g., orthogenesis, saltationism, or neo-Lamarckism — could claim a similar plausibility in explaining economic evolution.

    The crux with such allegedly unifying abstract principles derived by isolating abstraction from findings in other domains is that they provide but an abstract hull. In order to become a useful heuristic device, they need to arrive at domain-specific explanation which, in turn, would require to add substance by hypotheses on the disciplinary ‘details’ of actual evolutionary processes, e.g. in the economy. This is, of course, what is done in the first place in a bottom-up research strategy as it has fruitfully been practiced in the development of Darwinism in evolutionary biology. (Levit et al., 2011, p. 559)

    David Sloan Wilson advertises a common sense approach. This, of course, appeals to all economists that have not much more than that. As a matter of fact, Wilson’s approach is fundamentally flawed. The first thing to be clear about is: economics is NOT about psychology, human behavior, sociology, politics, biology, evolution, etcetera. Economics is about the properties and the working of the economic system. All Human-Nature approaches are a detour.

    Because of this, economics has to develop its own methodology and neither copy it from Newton nor from Darwin, nor from chaos theory, nor from complexity theory, nor from anywhere else.

    Where Wilson is right is that neoclassical economics is unacceptable. This, though, is known since more than 140 years.

    Egmont Kakarot-Handtke

    Levit, G. S., Hossfeld, U., and Witt, U. (2011). Can Darwinism be “Generalized” and of What Use Would This Be? Journal of Evolutionary Economics, 21(4): 545–562. DOI DOI10.1007/s00191-011-0235-3. URL
    Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL

    • ViperRum

      Well to some it is known that the constrained optimization approach is unacceptable. The Austrians fought against this for decades, for example. But with Nobels being awarded to people who ARE heterodox it is making it easier for people to explore new ideas and directions that do not fit so easily into the constrained optimization/equilibrium models. This undermines the “evil Empire/Mordor” narrative…it is evidence against it, not in favor of it. Most of science is “conservative” in that new and heterodox ideas face a steep barrier. Look at the work of Lynn Margulis. For years is was considered fringe and just not right. Now, it has been brought into the mainstream. Evolutionary theory itself evolved to accept Margulis ideas, rather ironic. IMO, Hayek had the deeper insight here than Wilson, Hayek seemed to realize that evolutionary like processes were at work all over society. In religion, law and legislation, as well as the economy.

      My beef is that it is not at all productive to use these obviously false straw men to try and push new ideas and new ways of looking at these issues. There is a fundamental intellectual dishonesty in it.

  • Mateo Villalba

    In a chronological way, I would add Douglass North and Ronald Coase between Allais and Akerlof. The New Institutional Economics (NIE) helps to understand the possibilities of an
    evolutionary approach to economics.

    “Existing economics is a theoretical [meaning mathematical] system which floats in the
    air and which bears little relation to what happens in the real world” Ronald Coase

    “We live in an uncertain and ever-changing world that is continually evolving in
    new and novel ways. Standard theories are of little help in this context.
    Attempting to understand economic, political and social change requires a
    fundamental recasting of the way we think.” Douglass North

    Other authors like Mancur Olson have also very relevant material for this purpose.

    Very interesting text of David S. Wilson. I included and cited some of his ideas in
    the theoretical framework of my thesis and some professors complained about
    that. They told me that evolutionary theories and biology have nothing to do
    with economics. After I explain the links between his approach and some
    concepts of NIE they allowed me to keep going. My work was finally approved and

  • Dylan DelliSanti

    Where does Samuelson fit into this narrative? So far, DSW’s story seems to imply that mathematical tractability was (more or less) recruited in service of market fundamentalism, but Samuelson had a lot to do with the mathematization of the discipline, was a pretty big deal, and was by no means a market fundamentalist. And where do the Austrians fit in?

  • Read Dierdre McCloskey’s Bourgeois Trilogy. Please.

    • Jan de Jonge

      Thad. I did read the first part. The Bourgeois Virtues. Very interesting. As much macroeconomics as Weber’s book about The Protestant Ethics. (She is called Deidre, by the way).

  • Jan de Jonge

    DWS writes “The more I learned about economics, the more I discovered a landscape that is surpassingly strange. Like the land of Mordor, it is dominated by a single theoretical edifice..”
    He also writes, at the end of this essay’ “The new methodology …overturned aspects of macroeconomics that Keynesians had previously considered incontestable.” (The new methodology is that of New Classical Economy). DWS apparently does not know the distinction between microeconomics and macroeconomics, although he does know the name of Keynes.
    Let me repeat myself once more (I have told this DWS in an earlier comment). Macroeconomics is concerned with changes in National Income and works with aggregates. It is only because
    microeconomists insisted that an economic theory without microfoundations was not able to explain economic developments that macroeconomics is disregarded and we have all the laments about the homo economicus and all the paradoxes, biases, heuristics and so on, that are rather irrelevant in the domain of macroeconomy but serious matters in the domain of microeconomics.

    • Derryl Hermanutz

      Aggregates emerge from individual actions. Sometimes micro actions that are beneficial to individuals — such as saving the money you earn — are catastrophic to the macro system as a whole. Ths situation is called a fallacy of composition; and with regard to saving is called the paradox of thrift.

      Economic activity is driven by the spending-earning of money. We work to produce stuff that we will offer for sale, for money. As long as the money is continuously spent-earned, re-spent and re-earned, it drives the real economy to produce stuff for sale to consumers.

      But if money-earners save rather than re-spend their money, the economic processes stop. If there is no demand market for your output (people with money are not spending it paying for the stuff you offer for sale), you stop paying out incomes to the workers/suppliers who contribute to your productive processes.

      Standard financial textbooks assume saving funds investments, and under an alternate monetary system that could be true. But in the present world, saving cash under your mattress, or saving bank deposits in your bank account, does not fund anything. Banks fund their lending by creating brand new bank deposits in the borrower’s deposit account. Banks don’t lend or invest their depositors’ savings. Saving money merely holds it out of circulation in the spend-earn economy.

      Even in the savings-funded capital markets financial system, saving does not fund business investment. You buy already-existing company shares in the secondary markets. Share sellers earn your money. The company whose shares are being bought-sold only earns the money when it issues and sells new shares.

      If you save your money, then invest it building new productive capital, then your saving funds your investment. For more than a century, this is how large corporations have been funding their capital expansion and buyouts of their competitors, and buyouts of companies operating in different industries: with retained earnings (profits) that have not been distributed as dividends to shareholders. It is also how small owner/operator businesses fund themselves — with the owner’s savings.

      Most money is bank credit (deposit account money), not government/central bank currency (banknotes and coins; physical cash money). Banks create new credit to purchase borrowers’ new interest-bearing debt. A bank loan creates a new deposit account balance (the money) in the borrower’s deposit account, and a new loan account balance (the debt) in the borrower’s loan account. Borrowers spend the deposit account money and owe the loan account debt. Payees — recipinets of the borrowers’ spending — earn the new deposit account money. The money is re-spent and re-earned, and eventually most of it is earned by savers who “keep it” rather than re-spend (or invest) it. Debtors owe ALL of the deposit account money supply “back” to their creditor banks, as their unpaid loan account balances and bond debts. But debtors can’t earn back the money, because savers have it and are keeping it, not spending it.

      Saving doesn’t fund investment. Saving crashes the commercial bank credit/debt money supply system. It’s an arithmetically flawed monetary system, as monetary reformers have continuously pointed out over the past century. But still, conventional wisdom just “knows” that “profligate” governments issue the national money supply, banks are financial intermediaries who get money from depositors then lend out their depositors’ savings, and saving funds investment.

      Delusion runs deep and strong in the bizzaro realm of conventional monetary economics.

      • Jan de Jonge

        Macroeconomics is dependent on but not reducible to micro actions.
        (see Kim, Supervenience as a Philosophical Concept, in Metaphilosophy, 1990, vol.21)

  • Larry

    The Human Condition …this is where we are all trying to become better than others..
    We can do this by putting others down…(Gossip)
    We can do this by working hard on ourselves (The Human State)
    We can do this by lifting others up…
    Then they will look up to us….
    As long as we are humans ….we will be in all three states at the same time…
    What percent do you want to give energy to in each state?
    All we need to do is move some energy from the Devil State(Gossip)
    And spend more time in the God State (where we are lifting others up…
    If you don’t know people you don’t know economics…

  • QuantEcon

    This is simply not true. It is not the excessive use of mathematics that makes neoclassical economics a wrong paradigm but the inappropriate (and out of date) use of mathematics.

    Mathematical tools and modelling techniques that are used in modern Physics (e.g. complex systems and chaos theory) cannot be used in neoclassical economics by definition (to the best of my knowledge there is not even 1 DSGE model that displays limit cycles!).
    However they are used in other schools of thought such as Post-Keynesian, Marxian, Agent Based Economics, Stock Flow Consistent modelling, etc. FYI, the same schools of thought do use social norms both in theoretical work and modelling (for example, the relative income hypothesis).

    In the end of the day it’s all about the underlying/ontological assumptions of neoclassical economics that are responsible for its failure. Maths is just a tool. You can use it either to maximise a nonexistent utility function or to study the dynamic properties of a macroeconomy.

  • Bob Williams

    How does one join the discussion?

    • Ajiesh Thuvanoor

      u are already in the discussion

  • Bob Williams

    I think I just found out.

  • Jesper Lyng Jensen

    Great article

    New progress in financial risk research provides a fix for some of the more extreme omissions of economic theory.

    By establishing “the financing cost of risk cost”, being the cost it takes to procure the capital to meet a sudden and unexpected capital requirement, we discover a completely new dynamic of economic risk.

    By adding the financing cost of risk, the equbrillium leading to the situation of the highest financial return (highest growth) shifts towards the organised society rather than the liberal individual. This is done by adding theoretical value to Insurance, Diversification, and Capital.

    The work will be released through Palgrave/Springer Nature i December and is titled “Redefining Risk & Return”. The book is based on the two papers:

  • MilkywayAndromeda

    So nice to find this link. Now my “work” is easier. I just have to share the link and I have not to spend time explaining the obvious… David makes it much, much better than myself! Thank you. It would be fun to lunch with him next time I am passing in Oslo.

  • Andres Gomez-Lievano

    Excellent article! However, I agree with others in the comments. It seems the problem with economics is more fundamental: they have the wrong understanding of how science works. I really recommend the paper of Doyne Farmer:
    Farmer, J. Doyne. “Hypotheses non fingo: Problems with the scientific method in economics.” Journal of Economic Methodology 20.4 (2013): 377-385.

  • Liz Connor

    Love the linking of Adam Smith’s ‘invisible hand’ concept with the activities of cells in our bodies. Spot on! Fancy basing a social science like economics on a deliberate misinterpretation of Smith and on a pure science like mathematics rather than on biology. Neoliberalism was doomed from the start!