Economic Theory Is Dead. Here’s What Will Replace It.

The New Economics can enter the post-Darwinian age right now.

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By David Sloan Wilson

Everyone seems to agree that the economics profession had a near death experience in 2008 and either needs to be or has been reborn in a different incarnation. The most optimistic assessments claim that a revolution is already underway based on two developments: 1) A greater emphasis on empirical research; and 2) a different conception of theory.

A thoughtful essay by the economic blogger Noah Smith titled “The Death of Theory” covers the first development. According to his numbers, the proportion of theory papers in the economics literature peaked between 1973 and 1993 and has been declining ever since. He describes the behavioral economics movement as a meteor that hit “the economic dinosaurs”, by which he means the neoclassical paradigm. He concludes by speculating that humanity is reaching “the end of a big Theory Wave” for all topics. Whatever can be gained by big theory has already been realized, so it only remains to dive into the data.

Other commentators argue for the continuing importance of theory, but a different kind of theory. It is only the self-contained system of mathematical equations inspired by Newtonian physics that is dead. In its place is a toolkit of modeling methods that address particular topics and must always be checked against empirical data to remain grounded in reality. Champions of this view include Dani Rodrik, whose book Economics Rules: The Rights and Wrongs of the Dismal Science is comprehensively reviewed by N. Emrah Aydinonat, and Angus Deaton, the newest Nobel laureate in economics (see this perceptive commentary by Justin Wolfers).

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All good, but there is something missing from the internet links that I just provided—any discussion of evolutionary theory. The only uses of the word “evolution” are colloquial and the only reference is to Thorstein Veblen’s classic article, written in 1898, titled “Why is Economics not an Evolutionary Science?”

That’s also my question. For an evolutionist such as myself, the idea that big theory is dead or that big data can be analyzed without a big theory is wacky. Way back in 1973, the geneticist Theodosius Dobzhansky declared that “Nothing in Biology Makes Sense Except in the Light of Evolution.” Since then, evolutionary theory has not experienced a crisis in the same way as economic theory and nobody is saying that it has run out of insights. Instead, it is needed more than ever to understand the tsunami of empirical information that has become available in genetics and molecular biology.

Einstein observed that “It is the theory that decides what we can observe”. The world is so complex that we cannot possibly attend to everything, so a theory—broadly defined as a way of interpreting the world around us—is required to tell us what to pay attention to and what to ignore. Without a theory, we are literally blind. If we up the amount of information that must be processed, then the need for theory to cure blindness becomes even greater.

Models designed to understand particular topics are good as far as they go, but collectively they are like a jigsaw puzzle with a million pieces still in its box. An overarching theory is required to assemble the puzzle. That’s how evolutionary theory functions in the biological sciences. The economics profession doesn’t need something like that. It needs that. The same theory that unifies the study of all living processes can unify the study of our own species, including our economic systems.

Thorstein Veblen got it right in 1898, but the lack of awareness among most of the New Economists is stunning. Here is what Dani Rodrik has to say about evolutionary theory in Chapter 4 of his book:

You may have noticed that thus far I have generally stayed away from the word “theory”. Even though “model” and “theory” are sometimes used interchangeably, not least by economists, it is best to keep them apart. The word “theory” has a ring of ambition to it…Darwin’s theory of evolution based on natural selection is impossible to verify directly and experimentally, in view of how long it takes for species to evolve, though there is plenty of suggestive evidence in its favor.

This places Rodrik’s understanding of evolution just a shade above creationists. He goes on to say that economic models do not have the ambitious pretentions of a theory. Instead, “they are contextual and come in almost infinite variety”. In other words, they are an unassembled jigsaw puzzle and my estimate of million pieces was too low.

Most behavioral economists are nowhere when it comes to evolutionary theory. I got excited when Richard Thaler and Cass Sunstein called for an economics based on Homo sapiens, not Homo economicus, in their book Nudge. Then I searched my kindle edition for the word “evolution” and came up empty. How can economics be based on Homo sapiens without any discussion whatsoever of Homo sapiens as a product of genetic and cultural evolution? Ditto for Dan Ariely’s Predictability Irrational and Animal Spirits, by George Akerlof and Robert Shiller, used the word only twice. In Akerlof and Shiller’s newest book, Phishing for Phools, all seven uses of the word “evolution” are colloquial. They say that their perspective is inspired by psychology but that’s a subject, not a theory. So far, the list of “anomalies” and “paradoxes” compiled by behavioral economists is just another unassembled jigsaw puzzle.

Now for some good news. Starting in the late 20th century, economics started to become evolutionized along with all other branches of the human social sciences. By now there is a sizable number of people from a melting pot of academic disciplines who use evolutionary theory to assemble the jigsaw puzzle for economics in the same way that it is used in biology. For a sample, check out a 2013 special issue of the Journal of Economic and Behavior and Organization (JEBO) titled “Evolution as a General Theoretical Framework for Economics and Public Policy”, which I edited with economists John M. Gowdy and J. Barkley Rosser. Or read Robert H. Frank’s The Darwin Economy, where he predicts that Darwin, not Smith, will be regarded as the father of economics 100 years from now. But why wait 100 years? The New Economics can enter the post-Darwinian age right now.

12 January 2016

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