Is there a crisis in Economic Theory?

2 PM, Seminar Room, Department of Economics and Management, via Inama 5

Speaker: Alan Kirman, University of Aix-Marseille III

Abstract

During each economic crisis criticisms emerge as to the use of current economic theory in guiding the economy. Already some 10 years ago, Greg Mankiw, when Chairman of the Council of Economic Advisers said,

“The fact that modern macroeconomic research is not widely used in practical policymaking is prima facie evidence that it is of little use for this purpose. The research may have been successful as a matter of science, but it has not contributed significantly to macroeconomic engineering.”

The purpose of this talk is to argue that we should change our basic framework and view the economy as a complex adaptive system. This would change the way in which we model the economy and, perhaps more important, make economic policy. In this approach, simple individuals acting in what they see to be their own interest and influencing and being influenced by others can generate very complicated and unpredictable aggregate phenomena. Collectively the individuals may be able to get more done than they can achieve alone. We can take lessons from social insects, and “Swarm intelligence”. Nobody would try to understand the organisation of an ant-hill by looking at the "representative ant".

The important lesson is that aggregate behaviour is emergent and such emergence may yield results which are far from what we might have expected when looking at the individuals and their behaviour. As soon as we start to consider situations in which individuals interact directly with each other and the results of their interaction feed back into the system, the evolution of that system may display quite unstable behaviour.

Taking this point of view, would necessitate a paradigm shift. Economics has, over time, tried to produce a coherent model to underpin the dominant laissez-faire liberal approach. But we have never proved, in that model, that left to their own devices, the participants in an economy will self-organize into a satisfactory state. This is an assumption. Complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self-equilibrate and will undergo endogenous crises. Economists should concentrate on the emergence of certain patterns.

In addition, empirical studies show that the institutions around which the economy and society have organised themselves play an important role in the evolution of the system. We cannot afford to ignore the characteristics of these institutions and this is particularly true of markets.

Some economists such as Colander and Kupers have suggested that we may be able to keep our basic framework and to nudge the system into “good” basins of attraction. A more radical view is that there are no fixed basins of attraction; these change with the evolution of the system and it is illusory to believe that we can choose good basins. We may be able to recognize and influence the emergence of certain states of the economy, but we are far from Leon Walras’s dream of economics as a science like astrophysics.