The Future in Economics
“For the last half-century, the world's leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith's "The Wealth of Nations," embodies the beauty, simplicity and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.
This educational approach stems largely from the sensible idea that a framework for thinking about economic problems is more useful to students than a ragbag of models. But it has become burdened with another, more pernicious notion. As departures from the Arrow-Debreu model become more realistic, and thus more complex, they become less suitable for the classroom. In other words, "real" microeconomic thinking should be left to the experts.”
Paul Seabright raises a common conversational issue among economists as examiners of their students, at least as I see it, in standard teaching assignments. There is nothing like a formal model to supply examinable content. As the degree course moves from first to final year, they search to find a "reliable"and assured way to sort of the chaff from the wheat, and to grade tightly among the wheat.
Arrow-Debreu general competitive equilibrium models are in this set of suitable “tough” tests. The student who persistently asks questions of the model’s relevance to the real world is suspected of innumeracy and marked down as unsuitable for economics. In the 1970s, I published "Mathematics for Innumerate Economists" (Duckworth) to address the needs of students in danger of being left behind or, worse, dropping out. The numerate student who appreciates the beauty of the maths and its poetic description of an imaginary world is marked up for potential membership of the elite.
These "the Emperor is naked” moments expose nascent fault lines in the so-called the proud boast that “economics is a hard science” along with physics (though physicists are known to smile indulgently at the assertion). At least, theoretical physicists theorise about the behaviours of sub-atomic particles that bear some clear resemblance to their real behaviours, as shown in the work of today’s winner of a Nobel Prize, Professor Higgs (Edinburgh University).
Nobody has shown, nor probably ever will show, how the GE in a real economy conforms to the extra-subjective fantasy of its predictions that are claimed for it. Yes, I know that Nobel Prizes were awarded for the “proofs” of GE, and no doubt the prize-winners were of the highest scientific quality, but did/can GE theory ever past the tests of experience? Where Professor Higgs is different is that his Nobel Prize was awarded only after the particle was located by experimental work. Meanwhile, Professor Hawkins awaits, literally at death’s door, because his work on Black Holes cannot be verified experimentally.
The plain fact (endlessly verified by observation) is that “the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions” is how the economic world operates. I do not believe that economists do best by turning to non-complex modeling of economies, or the parts therein, that are unreal beyond measure, to the sacrifice of trying to understand how economies in human societies have emerged and evolved in history, both ancient and modern.
I have noted several authorities dismissing Adam Smith’s Wealth Of Nations on the grounds that it is far too long (!) and allegedly could be reduced in size and improved in readability, by a competent graduate student. Without being cheeky, I have recommended to such impatient, narrowly educated, “know alls” that to understand economics it is necessary to research and understand how the economy got to where it is. As to where it is going, I also recommend that they step aside from the prediction business.
Economics is not like physics – the future of humans in societies is unknowable, whereas the physics of plant Earth even up to several million years ahead is knowable, at least in outline.