– Hayek made a very sensible
remark when he said, “I don’t think there are
any laws in economics, “there are only patterns, “and we have to learn to
recognize the patterns.” And I think that’s exactly right. Our job is really to try and
pick up the sort of trends and patterns that are
happening, but not to say, “I’m going to analyze the situation “and tell you where it’s going.” Just to try and watch it and
with some luck guide it a bit. Alan Kirman. I come from now from
(speaking in foreign language) in Paris but for many years
I was in Aix-en-Provence where I set up a research
group in economics but which became too conventional
so I ran away to Paris. (chuckles) The representative agent
as you know is a person who in some sense represents a population in the sense that his
choices, his actions, can be thought of as
typical or as summing up everything that the population is doing. Unfortunately, for many
reasons, you cannot do that in a system like the economic system, so it’s true in many physical
and biological systems too what happens at the top
is not in some sense what happens to the average
particle at the bottom. In an ants’ nest, you don’t
want to look at the typical ant to find out how the ants’
nest is organized and working. What you really want to know is are these new developments in some sense undermining the idea
that we should start from the individual and then move up? What we need to know is
how these individuals not only act in their own
interests and so forth, but also how they interact,
and it’s the latter part that’s important because macroeconomics, macroeconomic behavior,
emerges from this interaction. And that’s the big difference between studying an individual
and then claiming that the whole thing will
act like the individual. And behavioral economics
tells us that people are more complicated
than we used to think, but still for most people,
they believe that, well, there are biases and
so forth but underlying is this rational person. Pareto once said, “I think
people spend some of their time “taking non-rational decisions
and the rest of their time “rationalizing them.” And I think that that is a
clue to how people do behave so we shouldn’t try and
believe that everybody has this underlying rationality and we just nudge them back to it. No, I think they don’t, and
we can’t expect that of them. Our idea that after
2008 everything would be put on the table and we
would redo everything has actually not happened. The profession has a
huge amount of inertia. You will hear these words
like “back to normal” or “converging to a reasonable
state” and so forth. So the idea is we were
somehow then not really knocked off the path, but
the system will somehow come back to the path. And we’re not too worried about the fact that maybe the system
automatically all the time is generating these movements and so we should worry about that and not worry about how
it will return to normal. I think normal is a word we
should really ban for economics. I think there’s too much of
a tendency to look around for something smart from
psychology or from physics and then say, “That’s a really great idea, “I will reframe that
in terms of the things “I know how to do, and
then I will use that.” A lot of people have used,
quote, “psychological insights” but they don’t spend much of
their time actually working with psychologists because
multidisciplinary work involves learning the
other person’s language, working with them, and we
don’t see a lot of that. We do see a lot of people
picking up on ideas and maybe a little bit of collaboration, but I don’t think it really
penetrates our discipline, I wouldn’t say that
our discipline has been fundamentally changed because
of multidisciplinary work and it should be. Because the world is changing
and we can’t separate out so neatly economics from the other parts. We should be taking account of sociology, we should be taking
account of anthropology, and we should be taking
account of physics and biology. All those things are important. But I don’t see that really
happening at the moment. If you go into any big economics meeting and you ask yourself, “Am I
really now seeing something “innovative, something new?” What you’ll find is that
people, first of all, they want to impress you. They want to impress you with how technically competent they are. Then they tell you the story
about what they’re doing. But what they should be
doing is tell you the story about what they’re doing and then say, “Why do I need these techniques to do it?” And I think we haven’t got to that, and that’s probably our
fault because we promote young people on the
articles that they publish, but where do they publish the articles? They publish articles in
journals who are edited by the guys who have a huge
investment in human capital in the old way of looking at things. So I think it’s very difficult
to make a breakthrough. There are interesting breakthroughs, but typically, if you look at networks, networks are really important
and we understand that. But what do people say? Network analysis, really
important, very interesting, but it’s not incorporated
into, for example, standard macroeconomics. And it should be because
networks can produce collapses and Andy Haldane, the chief economist at the Bank of England,
has spent a lot of time explaining that, and he did
genuinely interdisciplinary work with Bob May, an ecologist. So it is possible and I
think that gave real insights into why networks can cause collapses. Those sort of insights
are really important, but I still don’t see enough
of that to make me think, “Oh, wow, economics is finally changing.” If we really wanted to change economics, I think people first of all
would have to get rid of a certain number of,
let’s say, basic ideas. For example, equilibrium as we know it is, I think, a handicap
for us because we’re always looking for convergence to an equilibrium, and that of course is an
inheritance from Walras. But what we are in is a
system which there are lots of interactions, feedbacks, and so forth. You don’t have a system
which is in equilibrium in any normal sense. What it is doing is evolving,
changing all the time. And we shouldn’t be
thinking of it as a system which is somehow coming to
an equilibrium, firstly. Second thing, people still
somehow seem to have the idea that many things are reversible, and in that sort of situation,
open-ended, evolving, things are not reversible,
and so, for example, Brexit. What do people say? “We want to get back to
where we were before.” But you can’t turn the clock back. Things have changed and the whole system is now different from how it was. And that’s the sort of world we live in. I work with, he has a quote, Senior Counselor to the New Approaches to Economic Challenges program at the OECD. It’s a fascinating
exercise because you have on the one hand all the
economists, well-trained, they’re picked because
they’re well-trained, and you have on the other hand the people who represent the countries, who take this stuff back and
tell their political masters what they should be doing. And I think the real
problem is that people A, want something which is pretty much immediately applicable, and
what do we show them in NAEC? We show them different ways
of thinking of the systems, an evolutionary, adaptive
system, and then they say, “How does that enable us to make policy “in the next couple of years?” And you say to them, “Well,
if you think of the system “like that then you may
begin to think that you can’t “write down something and
say, ‘This will happen.’ “You have to say, ‘Well,
we’re gonna try this.'” And I think a wonderful
example of how we should behave was Janet Yellen, and
people got very frustrated because she wouldn’t tell you
what she was gonna do next. She would say, “Well, we’re
gonna watch and see what happens “and then we’re gonna react.” And I think that’s exactly
how we have to behave. But we show all these new developments, agent-based modeling, graph theory, and we explain to people
how you can model them and the younger economists
are really interested and catching on, but
people who have been there for a long time writing
reports on Sri Lanka or some other country, they
really don’t want to know. They want to go back to their office and carry on writing about
Sri Lanka and so forth. So it’s an interesting game
and I think that the OECD has taken a very courageous
stance to actually push this sort of thing. And it’s working well in the sense that many people now come and participate. They used to come and listen, it was like going to the cinema, go and hear this interesting seminar and then we go home and do our work. So I think the ideas are changing. They’re permeating the OECD. It’ll take time but maybe
change is more likely to happen there than it is in academia. ‘Cause in academia the
system is so closed, it’s so much of a tribe, a church, that it’s more difficult to change there than it is in an international
organization like the OECD. If I was faced with a student who says, “I’m going into economics,” I would say to him, “Try not
to get discouraged early on “because what you will be
told is, ‘This is the way “‘our models are, and this is the way “‘you have to learn about it,'” and then he says, an intelligent student, “But that’s nothing like
the world that I see, “it’s nothing like the world. “I wanted to know about other things.” So you should not get
discouraged by the fact that you’re told, “Well,
after a couple of years “of careful teaching of techniques “you will be able to do this.” Because the students who
get chased away by that are exactly the students
that we would like to keep. Because intelligent,
open-minded students run away because they’re told they’ve
gotta learn the techniques. And so you wind up with a bunch of guys who learn the techniques. And I would say to them, “There are many “interesting problems in economics “and don’t hesitate to ask questions, “to challenge the people who teach you, “and say, ‘Is this really
what it’s all about?'”

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11 thoughts on “Why We Need a Multidisciplinary Economics”

  1. Sure, but doing the deterministic psychology game with individuals is debated, not wanted (by some/those I‘ve learned from), too complicated acc. to many.
    Additionally, I wonder how ‚things’ will develop if we can create the perfect model for human behavior.

    Otherwise, very interesting dude. Thank you for that guys.

  2. It is predictable what most people will do with a wallet full of credit cards. Just say charge it while using someone else's money. Advertising promotes household debt.

  3. Economists have always been stooges for the Corporatocracy. And they turned their backs on the future 40 years ago.

  4. bomba-deers need sharp teeth as much as sharp tongues (which often cannot be distinguished from the other, more so when which is more toxic is also debatable – like Komodo kid lizard lion band toothbrushes)

    That pressure sellers use to peddle wears, playing to fears of bad breath. To keep tracks taut as well as power trains down right paths, to prevent dented railway sleeper dogs, from whisking whole carriages off into fairy lands.

    The fruity stink serving as as counter weights that pull mesh potato lever lovers that trigger royal flushes, out into open markets. For bargain hunters and spare parts scavengers to scoop up.

    Pepsi cola sea pipers, that plug into ice-cream walls, still selling thumb nail peep hole pictures. Leaving leaking quantity site surveyors in a lurch. Swamping nations in scuba stink, So that everyone can black mail each other, inside tight knit beaver dams where everyone can pad nests with siphon bird bath water

    Good becayse threats keep tubes tight, for trawling lines that haul in more junk

  5. As Cornel West would say, it's not good enough just to be SMART, you've got to be WISE. The cult of smartness is what led to the current state of the world. Wisdom will take us out of it.

  6. 'This “equilibrium” graph (Figure 3) and the ideas behind it have been re-iterated so many times in the past half-century that many observes assume they represent one of the few firmly proven facts in economics. Not at all. There is no empirical evidence whatsoever that demand equals supply in any market and that, indeed, markets work in the way this story narrates.
    We know this by simply paying attention to the details of the narrative presented. The innocuous assumptions briefly mentioned at the outset are in fact necessary joint conditions in order for the result of equilibrium to be obtained. There are at least eight of these result-critical necessary assumptions: Firstly, all market participants have to have “perfect information”, aware of all existing information (thus not needing lecture rooms, books, television or the internet to gather information in a time-consuming manner; there are no lawyers, consultants or estate agents in the economy). Secondly, there are markets trading everything (and their grandmother). Thirdly, all markets are characterized by millions of small firms that compete fiercely so that there are no profits at all in the corporate sector (and certainly there are no oligopolies or monopolies; computer software is produced by so many firms, one hardly knows what operating system to choose…). Fourthly, prices change all the time, even during the course of each day, to reflect changed circumstances (no labels are to be found on the wares offered in supermarkets as a result, except in LCD-form). Fifthly, there are no transaction costs (it costs no petrol to drive to the supermarket, stock brokers charge no commission, estate agents work for free – actually, don’t exist, due to perfect information!). Sixthly, everyone has an infinite amount of time and lives infinitely long lives. Seventhly, market participants are solely interested in increasing their own material benefit and do not care for others (so there are no babies, human reproduction has stopped – since babies have all died of neglect; this is where the eternal life of the grown-ups helps). Eighthly, nobody can be influenced by others in any way (so trillion-dollar advertising industry does not exist, just like the legal services and estate agent industries).

    It is only in this theoretical dreamworld defined by this conflagration of wholly unrealistic assumptions that markets can be expected to clear, delivering equilibrium and rendering prices the important variable in the economy – including the price of money as the key variable in the macroeconomy. This is the origin of the idea that interest rates are the key variable driving the economy: it is the price of money that determines economic outcomes, since quantities fall into place.

    But how likely are these assumptions that are needed for equilibrium to pertain? We know that none of them hold. Yet, if we generously assumed, for sake of argument (in good economists’ style), that the probability of each assumption holding true is 55% – i.e. the assumptions are more likely to be true than not – even then we find the mainstream result is elusive: Because all assumptions need to hold at the same time, the probability of obtaining equilibrium in that case is 0.55 to the power of 8 – i.e. less than 1%! In other words, neoclassical economics has demonstrated to us that the circumstances required for equilibrium to occur in any market are so unlikely that we can be sure there is no equilibrium anywhere. Thus we know that markets are rationed, and rationed markets are determined by quantities, not prices.

    On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?

    Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.

    However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.

    Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.

    The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.

    It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.

    Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen.'


  7. The "representative agent" is not even the biggest problem. If economies actually behaved like mainstream models suggest when all agents behaved like the average of their group, then at least that insight would be meaningful, like studying an ideal gas in statistical mechanics/thermodynamics…
    But the fact is, that mainstream macroeconomic theory of all colors already violates fundamental accounting principles thereby negating the possibility of ever including monetary processes. At best – and that's highly debatable – it able to incorporate its function as unit of account… but the function as a means of payment is directly excluded by fundamental flaws in the foundation of macroeconomic theory. We can improve our understanding of agent behavior all we want, it's not gonna terribly matter because if basic rules of the game that cannot be violated by human behavior at the operative level are already violated by the logic of the foundation of all macroeconomic theory, then no deeper corporation with psychologists, sociologists, physicists or biologists will bring about new deep insights. Unless, of course, we physics minded folks recognize these accounting errors and start defining proper fields (stocks) and their corresponding flows.
    Economists employ a terminology that sounds all to familiar (e.g. consumption, interest, investment, income etc.) but the way they use it in the equations of their fundamental "balance mechanics" cannot be mapped onto quantities we actually know from real monetary economies… It is utter rubbish.

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