Economics as a Social Science: An Approach to Nonautistic Theory

9. Summing Up

CHAPTER 9 Summing Up [It is my] belief that in the present period economics as a practical art is ahead of economics as a science. —t. j. koopmans. Unless economics explains how the real economy works, it is not a science. Science is concerned with reality. To the extent that economics is a successful practical art it is, in fact, economic science. Empirical economists have often acquired a better understanding of the economy by dealing with the problems of the real world than can be gained from current economic theory. Economic theory can do better and secure a more effective grasp on the real economy by focusing on the real world. The National Bureau of Economic Research (NBER) organized a ‹eld project on sources of productivity change in industrial companies, and Martin Feldstein, president of NBER, reported rapturously on this unique venture into the real world: When I have described this project to non-economists, they were invariably surprised that the process of visiting companies, looking at production , and asking questions is an unusual part of economic research. It seems like such a natural thing to do. But as economists all know, it is unusual. We economists are generally accustomed to getting our insights by reading economic literature, going to seminars, and thinking hard about problems. We elaborate these insights in more or less formal models and then sometimes test these theories with aggregate statistics or micro data. But we rarely go and look and ask—I think that is a pity. Looking and asking provide insights and suggest hypotheses—and can shoot-down wrong ideas—in ways that go beyond introspection and reading. (2000, iii) The lesson that to theorize about the real economy it is useful to actually look at it is one that I hope more theoretical economists will take to heart. As a ‹rst step and the ‹rst lesson after escaping from autism, it is necessary to accept that because of the dif‹culties inherent in all measurement and because economics is concerned with human adaptive and reactive activity it can never be precisely accurate. The best it can do, and it is suf‹cient, is to be roughly accurate. 173 Second, while economics can contribute to helping other social sciences in doing their job, economics also needs to call on the resources of other disciplines to help it understand the economy, for “the part of economics that is independent of history and social context is not only small but dull” (Solow 1997b, 54). Finally, and this has been the main thrust of this book, in interfacing with the real economy theory needs to modify its fundamental assumptions to make them more realistic and it needs to discard the canonical and misleading hypothesis of “equilibrium,” replacing it with the more accurate and less polarized concept of “outcome”—which carries no baggage of the implication that it is necessarily desirable in itself, that it will persist, and that if disturbed it will reassert itself. The economy is an adaptive and complex but not a stable, balanced, or unchanging system. There is no ‹xed point, no stable equilibrium, toward which the economy is moving or to which it returns when it is disturbed. Everything is in the process of change away from the present and toward an unknown future. Change is the very essence of the capitalist market system ; it is not only the result but the engine that drives the system and the growth of the economy. The self-centered self-interest of neoclassical theory, as a positive description and normative prescription, should be replaced with Adam Smith’s interpretation of self-interest as including regard for others. In addition to being affected by needs for food, shelter, sex, comfort, and enjoyment, human beings also crave recognition by others as being worthy of respect. People have various needs: to feel useful, to work toward an ideal, to avoid social shame, to live up to societal and community expectations , and to have prestige and power. Human beings are more likely to be satis‹ed with acting “reasonably” (i.e., with bounded rationality, using rules of thumb, or satis‹cing) rather than driven by a maximizing hyper-rationality. Most transactions do not conform to the assumption of perfect rational maximization. The closeness of results in a transaction to perfect rational maximization, ceteris paribus, is likely to vary directly according to: (1) The size (or importance) of the stake (2) The degree of professionalism or specialization of the agent (3...