Back in 2000 The Economist ran an article titled “The Future of Economics” (4 March 2000, p. 80). It was largely a gloss on a symposium on the same from the Journal of Economic Perspectives (vol. 14, no. 1, Winter 2000). The authors acknowledged that economics was a faltering field. Setting aside the proposition that economics may simply have run it’s course and be into its dotage of diminishing returns, the article considers two possibilities for a way forward:
David Colander of Middlebury College, in an article that looks back on the present from an imagined 2050, blames the current discontent on the orthodox general-equilibrium model that underlies most of today’s economic theory. He favors a shift from the current approach, which has been called “loose-fitting positivism” (propose a model consistent with standard assumptions, then test it), to one based on “loose-fitting pragmatism” (forget about canonical principles, just search for patterns in the data).
Such an approach, he says, would be consistent with “the rise of complexity science within the scientific community generally.” Researchers sitting at their computers, subjecting data to a withering barrage of statistical analysis, would still hope to come up with laws of a sort, or regularities at any rate. But these “laws” would be regarded as provisional and ever-shifting: indeed, the claim is that changeless underlying patterns do not exist. Complex systems expand and evolve; even at the most fundamental level, these patterns are temporary. But whether this approach could still be called “economics” is debatable.
The second approach is much easier to reconcile with traditional methods. Its most celebrated exponent is Richard Thaler of the University of Chicago, who has also written a paper for the symposium. Mr. Thaler agrees that the canonical principles of orthodox theory have led economics astray, but he believes these mistakes can be put right. He seeks, in other words, a tighter-fitting positivism. You improve the fit above all, he would argue, by putting a more realistic account of human cognition at the center of the theory.
Orthodox theory famously assumes that people are rational. In reality, they are not. On the other hand, they are not crazy, or crassly incompetent — in other words, their behavior is not random. If economics could try harder to recognize that people try to be rational, but in certain, often predictable, ways fail to be, the positivist approach would have a better foundation. In essence, what Mr. Thaler calls for is a marriage, or at least much closer cohabitation, between economics and psychology.
I have thought of this article frequently since reading it back in 2000 when it was first published. Given the spate of books along these lines, especially the second, I’d have to say that this was one of the more perspicacious articles that I’ve ever read.
The first approach is an example of Petabyte Age type thinking, eight years before Wired put it on the cover. But of course it is an idea that had to incubate in the rarified world of advanced theoreticians for years before any eruption into the popular conscience. The main offering in this area would be Steven Levitt and Stephen Dubner’s Freakonomics (2005), though their book is not a fully atheoretic inquiry so much as putting of large questions to the test of large data sets. More to the topic would be Ian Ayres’s Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart (2007), though the fact that Mr. Ayres used the very methods he describes in his book to arrive upon a title casts a great deal of doubt on the soundness of said methods.
As for the build a better model of the economic corpuscles approach, it seems to have advanced along far enough that it is now also ready to be packaged up for mass consumption. And of course the psychologists have much more lucrative options in publishing than the mathematicians and computer scientists.
Judging by some of the key phrases in the Economist article (the predictably irrational stuff) I was pretty sure that they had in mind Dan Ariely’s thinking, published as Predictably Irrational (2008), but it turns out that Richard Thaler is, along with Cass Sunstein, the author of Nudge (2008). Rounding out the most omnipresent trio is Tim Harford’s The Logic of Life: The Rational Economics of an Irrational World (2008). Also on the list of offerings along this line would be Ori and Rom Brafman’s Sway: The Irresistible Pull of Irrational Behavior (2008) and Michael Shermer’s The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics (2007).
So that’s the future of economic study. Either a discounting of human rationality in favor of the system effect of irrationality or allowing rationality to drop out in favor of the system effect of economic thing-in-itself.