Mainstream Economics' Flight from Complexity

Abstract

By the late 1800s, Walras' mathematical model of a market system and Marshall's detailed description of individual markets captured the thought processes of most economists, and since then the quest for mathematical precision and the emphasis on mechanics over realism have further narrowed the scope of economic analysis. This paper examines several specific cases where overly simplistic and unrealistic models dominate despite evidence that the real world is more complex and fundamentally different from what the models suggest. For example, macroeconomists simplify their analysis by requiring mathematically tractable microfoundations of macroeconomic outcomes. Econometric practice has shifted toward single equation estimation models and away from systems of equations, often arbitrarily using instrumental variables to isolate simple relationships from systemic influences. Even economic growth theory uses static aggregate equilibrium models to explain inherently complex dynamic relationships. Among the probable causes of mainstream economics' retreat from real world complexity is the power of culture, which pushes economists to close ranks around unrealistic paradigms. These tendencies are reinforced by the active urging of wealthy interests who protect their privilege in the status quo of monopoly capitalism. The paper concludes with a call for heterodox economists to actively push our field out of its unrealistic and unproductive methodological box by undertaking all economic analysis from a holistic perspective and clearly positioning economic discussions and issues in the interconnected economic/social/natural spheres of human existence. In short, heterodox economists must undertake the difficult task of pushing our profession to respect and appreciate complexity.

Keywords::

• complexity
• heterodoxy
• modeling
• history of thought
• culture

Acknowledgements

The author would like to thank two anonymous referees for their helpful, insightful, and sometimes very stimulating comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Economics has clearly moved in the opposite direction from interdisciplinary research groups such as the Santa Fe Institute, for example.

² The author thanks one of the referees for this paper for urging him to emphasize how forcefully Walras' (1874) opening section convinces the reader to accept the economy as only a set of markets. Many neoclassical economics textbooks today define economics as “the study of the market economy.”

³ Moore (2003) provides an interesting account of how John Neville Keynes orchestrated a “compromise” that effectively put neoclassical theory ahead of historical theorizing and any discussion of real time in economics in Britain.

⁴ What we refer to as the Coase theorem does not accurately reflect the writings of Coase (1960), and, as Medema (2011) points out, Coase objected to the use of “his” theorem to justify ignoring externalities in economic analysis. Such a convenient pro-free market misinterpretation also plagues the work of Jensen and Meckling mentioned in the next paragraph.

⁵ See, also, the papers in the volume edited by Cate (2012), especially Cate's “Introduction.”

⁶ See, for example, the leading econometrics text by Greene (2008).

⁷ See, for example, Chapter 5 of Van den Berg's (2012) Economic Growth and Development.

⁸ Davidson (2009), for example, captures the close link between the neoliberal doxa and the neoclassical habitus when he notes that the many explicit and implicit assumptions behind the neoclassical paradigm effectively give a logical life to Smith's ([1776] 1976) metaphor of the invisible hand or Say's Law, which in turn supports the idea that self-interested individual actions automatically translate into socially optimal outcomes.

⁹ For example, the neuroscientists Lebreton et al. (2009) find that the portion of the brain that is stimulated by individual rewards and pleasures is the same portion of the brain that is stimulated by an individual's share of social rewards and pleasures. Decety and Lamm (2006) found that humans' ability to conceptualize another person's situation often actually diminishes one's own firsthand experience relative to the urgency of processing feelings of pain and happiness experienced by others. And, happiness studies such as Blanchflower and Oswald (2004), which use survey data in regression equations explaining human happiness, show that in both the UK and the USA people are substantially less happy when, all other things equal, they are unemployed, not married, older, male rather than female, retired, or they have lost their spouse. Frey and Stutzer (2013) include survey articles that cover many other countries and further confirm that people value marriage, status, respect of others, and participating economically in their societies.