New Economics Curriculum?

A New Economics Curriculum?

The WEA have critiqued conventional economics curricula and laid out some considerations for curricula that would be more suited to current circumstances, but not been explicit about its content. Here are some of my thoughts.

I think the core concept should be about some form of rationality. According to Wikipedia:

Rational choice theory uses a specific and narrower definition of “rationality” simply to mean that an individual acts as if balancing costs against benefits to arrive at action that maximizes personal advantage.

The most reasonable interpretation that I can think of is that they act as if – conditioned on the information available – their estimates of costs and benefits are approximately ‘objectively correct’ (in some sense to be specified). In stable situations with lots of data there are reasonably objective statistics, such as means, but it is less clear if the notion of objective correctness can be given any meaning otherwise.

A.N. Whitehead is well known for his work on the foundations of science. He introduced the notion of epochs that are in some sense stable, for which the narrow concepts of rationality and of probability make sense. His key point is that these epochs are bounded, contrary to the implicit assumptions of neoclassical economics. General Equilibrium Theory, for example, explicitly models economies as if they resulted from systems with definite rules acting on definite states, with only subjective lack of certainty, as represented by probability. The neoclassical view rests on some interesting mathematics that implies that probability distributions not only make sense in the short-term, but capture all of the uncertainty, forever. But Schumpeter takes a contradictory view:

Capitalism […] is by nature a form or method of economic change and not only never is but never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion […] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

There is a choice here. One could think of a long-running economy as part of a single system, but then there are currently unknowable parts of the system that will come to be critical, and conventional rationality seems wrong in implying that one should discount the possibility of novelty. On the other hand, one could suppose that at least some novelty marks a new epoch and hence a significant change in the rules, breaking the previous narrow rationality. Thus one cannot have both large epochs and conventional rationality without denying all novelty.

If we think in terms of ‘systems’, then the short-term problem is to thrive in the current system (perhaps in exchange for work) while the longer-term problem is to anticipate possible future systems, anticipate how to thrive in them and (possibly) to influence which comes about. In some cases we may anticipate sequences of new systems, hopefully ending up with a desirable one. The concept of systems naturally leads to the following mode of analysis.

Systems are often thought of in terms of interacting entities. These interactions may be positive or negative, but for a system to survive all its components must be either freely available (as in the air that we breath – for a while) or be supported by other components in the system. These support relations typically form self-supporting cycles. Sometimes a link may be weakening (as when air becomes polluted or oil becomes expensive) or there may be an opportunity for a new link (such as a new source of energy). Some of these changes would be routine, others would have significant consequences and hence mark a new epoch, generally settling down to a new system. Thus in principal it may be possible to identify potential new systems and the changes that may inhibit or promote their realization. Thus, in some cases, it may be possible to think beyond the current system.

Game theory provides an alternative view. An epoch is governed by specific rules, and hence corresponds to a specific game. But the rules of the game can change, as when coalitions re-form. Coalitions are generally self-supporting, in that typically every member must think that it is in their interest to remain in the coalition, and not switch. Such balances of interest may change, so players need not only to be able to play the current game, but also to anticipate changes in coalitions and possible new games. In games involving coalitions, such as real economies, the neo-classical notion of independent actors maximizing personal value is not credible: someone needs to value the coalitions unless there is some hitherto unidentified force-field that keeps them together.

More generally, it is not necessary that dynamic systems should proceed rapidly from definite system to definite system, or from definite game to definite game. Post 2007 it seems that economies can bumble along without ever definitely settling into some definite system/game. Turing (a great-student of Whitehead) investigated a variation on the classical assumptions. Instead of considering that there is a real, definite, but only approximately known system, he considered the possibility that there might be ‘objectively real’ ‘noise’ and showed that this gives rise to qualitatively different types of behaviour. Often the noise moves the behaviour between similar systems, so the effect is minor. But Turing shows that there can be ‘critical instabilities’ that break up epochs/systems/games. Going through such an instability there are significantly different potential future systems, as previously described. Which is realised will depend on the noise. But in addition, there is also the possibility of never settling in to a potential epoch/system/game, at least for a long while. One could recover the neoclassical view by supposing that economies were actually deterministic, and the noise was only apparent, but then there would seem little point in studying economics. If the noise is real then the ability to make predictions through a critical instability are strictly limited, but on the other hand such times of instability are when, with understanding, we can make a difference.

Dave Marsay

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