In 2012, the father of transaction cost economics and Nobel Prize winner Ronald Coase wrote in an article titled ‘ Saving economics from the economists ’, “The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate… In the 20th century, economics consolidated as a profession... the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economisation and giving up the real-world economy as its subject matter.”
Highlighting the growing irrelevance of institutional economics in the innovation-driven world of today, he further states, “Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship.” The reality of the economic world, unlike physical reality, is not bound by the constants of inert matter and time-invariant laws. For instance, Mt Everest was present more or less in its present state, much before it was identified as the tallest mountain, and will continue to remain there in the future.
Economic reality, on the other hand, is extremely transient, as it is determined by human beings with free will. Even half a century ago, nobody could have predicted the phenomenon of the ‘internet’, and that a few technology entrepreneurs and organisations would have higher valuation than oil companies. Yet here we are, and the world of technology is still changing at the speed of thought, fundamentally altering the nature of economic reality with itself.
Change in focus
Academic economics, however, refuses to alter itself accordingly. This, even after the economics profession had a near death experience during and after the 2008 economic crisis, as policy deadlock ensued following inherent disagreements between Keynesian advocates of increased government funding and neo-classical champions of austerity.
Economic textbooks still presume that 100-year old models or theories are well-equipped to describe the current global economy. In fact, the entire economic learning system has become extremely limited and isolated in its scope, failing to include the diverse determinants that affect actual economies today. Focusing more on its scientific and mathematical aspects, economists have ignored the effects of politics, culture, societal structures and even religion on economic activity. This is all the more ironic given the fact that like economics, all of these domains are human constructs that constantly interact and interlink with each other to affect change.
A proper understanding of how the world goes around cannot be had if only the economic aspect is isolated for study. We cannot understand Donald Trump’s trade policy or the Euro area’s economic woes purely through an economic perspective. These are not economic problems alone. They have political, sociological and cultural dimensions.
Recently, Finland introduced phenomenon-based learning in its grade schools. It is a multi-disciplinary form of learning where students analyse a particular topic, concept, idea or event, such as Brexit, from different perspectives (geographical, economical, mathematical, social, political, linguistic, and more). Such a holistic approach allows students to remain in touch with the real world, offering them an optimal approach to develop relevant 21st century skills in an active learning environment.
Implementation of new tools
Come to think of it, the over-dependence of economics and economists on theory and old empirical methods is gradually declining. It peaked during the 1970s-90s, where it was enough for economists just to show up, state their assumptions, solve the subsequent math problem and get some complicated looking equations to call it a day. This era of ‘theory without any real world relevance’ is over, with its last gasp coming some 20 years ago with the theory of social learning and herd behaviour.
Economists such as Daniel Kahneman, Richard Thaler and Vernon Smith showed that human behaviour and its effects on even the simplest of markets do not work the way economists long assumed. Even the most fundamental economic assumptions, such as that of a rational consumer, were debunked by the scientific experiments conducted by Colin Camerer, who scanned people’s brains and confirmed that non-rational decision-making processes were indeed at work.
While the accuracy of these processes is debatable, no one can deny the fact that these alternative approaches are indeed the way economics should adapt to survive and stay relevant in the future. Economics needs to be an interdisciplinary enterprise which recognises that the economy is an open system in interaction with other socio-political forces.
Trying to understand the real-world just by using the lens of economics as it exists today gives an incomplete and distorted picture which, when used by policymakers, can do more harm than good. As it is said, ‘In economics, the questions never change, only the answers do.’ It is time to accept this and employ different tools to find these new answers.