An exciting time
In the first, Philip Ball (whose book Critical Mass I reviewed for the other FT) offers a painless overview of the discontents of modern economics -
It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way with cool, omniscient rationality. The theory fails the basic requirement of a science that it can explain or predict the real world, and has evidently failed to make that world any fairer or more pleasant.
The usual defence is that you have to start somewhere. But mainstream economists no longer appear to consider their core theory to be a ‘start’ at all. The tenets of neoclassical economics are now so firmly embedded that economists who think it is time to move beyond them are cold-shouldered. These ideas have hardened into a rigid dogma, and to challenge them is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity doesn’t exist.
There is no other ‘science’ in such a peculiar state, where a demonstrably false conceptual core is sustained by inertia alone. This core, appropriately known as the Citadel, remains impregnable while those inside fashion an increasingly baroque fantasy. But as Alan Kirman, a progressive economist, has said, “no amount of attention to the walls will prevent the Citadel from being empty.”
In the second, Paul Ormerod responds to the "strong criticism on the letters page" apparently attracted by Ball's piece. While he agrees with most of Ball's criticisms, he notes the contributions of researchers such as Daniel Kahneman and Vernon Smith (who I interviewed a few years ago) in introducing the first cracks into the old dogma -
They created, almost on their own, the discipline of experimental economics. Standard economics merely assumes that people act in a particular way. Mr Kahneman and Mr Smith tested how people really do behave.
Their conclusions are a devastating blow to the postulates of the rational decisionmaker. In general, people gather limited information, reason poorly and act intuitively rather than rationally.
Encouragingly for someone approaching the end of their advanced Economics studies, Ormerod notes:
The challenge of reconstructing economic theory virtually from scratch makes it an exciting time to be an economist. It is attracting eminent researchers from other disciplines, such as mathematical sociology, computer science and statistical physics. One from the last of these, Doyne Farmer of the Santa Fe Institute, has a model that replicates many of the subtle features of prices on the London Stock Exchange. But far from assuming that traders are rational, he postulates that they have literally zero intelligence. Yet the model works very well.
The problem, and it is a very big one, is that most economists continue to act as if very little has changed and that the rational agent postulate remains generally valid.