[OPE-L] Baroque fantasies of a most peculiar science

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Sun Oct 29 2006 - 20:55:15 EST

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Baroque fantasies of a most peculiar science
By Philip Ball
Published: October 29 2006 18:48 | Last updated: October 29 2006 18:48
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 – rational, cool, omniscient. The theory has not
foreseen a single stock market crash and has evidently failed to make the
world any fairer or more pleasant.

The usual defence is that you have to start somewhere. But mainstream
economists no longer consider their core theory to be a “start”. The
tenets are so firmly embedded that economists who think it is time to move
beyond them are cold-shouldered. It is a rigid dogma. To challenge these
ideas is to invite blank stares of incomprehension – you might as well be
telling a physicist that gravity does not exist.

That is disturbing because these things matter. Neoclassical idiocies
persuaded many economists that market forces would create a robust
post-Soviet economy in Russia (corrupt gangster economies do not exist in
neoclassical theory). Neoclassical ideas favouring unfettered market
forces may determine whether Britain adopts the euro, how we run our
schools, hospitals and welfare system. If mainstream economic theory is
fundamentally flawed, we are no better than doctors diagnosing with

Neoclassical economics asserts two things. First, in a free market,
competition establishes a price equilibrium that is perfectly efficient:
demand equals supply and no resources are squandered. Second, in
equilibrium no one can be made better off without making someone else
worse off.

The conclusions are a snug fit with rightwing convictions. So it is
tempting to infer that the dominance of neoclassical theory has political
origins. But while it has justified many rightwing policies, the truth
goes deeper. Economics arose in the 18th century in a climate of Newtonian
mechanistic science, with its belief in forces in balance. And the
foundations of neoclassical theory were laid when scientists were
exploring the notion of thermodynamic equilibrium. Economics borrowed
wrong ideas from physics, and is now reluctant to give them up.

This error does not make neoclassical economic theory simple. Far from it.
It is one of the most mathematically complicated subjects among the
“sciences”, as difficult as quantum physics. That is part of the problem:
it is such an elaborate contrivance that there is too much at stake to
abandon it.

It is almost impossible to talk about economics today without endorsing
its myths. Take the business cycle: there is no business cycle in any
meaningful sense. In every other scientific discipline, a cycle is
something that repeats periodically. Yet there is no absolute evidence for
periodicity in economic fluctuations. Prices sometimes rise and sometimes
fall. That is not a cycle; it is noise. Yet talk of cycles has led
economists to hallucinate all kinds of fictitious oscillations in economic
markets. Meanwhile, the Nobel-winning neoclassical theory of the so-called
business cycle “explains” it by blaming events outside the market. This
salvages the precious idea of equilibrium, and thus of market efficiency.
Analysts talk of market “corrections”, as though there is some ideal state
that it is trying to attain. But in reality the market is intrinsically
prone to leap and lurch.

One can go through economic theory systematically demolishing all the
cherished principles that students learn: the Phillips curve relating
unemployment and inflation, the efficient market hypothesis, even the
classic X-shaped intersections of supply and demand curves. Paul Ormerod,
author of The Death of Economics, argues that one of the most limiting
assumptions of neoclassical theory is that agent behaviour is fixed:
people in markets pursue a single goal regardless of what others do. The
only way one person can influence another’s choices is via the indirect
effect of trading on prices. Yet it is abundantly clear that herding –
irrational, copycat buying and selling – provokes market fluctuations.

There are ways of dealing with the variety and irrationality of real
agents in economic theory. But not in mainstream economics journals,
because the models defy neoclassical assumptions.

There is no other “science” in such a peculiar state. A demonstrably false
conceptual core is sustained by inertia alone. This core, “the Citadel”,
remains impregnable while its adherents fashion an increasingly baroque
fantasy. As Alan Kirman, a progressive economist, said: “No amount of
attention to the walls will prevent the Citadel from being empty.”

The writer is consultant editor of Nature and the author of Critical Mass

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