Posted by: Dirk | June 23, 2009

Evolution and Revolution in Economics

I am reading Thomas Kuhn’s The Structure of Scientific Revolutions (1962). Here is a very interesting excerpt (p.5-6):

Normal science, the activity in which most scientists inevitably spend almost all their time, is predicated on the assumption that the scientific community knows what the world is like. Much of the success of the enterprise derives from the community’s willingness to defend that assumption, if necessary at considerable cost. Normal science, for example, often suppresses fundamental novelties because they are necessarily subversive of its basic commitments. [..]

Sometimes a normal problem, one that ought to be solvable by known rules and procedures, resists the reiterated onslaught of the ablest members of the group within whose competence it falls. On other occasions a piece of equipment designed and constructed for the purpose of normal research fails to perform in the anticipated manner, revealing an anomaly that cannot, despite repeated effort, be aligned with professional expectation. In these and other ways besides, normal science repeatedly goes astray. And when it does – when, that is, the profession can no longer evade anomalies that subvert the existing tradition of scientific practice – then begin the extraordinary investigations that lead the profession at last to a new set of commitments, a new basis for the practice of science. The extraordinary episodes in which that shift of professional commitments occurs are the ones known in this essay as scientific revolutions. They are the tradition-shattering complements to the tradition-bound activity of normal science.

Let me say that we had some very big anomalies in economics recently. Here is an (incomplete) list:

  1. monetary policy and inflation-targeting should work in theory: have failed in practice
  2. capital should flow from capital-rich to capital-scarce countries: flows did go uphill
  3. profits are the results of investment: recently, profit levels were high with investment falling
  4. (financial) markets are efficient: we have experienced a market failure in financial asset markets with a breakdown of inter-temporal substitution

Somehow, the way our economies behave is very far away from what the textbooks tell us. In good times, things were (or at least seemed) alright, but today our mainstream theories clearly fail to explain the four issues above. I have pointed out more than once what possible alternatives are regarding these issues. I think that we would need to accept more than one theory for each of these issues, for the time being. What I hope for is some kind of Einstein who would come up with a general theory which is elegant and simple, yet explains many of these issues. John Maynard Keynes produced something close to this in his 1936 General Theory, but since then much has changed.

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