Radical, yet centrist.
The Radical Remaking of Economics - Evonomics http://evonomics.com/radical-remaking-of-economics-eric-beinhocker/ (via Instapaper) By David Sloan Wilson and Eric Beinhocker This year marks the 10th anniversary of Eric Beinhocker’s influential book The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Like an earthquake tremor, Beinhocker’s book rattled the windows of the economic establishment by proposing a new foundation for the discipline that was paradigmatically different than its current foundation inspired by Newtonian physics. The Origin of Wealth played a special role in my intellectual development. As president of the newly minted Evolution Institute (EI), the first think tank explicitly based on modern evolutionary theory, I was giving myself a crash course in economics and found Eric’s book enormously helpful. When I had the opportunity to organize a conference on “The Nature of Regulation” in 2009, with funding from NSF’s National Evolutionary Synthesis Center (NESCent), Eric was among the first people I invited and consulted with on others to include. Get Evonomics in your inbox That conference gave me the confidence to hold my own series of workshops, also supported by NESCent, culminating in a special issue of the Journal of Economic and Behavior Organization titled “Evolution as a General Theoretical Framework for Economics and Public Policy” in 2013. By that time, Eric had left his position at McKinsey & Company to become director of the Institute for New Economic Thinking (INET) at Oxford. The following year, we decided to join forces by submitting a proposal to Germany’s Ernst Strungmann Forum to organize a forum titled “Complexity and Evolution: Toward a New Synthesis for Economics”. Ernst Strungmann Forums follow a distinctive format that brings over 40 experts together for a five-day period. There are no formal talks; instead, the participants are divided into four groups that discuss articles written in advance, with lots of cross-fertilization between groups. The experience is much more impactful for the participants than the average scientific conference and the results are published in an academic volume by MIT Press. Eric was a member of the Forum organizing committee, but then a skiing accident prevented him from attending the conference. The loss was felt by all, but the show went on and the MIT Press volume has just appeared in print. The 10th anniversary of his book and the publication of the MIT Press volume makes it a fitting time to touch base with Eric on the past, present, and future of economic theory. DSW: Greetings, Eric! I am looking forward to this conversation. EB: Thanks for the very kind introduction David, a pleasure to be speaking (virtually) with you! DSW: Let’s begin with the circumstances that led you to write your great book. EB: My father instilled a great interest in science in me, particularly physics, evolutionary theory, and computation. However, in an act of teenage rebellion, I decided to study economics at Dartmouth rather than science. But one of the great benefits of a liberal arts education is I could still continue to take courses in science while I was studying economics. Two particularly influential courses were one on artificial intelligence, where I learned how real human intelligence and AI systems trying to imitate it were profoundly different from the rational models of my econ courses, and system dynamics (taught by the late Barry Richmond) where I learned that non-linear dynamical systems behaved nothing like the equilibrium models I was studying in econ. Both of these courses left me with profound cognitive dissonance – the theories I was learning in economics seemed to have little to do with the real world, while the ideas I was learning in these courses seemed much more descriptive of how a system like the economy worked. I continued to explore these ideas in graduate school at MIT, strongly encouraged by my advisers John Sterman and Rebecca Henderson. Then after graduating, I decided to work in business at McKinsey rather than academia (as well as pay back lots of student loans!) and that experience further reinforced my sense that the real world looked little like the economics textbooks. In 1994 my McKinsey mentor Dick Foster introduced me to Brian Arthur at the Santa Fe Institute and it was like I’d found intellectual nirvana. McKinsey then generously allowed me to have a sabbatical at SFI, which is where I did most of the research for the book. DSW: What was the reaction to the book? EB: As I was writing it, I would periodically think “they [orthodox economists] are going to really hate this part!” or “they’re really going to throw rocks at me for this!” So I was a bit nervous when it first came out. But then serious people like John Kay, Martin Wolf, and Steven Pearlstein wrote positive reviews of the book in the popular press, and Herb Gintis (who I hadn’t met before) wrote a very erudite review in the Journal of Economic Literature. To the extent there was criticism it was generally fair (e.g. my strawman portrayal of neoclassical economics was probably more true of macro than modern micro). Given the book was a frontal attack I was surprised there wasn’t more pushback, but I think in the years it took me to write it, the number of hardcore neoclassicists had already begun to dwindle and there was growing interest in new approaches. Then of course the 2008 crisis hit and things began to really shift. DSW: Before getting to complexity and evolution, I’d like to discuss the disciplinary landscape of the economics profession. There are many schools of thought, but one maintains a position of dominance. Can you explain this intellectual and social dynamic for a broad audience? EB: The rise and dominance of neoclassical theory and its political cousin neoliberalism is a fascinating bit of intellectual history. I owe a great debt to Phil Mirowski for opening my eyes to it. His book More Heat Than Light was a major source for the history chapter in my book and he kindly let me interview him during my research. My cartoonish summary would be that a group of very clever people in the late 19th century (Walras, Jevons, Menger, Pareto) wanted for very legitimate reasons to introduce mathematics and rigor into economics. But the tools they had at the time – primarily static equilibrium methods – were simply the wrong tools for the job. But they couldn’t have realized that at the time, and wrong tools were better than no tools, so their work set off a multi-decade creative burst of developing mathematical theories of the economy as an equilibrium system and shifting economics out of the philosophy department and into the new domain of social science. But as the neoclassical models became more elaborate they also became more detached from reality, and unfortunately the profession began to reward mathematical virtuosity more than empirical validity. On a parallel track in the latter half of the 20th century, a group of economists and political entrepreneurs began to take many of the core neoclassical ideas and develop what came to be called neoliberal political theory to counter the rising post-war threat of socialism – Daniel Stedman Jones’s Masters of the Universe provides an excellent account. Thus by the late 20th century academia was dominated by neoclassical economics, and politics and policy (at least in the U.S. and U.K.) were dominated by neoliberalism. But as I argue in my book, the whole edifice was built on sand. The cracks had been forming for some time, but in 2008, shortly after my book was published, the edifice really began to crumble. The neoclassical program reached its absurd logical conclusion when modern macro had almost nothing useful to say about the crisis – Paul Romer’s recent paper “The Trouble with Macroeconomics” makes this case in intellectually devastating and witty fashion. And decades of stagnating wages, rising inequality, low social mobility and greater economic insecurity have led to a loss of faith in the center right/left neoliberal consensus, thus creating the vacuum that Brexit, Trump, and other populists are dangerously filling. So while this may all sound like abstract, intellectual stuff, it really matters in the real world! DSW: Your account makes me want to develop our conversation in two directions. The first direction is scholarly: if the neoclassical edifice was built on sand, how does a combination of complexity theory and evolutionary theory provide a more solid foundation? The second direction is political and ideological. Why is political discourse about economic issues so disconnected from academic discourse? Any scholar will tell you that neoliberal discourse invokes major figures such as Adam Smith and Friedrich Hayek in ways that bear almost no relationship to their actual work. As for the financial collapse of 2008, it might have dealt the final blow for neoclassical economics in the scholarly world but my impression is that the neoliberal “Masters of the Universe” recovered rather nicely in the political and real-world economic sphere, which is why our problems continue to get worse. And figures such as Donald Trump might capitalize on the fact that things are falling apart, but they will be among the last to embrace or even notice scholarly attempts to provide a more solid foundation based on complexity and evolution! EB: Since you’ve asked a two-part question, I’ll give a two part answer. First, in order to put economics on a sounder footing, we need to strip it right back to its intellectual foundations and build back up from there. At the foundation is an ontological question: what kind of a system is the economy? In my book I make a detailed argument as to why the answer is that the economy is a complex and evolutionary system. From my more recent work, particularly inspired by my interactions with the investor and philanthropist George Soros (disclosure: he is also a funder of my research center through INET), I would also add that the economy is a reflexive system. A core dynamic of the economy is the interplay between the subjective reality in people’s heads and the objective reality of the world. Our ideas about the economy affect the economic world (e.g. the contribution of neoliberal theories to policies which made the financial crisis possible), and the economic world shapes our ideas (e.g. the experience of 1930s German hyperinflation shaped German economic theory, which in turn has shaped Europe’s response to the euro crisis). There is a Journal of Economic Methodology special issue on reflexivity and a paper where I attempt to draw a link between complexity, evolution, and reflexivity. If one accepts this ontological position, that the economy is complex, evolutionary, and reflexive, then one can start building a set of theories and models to describe it in those terms, and test those models empirically. In his paper, Romer calls neoclassical macroeconomics “post-reality economics”. He’s right. So the key challenge is whether we can use these new tools and ideas to describe the economy as it really is – a glorious mess of real human behavior, social networks, cultures, institutions, politics, and innovation – rather than the sterile idealized account of neoclassical theory. We know from economic history that the economy is an incredibly dynamic system, from the explosion of growth unleashed by the industrial revolution, to the booms and busts of financial crises, to the co-evolution of technologies and institutions. This doesn’t look much like an equilibrium system, and traditional economics has struggled to explain these phenomena. A key test then is whether a complex, evolutionary, reflexive view can do better. This then leads to your second question. If we have better explanations of how the economy works (positive economics in the jargon) then we can develop new ideas on how we can make it work better (normative economics). How might we think differently about policy and politics and even big concepts like “capitalism”? I ended the Origin of Wealth with a chapter on this, but always felt it was unsatisfactory and incomplete. So that’s the subject of my current work and I’ve had a very fruitful collaboration with Nick Hanauer who is a philanthropist active in the real world of politics and institutions. For decades we’ve been told there are only two choices: free market neoliberalism, or redistributive socialism. In crude terms we can have growth or fairness, but not both. The economist Arthur Okun in the 1970s called this the “big trade-off” and it has framed much of our politics for the past several decades. We believe this is a false choice and neither is a good description of either how economies actually work, nor how they should work. Instead, we draw on a variety of new economics work as well as work from anthropology and psychology to develop a view of the economy as an evolutionary system of cooperative problem solving (including drawing on your important work on altruism). We define prosperity as “solutions to human problems” and argue that cooperation is the key to solving more and more complex problems thus increasing prosperity. In our view the purpose of capitalism is not allocative efficiency (as often argued in neoclassical economics) but rather is an institutional system for incentivising and rewarding cooperative problem solving, and evolving new and better forms of cooperation and solutions. We outlined this view in a piece in Democracy in 2013. We think this way of describing the economy has big policy and political implications because if you buy this story, then economic inclusion becomes central to how capitalism works. Including people in networks of innovators, workers, and consumers is an essential ingredient for growth, not just something you do for social justice reasons through redistribution afterwards. Inclusion does not imply equality of outcomes, which is neither possible nor necessarily desirable. But it does imply fairness of process, which the psychology literature tells us is what people actually care about – inclusion means that everyone participates in and contributes to the economy, and everyone benefits in a fair way. It is a concept more related to the ethics of Rawls or Sen than to neoclassical utilitarianism. Where this line of argument ultimately leads is that our debates about growth versus fairness, about big versus small government, and trickle-down versus redistribution, are the wrong debates. What we should be debating are the best ways to give people the capabilities (a Sen concept) to be included in the economy and then how to include them. The middle class is the great engine of economic, social, and political inclusion, and we should be debating how we can strengthen and expand the middle class – what my collaborator Nick calls “middle out economics”. There is also a strong reflexive relationship between an inclusive economy and an inclusive democracy. They can mutually reinforce each other, as they did in the post-war rise of the middle class, growing social mobility and expansion of opportunity, civil rights and women’s rights. And we’ve seen the loop go into reverse since the 1980s with the hollowing out of the American middle class and capture of the political system by a plutocracy. These are the topics of a book that Nick and I are working on, so watch this space! DSW: Thanks very much! Excellent! All of this is consilient with my work with Elinor Ostrom, Peter Turchin’s work on the cultural evolution of large scale societies and the history of the United States, and the analysis of Norway as a case study of cultural evolution leading to a robust economy and high quality of life. Now let’s return to the scholarly question of how complexity theory and evolutionary theory can provide a more solid foundation for economics. I will be covering the content of the MIT volume in other interviews, so let’s focus on your impressions of progress since the publication of your book and your own efforts as director of INET Oxford. EB: There has been a lot of progress since the Origin of Wealth was published. Notably the financial crisis shredded whatever credibility neoclassical macro had left and created space for new models and approaches. The major central banks have been surprisingly open to complexity inspired approaches and taken an interest in agent-based modelling, network theory and other tools. We were part of an EC funded project called CRISIS that worked on new approaches to understanding macro-financial interactions and had very productive interactions with policymakers and central banks. My colleague Doyne Farmer has continued that work, generating some important results and collaborating with the Bank of England. The OECD is also leading a promising initiative that we’ve been involved with called New Approaches to Economic Challenges that is exploring applying complexity ideas to policy. I’m also very excited about recent work on economic growth being led by figures such as Ricardo Hausman, César Hidalgo, and Luciano Pietronero that may lead to a deep evolutionary understanding of growth, innovation and development. Two areas where there is much potential are economic inequality and the economics of climate change. Inequality is about understanding the evolution of distributions and the agent-level processes that create them – natural topics for a complexity approach. Likewise, the problem of climate change is the “mother of all complex systems problems”, involving interactions between complex physical systems and complex socio-economic systems. Solving climate change requires economic transformation on the scale of the industrial revolution – a phenomenon that as I discussed in my book neoclassical models cannot explain. Thus I worry that the neoclassically derived models that dominate the field – and the policy recommendations that come from them – may be leading us down the wrong path. I also believe that a complexity economics approach could yield new insights into how to rapidly transform the system, how to trigger a new clean energy industrial revolution. Get Evonomics in your inbox DSW: One barrier to creating a new foundation for economics is that the integration of complexity theory and evolutionary theory is still a work in progress. This is something that I have long known and was evident during the Ernst Strungmann Forum. What are your thoughts on the current level of integration between these two bodies of theory? EB: Not integrated enough! Which is why I very enthusiastically supported your efforts on the Strungmann Forum (and was very sorry to miss it due to my skiing mishap). It is like the old cliché about the blind men feeling their way around an elephant – complexity theory and evolutionary theory are clearly different parts of the same elephant. But they describe their respective parts of the elephant from different frames, from different disciplinary backgrounds, and with different mathematical and modelling tools. The terminology also makes it a bit confusing: “complex adaptive systems” is quite a broad category and encompass systems that are adaptive but not evolutionary, evolutionary but not adaptive, and both evolutionary and adaptive. Ecologies fall into the latter category with both biological evolution and adaptive behavior at work. Social systems, including economies, also fall into the latter category with both cultural evolution and adaptive behavior at work. And work by yourself and your colleagues at EI shows, things get even more complicated for social creatures such as humans as evolutionary selection is working at multiple levels, and in the case of humans across both genes and culture, and we have the reflexive feedback between the subjective reality of that collective culture (what some refer to as “inter-subjective reality”) and the objective reality of our world, which further drives cultural evolution. E.O. Wilson argues that this is now the dominant force on our planet, titling one of his books The Social Conquest of Earth. So the complex, evolutionary, reflexive system of human society is a challenging phenomenon to get our heads around, and we haven’t yet fully integrated these concepts nor found the right language to talk about them. But the Strungmann Forum was an important step in that direction and I hope there will be much more work to achieve consilience (another Wilson term) amongst these powerful ideas. DSW: In chemistry, a catalyst is a substance that increases the rate of a chemical reaction, sometimes by orders of magnitude, without being used up in the process. I’m a believer that rates of cultural change can also be catalyzed. Positive change that otherwise might require decades or might not happen at all can be accomplished in years, but only if we know what to do. The progress that has been made since the publication of your book is too slow. What can be done to catalyze the “radical remaking of economics”, both inside and outside the Ivory Tower? EB: Depending on the day of the week I either think things are moving quite quickly or painfully slowly. Policymakers are providing a major pulling force for new thinking. The crisis was a big wake-up call about the pathologies in standard economics and problems like inequality and climate change demand new approaches. On the other side, students are providing an important pushing force, rejecting curricula that paint abstract imaginary worlds and tell them little about the problems that will shape their future. This has led to some promising efforts on curriculum reform (see for example CORE). And in academia, there is actually a lot of very exciting economics being done – but much of it is being done outside of traditional economics departments, in psychology departments, business schools, public policy schools, computer science departments, environmental sciences, geography, sociology, history, anthropology, physics, and lots of other places dealing with complex human social phenomena. And within economics departments you often find a spectrum – from very open-minded people pushing the boundaries to others who are stuck in the neoclassical box and will never leave it. We probably won’t change the minds of very committed traditionalists, but in a sense economics is being reinvented around them. INET is working to try to help catalyze this change, supporting new research, building a community of scholars, engaging policymakers and the media, and supporting curriculum reform and young scholars. And Evonomics has provided a terrific outlet for bringing new economic thinking to a broad audience. But it’s a long game. In my mind one of the biggest barriers to this shift is the academic journals. It is ironic that new economics work can get published in top science journals like Science and Nature, but struggles to get into the big name economics journals. We have some pretty jaw-dropping rejection letters, e.g. strong empirical work being rejected because it doesn’t fit the theory. Unfortunately it creates a strong incentive, particularly for younger researchers building their careers, to “play it safe” and do work that the journals will publish rather than challenge the orthodoxy. Romer’s paper describes this well – it creates a culture that defers to authority and precedent rather than promotes true scientific enquiry. One can dismiss all this as squabbling academics. But it really matters. Humanity is in a race between the challenges we face – from populist threats to democracy and open societies, to poverty in the developing world, to climate change, to terrorism and conflict – and our ability to understand the complex societies we have created. It is a race that we have to win. DSW: Thanks for this great conversation. You continue to be a great mentor. EB: Thanks David, I’ve been enormously inspired by your work as well as your energy and the efforts of the Evolution Institute. 2016 September 29 Donating = Changing Economics. And Changing the World. Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. 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