Economics is due for a paradigm shift. That’s the argument of British money manager George Cooper‘s very interesting if less-than-felicitously titled new book, Money, Blood and Revolution: How Darwin and the Doctor of King Charles I Could Turn Economics Into a Science. It is also, to be fair, something economists have been talking about for decades. Yet it keeps not happening. Why is that?
The idea of a paradigm shift comes from Thomas Kuhn’s 1962 book The Structure of Scientific Revolutions. Kuhn, a physicist turned philosopher of science, had spent a year in the late 1950s at the then-new Center for Advanced Study in the Behavioral Sciences at Stanford and been struck by how the assembled psychologists, economists, historians, sociologists, and the like often disagreed over the very fundamentals of their disciplines. Physicists, in his experience, didn’t do that. This wasn’t because they were any smarter than social scientists, Kuhn concluded. It was because they had found a paradigm within which to work. (Ethics alert: this account is shamelessly self-plagiarized from something I wrote a few years ago.)
A Kuhnian paradigm is a set of assumptions that allows scientists in a particular field to avoid time-wasting arguments over the basics and spend their days solving small but useful puzzles. Scientific assumptions are never perfect mirrors of reality, though (“all models are wrong; but some are useful“). When evidence piles up that contradicts the paradigm, a science sometimes needs to go through the painful process of a paradigm shift.
Just as Kuhn was writing this, economics was finally settling into what looked like a scientific paradigm, in which mathematical models built around rational agents trying to maximize something called utility were presumed capable of answering all the questions that needed to be answered. Financial economics adopted its own, narrower paradigm, in which the starting point was that the prices prevailing on financial markets were more or less correct (a belief that in those days went under the name Efficient Market Hypothesis, although the EMH is for the most part understood to mean something much narrower now).
The economists did this quite self-consciously — they’d all read Kuhn, or were at least familiar with his thesis, and cited him frequently in the 1960s and 1970s. The most famous assertion of the then-reigning hubris of financial economics, Michael Jensen’s “I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis,” was followed a few sentences later by this:
Yet, in a manner remarkably similar to that described by Thomas Kuhn in his book, The Structure of Scientific Revolutions, we seem to be entering a stage where widely scattered and as yet incohesive evidence is arising which seems to be inconsistent with the theory.
That evidence has just kept on piling up in finance. In macroeconomics, too. On the theoretical side, there seems to be much less consensus than there was 50 years ago about what rational behavior under uncertainty even looks like. When an economist suggests, even jokingly, that it’s time for the discipline to embrace the 19th century concept of “aether” to explain the otherwise unexplainable, you can tell something‘s wrong. But as Kuhn wrote, a paradigm won’t give way until there’s a new one to replace it. And so while mainstream academic economists have become more open to alternative approaches and willing to acknowledge gaps in their knowledge (see my interview from a couple weeks ago with Harvard’s John Campbell, or the generally friendly reception among mainstream economists to Thomas Piketty’s jeremiads against mainstream economics in Capital in the Twenty-First Century), they haven’t really changed how they go about their work.
Cooper, who initially embarked on an academic career in engineering and physics (if you want a microengineered silicon gyroscope, he’s your man) before switching over to finance, wrote a book six years ago called The Origins of Financial Crises that sketched out in wonderfully clear and acerbic terms why the then-dominant approach to financial regulation — leave the financial sector as unfettered as possible in good times, then bail it out in a crisis — was a recipe for recurring bubbles and crashes. This time around he entertainingly sketches past paradigm shifts in astronomy, biology, and medicine — and explains why he thinks economics, or at least macroeconomics, is due for a similar shakeup.
Then it comes time to offer up his ideas for a new economics paradigm:
- Replace utility-maximizing economic man with a Darwinian fellow who simply wants to do better than the next guy.
- Let this selfish creature fight it out in a macroeconomic model based on the circulatory system. “Capitalism would act to push wealth up the social pyramid,” Cooper writes, “while democracy, and its progressive taxation system, would act in the opposite direction to push it back down, causing a vigorous circulatory flow of wealth throughout the economy.”
So what makes modern capitalism work is not so much the accumulation of capital as its constant flow through the system. It’s an interesting thought. The basis of a new paradigm for economics? Hmmm. Cooper does his best to prep the reader by showing how intuitive and simple the insights of Copernicus, Darwin, and William Harvey (Charles I’s physician, who figured out how blood circulates through the body) were, but I still found his suggestions to be almost laughably crude. Maybe that’s just me. Or maybe it’s the natural initial reaction to a potential new paradigm.
