Peter Smith sent me his new book The Reform of Economics: How the complex systems approach is building a realistic and humane alternative to laissez-faire. In a letter accompanying it, he said he has two motivations. One is to get economics out of the trap of over-simplifying so that models can use linear algebra and thus be made ‘tractable’. This is one of the things that makes complexity economics and agent-based modelling appealing; virtual economies run on a computer do not need to be solved algebraically.
The other aim is to make economic methodology something more like normal scientific methodology. Economic method consists of choosing some basic postulates and making deductions from them. The deductions can then be tested against data. Normal science involves both induction and deduction. Careful empirical observation will shape theory.
The book dates the choice of the purely deductive path to Lionel Robbins and his 1935 essay The Nature and Significance of Economic Science. He defined economics as the science of constrained choice, which, “Not only excludes uncertainty, but it also excludes from the scope of economics both institutions and the medium-term evolution of economic systems.” This isolates economics from the institutional framework of the economy, and hence from what determines the availability of resources over time – it makes economics an inherently static subject.
Natural scientists do regard economics as bizarrely non-empirical – I’ve been in multi-disciplinary conferences about both macroeconomics and behavioural choice at which biologists exclaim about how rarely economists discuss data, for all that they might go away and test hypotheses. One of the joys of being on the Competition Commission for eight years was how profoundly evidence-based the process is, and hence a real insight for an economist used to generalising about how companies behave. There aren’t many business people who think about marginal cost curves and production functions.
The Reform of Economics is a game of two parts (not halves). It is mostly a critique of economic methodology but also has a useful introduction to agent based modelling. It ends on an upbeat note I very much like:
“Economics is becoming a much more interesting area in which to work and learn; and we have every hope that a more realistic and effective reformed science of economics will also be a more humane one. For, ultimately, economics is about the well-being of humanity.”