Economics on trial

A nudge for economists

by Alberto Orioli

5' di lettura

In a few years, the Nobel prize in Economics has been awarded to four behavioural economists, that is to say the economic scientists who are most inclined to contaminate their discipline with psychology. The rationality of “Homo Economicus”, or economic man, at times presumed to be absolute, is opening to the idea of humanity capable of improvement, perhaps not only led by binary systems of incentive and disincentive, risk and opportunity, but also stimulated by feelings, anxieties, neuroses, errors in perception and passions. And these elements often make the difference.

Hence, Homo Economicus is increasingly becoming the man on the street, also for those who need to examine his action to make it theory. The choice of the Nobel committee, over the course of the years, teaches us how economic science is breathing, how it absorbs the spirit of the time. It is no coincidence that it is a social science, and the first who sought help in psychology was probably Keynes himself when he stylized the inclination toward consumption. Now Economics, after seasons of hyper-rationalism, is looking for roads to evolve also because it turned out to be vulnerable above all in its most relevant sense that made it perhaps the most valuable science of power (or for power): the capacity to be predictive.


The “queen question” which weakened the self-esteem of the proud descendants of the London School of Economics (in the year 2008) and of their academic elite, remains a heavy shadow to erase. “Why did no one see it coming?” Queen Elizabeth II asked with regal innocence to speechless bystanders to have an explanation for the most tragic and pervasive global financial crisis of the post-war era. The lacking response and the embarrassed silence marked a before and after. First a “sad science” (copyright Thomas Carlyle) which knew what to recommend to politics because it was capable of predicting the future: then a more inward-looking science, questioning whether it was still sufficient to bring up the regularities summarised for the cycles of the past again as a possible interpretative scheme for the future.

All of a sudden, Economics is reckoning with the other, with that moral hazard which it believed to know inside and out, examining the behaviour of the perfect egoist, the ideal base type (even if not unique) for the study of economic behaviours. For a while it had understood that it had to relate to a “bounded rationality” (Herbert Simon, another Nobel winner), but now the economy is reckoning with an additional necessity: that of humanising econometric models. And it is asking for help from psychology, anthropology and the neurosciences. Maybe also from sociology, when it discovers that one of the key factors of our time is fear, individual fear and collective fear which is real, presumed or often completely irrational. And perhaps it is also turning to philosophy, as it discovers, for example, that the increasing interaction with machines, robots and algorithms can even lead to a permanent alienation from the world of people, to the renouncing of the nature of Homo Empathicus, with everything that can follow in terms of economic choices.

The best sign that Economics is going through a new evolutionary stage comes from the most extraordinary existing economic think tanks, that is to stay the research units of the central banks. It is here that the world's best economists are reckoning with the disturbing reality of growth without inflation, of employment without salary increases and without productivity, that undermines the rules of monetary policy, which is the first engine, or in any case, a pre-condition for every other economic policy. The central bankers are the first to say that the “general equilibrium theory” no longer works, which was for a long time the paradigm of the school of neoclassical economists. The DSGE models no longer work, as the econometricians call them, the dynamic stochastic general equilibrium models, according to which it is possible to predict expectations, under technological and budgetary restraints, of rational agents considered “representative” created in conditions of uncertainty and in a dynamic way.

It is the formula of the perfect Homo Economicus, he who acts as an optimising subject of future gain and in this way produces, combined with other peers, measurable (and therefore predictable) collective behaviours. Maybe also Robert Lucas Jr's (another Nobel winner) theory of rational expectations needs some maintenance because otherwise we would not have had, just to cite an example, the dramatic queues at the counters of the British lender Northern Rock, a first symbolic snap-shot of the “start of the finish”. It was Mervyn King, the then legendary governor of the Bank of England, who explained the short circuit: “People aren't pursuing optimising strategies – the assumption economists make; they are pursuing what I call ‘coping' strategies. And there is no mathematical solution to that problem. Traditional models do not have room for the idea that the current headwind is not going to go away.”

The econometric models to which generations of brains applied themselves risk no longer being suitable. If, for example, Minister Pier Carlo Padoan is still sparring with colleagues from the EU on the theme of how to calculate the output gap, it is because on models of potential growth there are different interpretations. Not to mention the disagreements on the methods of calculating gross domestic product (GDP). If from the world of physicists comes a direct and frontal attack to econometry which does not use the mathematics of chaos or fractal geometry, it is because nature and the natural behaviour of man can be read and codified also with new tools, perhaps those very tools used by weather forecasters, always respectful of the whims of chance. In Manchester, the Post-Crash Economics Society has been born, a group of students that are calling for a rethinking of the whole discipline.

It is no coincidence that their Manifesto has received a formal “blessing” from the chief economist of the Bank of England himself, Andrew Haldane, a central banker working on rethinking the drifting of a “methodological monoculture.”. The Manchester club has widened and now it has spawned at least 40 similar groups across the world. They are open to those who “want to study economics to make the world a better place and not just to improve one's own employment chances.” It is also for this reason that Il Sole 24 Ore is today launching the “Trial of Economics”, a new debate in which economists will face each other and others from sister disciplines. It is a way of understanding the evolutionary state of this science, the potential errors and the possible mitigating circumstances, with the idea that the only verdict can be that of improving the interpretive capacity of this discipline. And it is a way with which the newspaper is applying the nudge (the gentle touch) thanks to which Richard Thaler won the last Nobel. The launch of the discussion starts with the contribution of the Nobel winner of 2013, Robert J. Shiller. What better “nudge” to help economists understand each other more and to have a better understanding of what they are teaching us? It is also a way to prevent Economics from becoming just Econocracy.
(traduzione di Catherine Hornby)

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