A Guest Post on Economics

Obligatory money-themed image

Being such an internationally focused fellow, I often feel that economics are one very useful way of understanding the world that I didn't learn from my undergrad education at Kalamazoo College. After all, economic interactions and economic relations are a major part of when happens between national boundaries, yet I still find myself mystified by the economic relationship between China and the United States, the international political relationship which I focus on the most. I recently read The Map Is Not the Territory: An Essay on the State of Economics, written by John Kay. Since this is about as far into economics as I normally get, I found myself intrigued by this field of which I know so little about. Although I think that I am more logic and statistic-based than many of my acquaintances, aside from an internationally focused class from John Dugas at K reading Freakanomics in 2008 (which just seemed like some clever statistical analyses applied to real-world situations) and slogging though half of Nudge in Spanish a few weeks ago, I don't think I have ever had any education in economics. Inspired by my general lack of background in economics and the curiosity ignited by the article, I inquired about the state of economics, and Eric Swanson was good enough to help me out. Eric Swanson is a former classmate of mine from Kalamazoo College who studied economics there. We studied Chinese in Beijing together at Capital Normal University as well. When Eric responded to my queries, which were basically asking his opinion of John Kay's article, I was so pleased with the information contained therein, that with Eric's permission this is going to be the first guest post of my blog!

     The biggest weaknesses of Neoclassical economics, which dominates in America, is that it is unable to look paste equilibrium economic models and discounts the impact of cultural factors on the economy. In the late 1800s a French economist named Leon Walras started analyzing economics with newly developed calculus tools and the recent theories on equilibrium systems developed by physics. To oversimplify; economists were so thrilled that he had made mathematically precise model of the economy that they have clung to it ever since. 

     Economists who disagreed split off and turned into sociologists. Meanwhile physics and the other hard sciences studied equilibrium more and concluded that very few natural phenomena were represented well by it and started developing things like chaos theory and the aptly named complex systems. Economists like their equilibrium models because you put your data in and it will spit out the same results every time because it's an equilibrium model that always returns to a steady state. With a complex systems you throw in your set of starting factors and any number of things can happen based on any number of possible occurrences reacting off of each other. There are effectively an infinite number of possible paths the system might take to a potentially vastly different ends.

     In the last twenty years or so, some economists have finally learned about complex systems, and combined with the sufficiently powerful computers we have now, are doing some really interesting research with it. But this is not orthodox in the US, and certainly not something that would be taught in undergrad classes. Honestly, the core of undergrad economics could basically be replaced by one course and a math major. The most interesting econ course I took at Kalamazoo College, and the one I learned the most from, was Econ and Law, which was really a behavioral economics course. Right now I'm doing econ grad school research and trying to find schools that are willing to deviate from neo-classical economics.

Eric also sent me an excerpt from a paper he wrote for a class which provides a more specific critique of Neoclassical economics:

     Neoclassical economics effectively puts a wall between everything dealing with making money and everything else. Economics concerns everything on the inside, i.e. money, while everything on the outside is irrelevant. The global economy is perhaps the most massive and complex institution our species has ever created. But to say that it is unconnected to the myriad other human institutions that do not deal directly with money is preposterous. Economies are made up of numerous social practices, each specific the local culture. This is why as basic a capitalist transaction as buying a pair of socks is conducted with marked differences in China compared to the United States. In China, it is expected that the asking price will be above the normal going rate. It is the responsibility of the buyer to haggle over the price of the socks and wrestle it down to what he or she is willing to pay. In the United States, there is no haggling, and a salesperson would be confused and possibly offended if the buyer began pointing out tiny flaws in the socks to negotiate a lower price. The religious holiday of Christmas distorts the entire economic year in the United States. Entire businesses base their profitability on the sales they make during this period. To say that culture has no effect on economics is simply silly.
     It is foolish for neoclassical economics to try to limit the scope of economic science by defining it so narrowly. Including cultural forces in the analysis of how people make economic decisions enhances economics’ explanatory power, even if it does make it a less precisely mathematical science. Including all of the forces that act upon economic agents certainly increases the difficulty of modeling, but it would be shameful to deliberately leave out vital information because it made things more complicated.

Eric also recommended a wonderful book called "The Origin of Wealth" by Eric Beinhocker which he is currently reading. It details how complexity theory, evolution theory, and computing power are changing the way we can approach economics in ways that better understand the complex modern world.