The New Copernicans

Published: November 19, 2008

by frog

It wasn’t that long ago in historical terms that Nicolaus Copernicus bucked the established western wisdom and asserted that the earth may in fact orbit the sun. He rightfully feared the retribution of the authorities and was careful to pay them tribute when he finally did publish shortly before his death. Although the evidence has been building for decades, only recently has academia began to get any traction in their criticism of neoclassical economics. This is, in my opinion, due to both their own temerity and to the failure of the fourth estate – the media – to do their homework.

The current economic meltdown is proving fertile ground for legitimate questions to be asked about the scientific rigour of the pseudo social science of economics.

In an article critical of the modelling used by the IEA in their World Energy Outlook 2008 released last week, Dr. Charles Hall fires another broadside at those who continue to lead us based on bad science:

Neoclassical economics and economists have reigned supreme despite their dismal track record of late, as evidenced by governments turning to the same economists who got us into the credit crisis situation to get us out. It used to work better: economies expanded simultaneously with an expansion of economic departments and economic theory. It looked like the theories worked, although since more and more oil was being pumped out of the ground perhaps any theory could ‘seemingly’ work. Capitalism may be a giant Ponzi scheme once fueled by ever more investors and ever more oil at its base, but this has ceased, most likely forever (see here for a definition of Ponzi scheme). The economic theories became ever more analytically elegant as they got further and further from reality. Our most prestigious economics departments not only did not teach very much about oil or grain or other sources of real wealth but increasingly not even about money. Rather their focus was far too often complex econometric models using rather stupid starting assumptions (e.g. Nadeau, 2008). Acceptance of graduate students was increasingly taken based on their math skills rather than their ability to understand real commodity paths. Wall Street followed the lead of our major economists. As we have seen in other disciplines, such as ecology, there has been massive conflation of mathematical and analytical rigor with scientific rigor.

The basic theories of neoclassical economics break many conventional rules of science: for starters the boundaries are wrong, the laws of thermodynamics are not respected and the whole edifice is based on “sets of more or less plausible but entirely arbitrary assumptions” about the economy that were chosen based on an inappropriate physical analogy and that were analytically tractable (Leontief, 1981; Hall et al., 2001; Nadeau, 2008). In fact why should economics be a social science at all? Real economies are about the flow of real materials and the energy required for those flows and materials. Earlier economists (the physiocrats and the classical economists such as Adam Smith and David Ricardo) understood the physical base for wealth and made no such foolish assumptions, nor should we.

Instead of the kind of economics that dominates today what we need is a biophysical approach to our economic system, one that is based on real physical and biological production and distribution possibilities (Cleveland et al., 1984; Hall and Klitgaard 2006). We would do well to understand and guide this transition.

Here in New Zealand, it’s high time we question the accepted wisdom that our leaders claim will lead us to the promised land. The neoclassical economic model is failing us. It is based on some pretty poor assumptions and defies the laws and rigour of science. Before we throw the baby out with the bathwater, let us consider in what ways this ill conceived paradigm has served us. But let us also question every assumption on which it is based, and expose each to a fresh light of enquiry.

Like Copernicus 500 years ago, we need to pluck up the courage to take our view of the world to the next level. A level that is more sustainable, more egalitarian, more humane.

frog says

Published in Economy, Work, & Welfare by frog on Wed, November 19th, 2008   

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