The Number One Failure of Modern Economics

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In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics, “may have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.”

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.

Elise is from Fairfax Station, Virginia. She graduated in May 2011 from James Madison University in Harrisonburg, Virginia with a BBA in Economics and a concentration in European Business.

(This article is a product of the Acton Institute — www.acton.org, 161 Ottawa NW, Suite 301, Grand Rapids, MI 49503 — and is reprinted with permission.)

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  • John Paul II used to say that culture, not economics or politics, was the driver of history. I remember reading in George Weigel’s biography of the late Pope, how a young Karol Wojtyla used to participate in clandestine performances of classical Polish plays as a form of cultural resistance to the Nazi occupation of his country.

    I remember thinking, resisting Nazi murder by performing a play? How useless is that? But if you’re out to save the soul of a nation – and that is what the Nazis were trying to crush most of all – then it makes sense.

    The soul of our nation could use saving. Our country is traditionally Protestant. Could we change into something greater – the fullness of the Catholic Faith – in order to save ourselves?

  • Great article and a great line there: “To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists.” Marx put the horse behind the cart but modern economists have put the horse on top of the cart and expect us to pull it forward.

    Charlie Chaplin mocked the system in Modern Times presenting man as cog in the machine. The truth is not that nice, Communism and Fascism proved that we are not “part” of the machine, we are WHAT FEEDS the machine. Wall Street is the temple where we bring our sacrifices and hope for a blessing from the gods of finance. Some authors have even called New York “The New Jerusalem.” A refined form of blasphemy indeed, a bad copy of the Temple of God.

    If you think of Solomon’s Temple and its divine design you shall see that it is a womb. Deep inside that figurative womb lives the Source of Life in the Holy of Hollies. Around the temple there are areas prepared for different groups of people: the High Priest, the priests, the Levites, the men of Israel, the women and the children of Israel, the convert gentiles, etc. Everyone has a place. Seen from above you can describe it as a figurative woman, the “gunai” of Genesis 3:15 with all her children, her family. We all know who she is: Our Blessed Mother.

    To that Temple the people brought their children to be dedicated, the tenth of the fruit of their labor to feed the men of God, their sins to be forgiven. The Temple is a model for the family of mankind with life emanating from its sacred figure of Mary’s womb. That is the model for our society, a family model where subsidiarity and solidarity are the fertile soil where God grows His children in peace and prosperity “satisfying the desire of every soul.” It is the triumph of life.

    The economic system of this world is the opposite. It is more aptly symbolized by the temple of Baal where people bring their children to be sacrificed, where the priests ravage the land to satisfy their desires and only their desires, where lies and superstition chain the souls to an early death: all ends up feeding Baal, it is the triumph of death.

    We are now approaching the time when this nation will have to take one road or the other. The scam is about to be uncovered and its unholy lies are about to be revealed. They are already dumping money on the streets in a vain hope to revive what they have been killing for decades. Just as it has been predicted.

    This is getting interesting.

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