(A reflective and hopefully thought provoking viewpoint. I need to give more thought to this issue which presents many challenges).
Whilst writing the previous article for the website I began to reflect on what economics and the implementation of the current economic models in western economies mean in the light of the massive transformations that are occurring. The increasing recognition that the current economic models and capitalism have failed surely requires an urgent and fundamental review and reform. Many people in the past have argued that economics is an art and not a science though it is clearly related to the social sciences. As globalism evolved with the resultant national economies becoming more complex and connected the current definitions and interpretations are in need of radical reforms.
Many factors impact on economies such as volatility in oil prices and stock exchanges and the sudden and unexpected changes in the political complexion and policies in countries. The current economic theories and doctrines are increasingly seen to be inadequate in dealing with these multidimensional, variable and often contradictory factors. Recently many commentators have been highly critical of economics highlighting its failures over the past few decades and have called for fundamental reviews and reforms to the current practices. However many economists have become complacent and somewhat arrogant and do not feel any review or reform is needed. This mirrors what scientists felt of classical physics at the end of the 19th century (see later).
It might be interesting to compare economics with the evolution of science and scientific methodology. For example two distinct historical phases can be identified with physics namely Newtonian Physics (Classical Mechanics) and Relativity/Quantum Physics (Quantum Mechanics). Newtonian Physics dealt with the observable world and the universe that was then known i.e. the macro world. It depicted with a high degree of accuracy the appearance of eclipses, explained the action of tides and the behaviour of forces particularly that of gravity.
Over the centuries after its formulation further confirmation of its validity gave rise to a view that is was the ultimate explanation and represented the absolute truth. Many scientists became arrogant and believed it could explain all the phenomena in the then known world and universe. However once research began of atomic physics and investigations into the micro world this view was quickly dispelled by Albert Einstein and the founders of Quantum Physics including Werner Heisenberg and Erwin Schrodinger and Max Planck. Quantum Mechanics replaced Classical Mechanics for microscopic phenomena but was still able to accommodate Classical Mechanics and the macro world.
However the major difference between the two approaches was that instead of the belief in absolute prediction and certainty, quantum mechanics gave results that were based on probability and uncertainty. Examples of this were the Heisenberg Uncertainty Principle and the two slit paradox. The former was that there is a fundamental limit of an atomic particle and its momentum can be simultaneously known. Also there is a fundamental limit to the energy of an atomic particular when it is measured for a finite time. The product of the two uncertainties must be greater than Planck’s constant divided by 2pi. The reason for this uncertainty is that the method of measuring says the position of an atomic particle perturbs that position resulting in uncertainty of its position; in a sense it creates a cloud of uncertainty.
The two slit experiment showed the fascinating and perplexing fact that light could be both a wave and particle (photon) often referred to as wave particle duality. Light behaves as a wave when being propagated and a particle when interacting with matter. For example interference and diffraction shows light as a wave and the photoelectric effect as a particle. As a result observations and subsequent results violated traditional expectations. So the quantum revolution created a totally different theory for physics. In many ways modern physics has become more like philosophy.
So can economics and its currently practised theories learn anything from this scientific revolution? Economists and the models they practice massively failed to predict the financial crisis of 2008 and continue to provide no meaningful view or prognosis of the current dire state of the world’s economy. Instead they continue to promulgate traditional views and theories whether these are based on Classical, Keynesian, Supply and Demand, Capitalism, Market Socialism or Laissez Faire approaches. These theories include: introducing Quantative Easing (QE); low or negative interest rates and austerity which have made the situation worse. Many of these approaches are based on debt accumulation which will ultimately lead to even bigger problems for individual countries and the world. The message seems to be manage the situation in a misguided way but do not solve it!
So could economics develop new and more reliable models in the future by fundamentally reforming current practices? If so could economics learn anything from the scientific revolution described above that would hopefully lead to a better recognition and management of the factors that create economic crisis? I think a starting point could be the recognition of the complexities and consequences of the impact of the numerous connected and often contradictory factors now in play globally. It would be interesting if a new set of theories could be developed writing algorithms that introduce elements of a Heisenberg Uncertainty Principle and the adoption of more realistic views of the limitations of the current practices and doctrines in economics.