DEPP working paper
This Working Paper is part of the Development Economics and Public Policy series
New Perspectives on Realism, Tractability, and Complexity in Economics
Peter Smith.
Abstract
Mainstream economics owes its influence to three factors. (i) Its claim to show how unfettered market forces can optimise the allocation of resources. (ii) A model of motivation and behaviour that predicts advantages for a much-reduced role for the public sector. (iii) A very large, long-standing and ongoing public relations campaign, financed mainly by large business organizations, to promote these ideas as true and sound. Evidence is presented that the bases of (i) and (ii) are artefacts of the stringent process of simplification used to condense complex reality into simple models (‘complex’ and ‘simple’ are defined).
In the former case, fuzzy logic and genetic algorithms are used to rework a more realistic (and more complex) version of the basic model of competitive markets, resulting in an equilibrium significantly different from the one predicted from the usual static analysis, and which is not compatible with the theorems about the optimality of competitive equilibria. This study also shows that, with methodology that demands much less stringent simplification, the Walrasian problem of how a market could attain equilibrium is readily solved.
In the case of (ii), research in the fields of management, political science, theoretical and field biology, and in neuroscience shows that the belief that economic rationality will necessarily drive actors in politics and the public sector to misbehave in ways that give the private sector an inherent, strong advantage in efficiency and effectiveness is wrong.
The possible extension of the methodology applied to (i) to other technical aspects of economics (including international trade theory, and development), and the limitations to usefulness of theory in political domains, are both discussed; the philosophical case for laissez-faire policies is considered briefly; and the prospects for change in the way we view the economic domain are reviewed.
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