Economics and Social Constructs

28 05 2011

These days I am reading a book by an evolutionary economist. One of the best and sadly truest puns in there is that microeconomics is about things economists are wrong about in particular, whereas macroeconomics is about things they are wrong about in general. Why has this happened? Quite a few among us believe this is due to the divorce between economic enquiry and reality. Real life only rarely fits neatly the elegant mathematical models we are using. Why?

First of all, we need to keep a pivotal point in mind – that we live in a world of evolutionary social constructs. The overwhelming majority of what we can see, feel, touch, smell, or realize is, in fact, some sort of a social construct – made by people somewhere and used by them. Beginning from the perception of social order and ending with the institutions of the market, one will be hardly pressed to disprove that all of them are socially constructed.

Economics itself is even more so. The economic system has been constructed through a long evolutionary process in which it has increased its efficiency immensely to reach the point where it stands today. The sophistication of its institutions has been brought about by the willful action of both individuals and society through a long process of learning-by-doing. The result is an ever-changing dynamic complex which main aim is the satisfaction of human needs.
Therefore the driving forces behind the economy are not some kind of mechanistic forces that push the system towards some so-called optimal equilibrium point. It’s rather a set of evolutionary mechanisms that continuously learn and adapt in order to achieve an ever better allocative efficiency. Being non-deterministic and extremely chaotic (in terms of sensitive dependence on initial conditions) those activities can never truly be captured in a simplified equation.

The problem is that most of the time those simplified equations, the “laws” of economics (oh, the irony!) seem to fit data pretty well. Sadly, those are the times when evolutionary forces are at rest and nothing in particular is happening. On the other hand, when there is some violent commotion – like a financial crisis – those forces come into play, trying to act in such ways as to ensure systemic survival.

Exactly when they are active the mathematical models break since they are unfit to describe an essentially non-linear process of adaptation and constant learning. The mathematics we are using is (mostly) static and deterministic. The real life and the economy are not. Neither are the institutions we have constructed – they also learn and adapt. Why then lose time trying to formalize and model instead of focusing on what is truly important – institutions, behavior and observation?

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