Wilson's piece - grandiosely titled "Economic Theory Is Dead. Here’s What Will Replace It." - claims that evolutionary theory will be the magic bullet that will breathe life into econ. The piece doesn't explain how to incorporate evolutionary thinking into econ, but it does link to a 2013 special issue of JEBO that Wilson edited along with Barkley Rosser about incorporating evolution into economics. In a paper in that volume, Wilson lays out his ideas explicitly
But only slightly. Wilson's paper does three things: 1) it references economists who have suggested making use of evolutionary ideas in the past, 2) it discusses some arguments against using evolutionary theory in econ, and 3) it lays out some broad general principles of evolutionary theory. Concrete examples are left to the other papers in the volume (which are all sadly paywalled).
In principle I think evolutionary theory might add a lot to economics, because economies obviously involve things like birth and death of firms, competition, predation, and other features similar to natural ecosystems.
But the case for using evolutionary theory in econ is not yet a slam-dunk. The big reason is that we don't have much evidence that inheritance of traits occurs in economies. In biological evolution, we have many clear examples of heredity. In econ, to my knowledge, we have none. Evolution needs heredity, so evolutionary theorists who want to change the econ world should focus on demonstrating the existence of traits that are passed from company to company, or person to person, or industry to industry, within economies. Or, alternatively, they should show that companies and/or individuals have traits that change over time in a way similar to the way that biological traits change between generations. They should be very concrete and consistent about how to measure these traits. Then we can start talking about using evolution to create a new economics.
Would-be evolutionary economists should realize that the measure of their success will be quantitative prediction. Get some numbers right out of sample, and they will win. What won't be useful is for them to simply point at various economic phenomena and say "Hey, this looks kind of like it conforms qualitatively to one or more general principles of evolution!" That sort of vague hand-waving does not really generate any progress in humanity's understanding of our world - it merely creates a feel-good sense of "truthiness" that makes for some good hypey media articles but little else. Evolutionary theorists, like all other researchers in all fields, should focus on predictive power and leave the hand-wavey just-so stories to a minimum.
Hanauer and Liu's piece - similarly titled "Traditional Economics Failed. Here’s a New Blueprint." - is, in my opinion, much more promising, if also pretty vague. It is also much more diverse, specifying many different sweeping changes that they believe need to be made in economic theory. Among these are:
1) The replacement of reductionist models with ones based on "complex adaptive systems"
2) The use of network models
3) The use of disequilibrium models
4) The use of nonlinear models
5) The replacement of "mechanistic" theories with "behavioral" ones
6) The replacement of optimization with something resembling "satisficing"
7) The replacement of forward-looking agents with adaptive agents in econ theories
8) Modeling people as interdependent instead of independent
9) Modeling people as irrational approximators instead of rational calculators
10) Modeling people as caring about reciprocity
11) Modeling win-win situations instead of environments characterized by rivalry
12) Replacing models of competition with models of cooperation
There is a lot to digest here. I'd split these points into three categories:
Category 1: Good points. These include (2), (4), (6), (7), (8), (9), (10), and (12). Hanauer and Liu identify networks, nonlinearity, incomplete optimization, incomplete forward-looking-ness, externalities, behavioral heuristics, social preferences, and cooperative games as areas needing more attention in economics. I agree with all of this.
Category 2: Points that misunderstand the current state of economics research. These include (3) and (11). Regarding "equilibrium", economists don't use it in the physics sense that Hanauer and Liu cite. Instead, they have redefined the word "equilibrium" to mean "any solution to a system of equations in any model." The term is thus now meaningless. Many, many mainstream economic models include "transition dynamics" or "short-run equilibrium" that is exactly the same as what Hanauer and Liu call "disequilibrium".
As for "win-win" models, most existing mainstream econ models are all about win-win situations. This is the concept of Pareto Efficiency.
Category 3: Points that are not very well-defined. These include (1) and (5). "Complex adaptive systems" is a term that gets thrown around a lot but rarely gets a concrete definition. In computer science research, "complexity" basically just means "displaying emergent properties", and progress in that field has been rather halting. I'm still not sure what the term "complex adaptive systems" means in terms of economics.
Hanauer and Liu assert that "We understand now how whirlpools arise from turbulence, or how bubbles emerge from economic activity." The latter is not the case; we do not actually know what bubbles are, or even whether they are a single phenomenon or several similar-looking phenomena. Are bubbles based on "greater fool" speculation? Rational mispricing? Emotion-based irrational mispricing? Information cascades? Other forms of herd behavior? Bayesian "information overshoot"? Some combination of these? None of these? We just don't know.
As for making economics less "mechanistic" and more "behavioral", Hanauer and Liu do not explain what this means, and merely reference a David Brooks book (which is not encouraging).
So I agree with about two-thirds of Hanauer and Liu's points. The others need tightening up, but not bad overall. The question is whether these ideas, together, represent a new paradigm in economic theory. Hanauer and Liu argue that they do, but I am not so sure. There seem to be three mini-paradigms here: bounded rationality, interdependence, and holistic analysis. The first two have already been making inroads in economics, though I think they should make more inroads. The latter is kind of an older idea that doesn't seem to have panned out as well as many hoped - there isn't actually going to be a Second Enlightenment replacing reductionist science with holism.
But I think that more important than any of these theoretical changes - or the evolutionary theory suggested by Wilson - is the empirical revolution in econ. Ten million cool theories are of little use beyond the "gee whiz" factor if you can't pick between them. Until recently, econ was fairly bad about agreeing on rigorous ways to test theories against reality, so paradigms came and went like fashions and fads. Now that's changing. To me, that seems like a much bigger deal than any new theory fad, because it offers us a chance to find enduringly reliable theories that won't simply disappear when people get bored or political ideologies change.
So the shift to empiricism away from philosophy supersedes all other real and potential shifts in economic theory. Would-be econ revolutionaries absolutely need to get on board with the new empiricism, or else risk being left behind.
from Noahpinion http://ift.tt/1Mu7KjL