The economics media is a buzz with news of the newly announced winners of the 2021 Nobel Prize in Economic Sciences, of which there are three people sharing two prizes.
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Is a rift in economics being resolved?
There has been contention between economists, and between different schools of economic thought about the value of observed (empirical) evidence vs thought experiment (intuition) evidence.
This year, the two prizes in economics are awarded to people who learn heavily towards observation, and this is being much discussed as these people are doing the usual rounds of post Nobel prize award interviews.
What is the “rift” in economics?
Simply put, it’s the value placed on empirical evidence, which is evidence obtained through observation, and intuitive evidence, which is evidence obtained through thinking through a problem.
I’m sure you’ll all heard some variation of this joke:
If economists want to understand more about horses, they will sit in a room and think “What would I do if I was a horse”?
Aren’t both valid in different contexts?
Yes, and I think therein lies the problem.
How is this handled in physical sciences?
In physics there is a defined split between theoretical physicists (who learn to thought experiments) and experimental physicists (who learn to observation). Some physicists focus on one, while others focus on the other.
In physics this works because in physics there is really ONE school of thought. In physics, things that don’t fit a theory pile up until someone comes along and uses those anomalies to help them create a new updated theory.
The famous Albert Einstein thought experiment of “What would I see if I travelled on beam of light?” led to his development of special relativity, and later to his updated theory of gravity, general relativity.
How is this handled in economics?
Replacing an older school of thought with a new one doesn’t happen in economics.
This is why there are multiple schools of economic thoughts.
When enough anomalies pile up so that someone uses them as the basis for creating a new theory which takes them into account, the old school of economic thought is not replaced with the new one. But rather a new one is spawned while the old one continues.
Here’s an extreme example of this in economics
The neoclassical school of economic thought is a continuation of the classical school of economic thought first proposed by Adam Smith. Neoclassical economics is the dominant school of economic thought in the western world, if not the entire world.
The entire WTO trading system, as supported by the activities of the World Bank and the International Monetary Fund, is built on the ideas of neoclassical economics.
One of the core elements or axioms of neoclassical economics, is that people within the economy act as rational agents. That we each individually make rational decisions which further our individual self interests.
In 2017 the Nobel Prize in Economic Science was awarded to Richard H. Thaler, for demonstrating that we do NOT make rational decisions.
Richard Thaler is credited for getting mainstream economists to accept what is called behavior economics.
I love this quote from the article linked to above:
“Aside from the policy implications, there is an incredible irony here. Standard economics is mocked for its rationality assumptions and yet those assumptions are held up as an ideal for real human beings. It is as if there is a neoclassical man deep in each of us struggling to get out but he is continually bombarded by behavioral shocks. Behavioral policy is about nothing less than becoming the real you! All this despite your resistance”.