Why Mainstream Economics Is Inadequate For Policy

A tentative answer

( Duc PHAM-HI )

If I can be allowed some musings here, I see many reasons , some practical and some epistemological .

From an pragmatic viewpoint, any science can be "adequate" ( from the Latin etymology, "equal by proximity") only if its previously hidden structures, uncovered by the scientific approach, remain valid when human actors apply them successfully in hitherto unexploited areas for his own enrichment.

  • Heliocentrism performs and predicts better than geocentrism or epicyclicity.
  • Zener effects allow diodes,
  • Fast Fourier and Direct Cosine transforms allow MP3, etc.

For some time, Adam Smith's division of labor and Riccardo's competitive advantage theories could be put to work.
Likewise, Keynes's foundations for using Government spending to stimulate to the Economy…

But what if, TODAY, unlike in physics and other "natural sciences" dealing with inanimate non-learning objects, the level of education of the human "objects" of Economics allow them progressively to act against the workings of the "laws" of the science, because they can see what the 'science' is predicting ?
As they become themselves "sapiens", each members' own agenda can bring them to be contrarians, for instance, because the profit ratio for a "dark horse" can be so much higher.

It comes round to "Can the world continue its path towards the predicted spot, if that spot can be predicted ? ".
The classical time-travel-paradox applies here, because successful predictions play the role of the Time machine.

In my humble opinion, "Mainstream Economics", precisely because its goal was since its first steps, and still remains today, to predict a definite future (equilibrium) state, will be the provider of its own poison: any of its success will generate actors who use its potentially successful predictions, to make a profit, and thereby, willingly or unwillingly, introduce changes in the settings for which the predictions have been made.
If those changes are massive enough, they will turn a correct forecast into a wrong prediction.
And people will afterwards, say : economists can't make a correct prognosis, or worse, Economics laws are broken.

Does that mean there is no way out ? Not !

We only have to turn to some other successful, modern paradigm to look for ways that can help us make sound profitable choices in our (collective) living… which IMHO, is what Economics about. We just have to keep in mind the mathematical definition of a policy as a time sequence of actions in the context of Optimal Control Theory, and not that noble but utopic quest of enlightened guidance (or manipulations ?) from the governing authorities ;-)
Then the Geographical Positioning Systems paradigm for example can show us some things to learn …

In the text I have presented here in Reykjavik (downloadable at the bottom of this page, click on 'Files') , I call for the application of this GPS principle to an environment that is one of the most formal and well defined : Banking Regulation on Risk capital ratio in the Basel Accords.
It's quantitative, it's measurable, and it's laden with separate agenda from Sovereign states, Regulators, bankers, (credit) consumers groups.

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