Paradigms

Economics: Making Sense of Modern Economies is a thematic collection of articles originally published in the Economist. The collection is fairly informative for people with no background in economics. Section 9 discusses schools and trends in post-war economics and clarifies the positions of many people whose names one just comes across (Krugman, Stiglitz).

One of the things that I never thought about is how economics as science fits the idea of paradigm of Thomas S Kuhn in his Structure of Scientific Revolutions. Kuhn's examples are mainly about physics, but it is unclear how many paradigm shifts we have observed there: maybe only two, from Aristotelian to Newtonian and from Newtonian to 20th century physics (relativity and quantum phenomena). Briefly, as explained in any Philosophy of Science 101, a paradigm is a consensus among scientists about the theory, method and problems of their field. An era of such consensus is called "normal science". A paradigm is manifested in text books and archetypal examples. At some point there emerges an anomaly that does not fit in the existing theories. It will be ignored for some time, but maybe it eventually becomes too well-known, and there will be a period of scientific crisis. A new theory may emerge to explain the anomaly and may establish a new paradigm. Earlier views about scientific progress had emphasized that the new theory should explain the anomaly and, moreover, "absorb" the earlier theory by explaining everything that it explained, too. Kuhn's view was that this is not the case, theories can be incompatible.

In economics, the theories to be tested are crucial to avoid crashes and crises. A crash can be seen as an indication that relied on a wrong theory that did not anticipate it. These anomalies are quite well-known to many of us: 1970's stagflation, 1997 South-East Asian crash, and the 2008- depression.

Section 9 offers a useful guide to the current big schools of economics. Apparently in macroeconomics these are "freshwater" economists who dread government interference with the markets, and "saltwater" economists who think "the grit in the economic machine justified some meddling by policymakers" (p. 283). Since the 1980's the views coerced in a "brackish" semi-consensus in model-making and the brackish views influenced central banks. The dynamic stockhastic general equilibrium (DSGE) modeling seems to an example of this.

Interestingly (for a philosopher of science at least) the modellers knew that DSGE models weren't always very good. The Bank of England's DSGE model does not include financial middle-men (p. 284) and therefore it is quite useless in analysing banking crises. But there was no priority in fixing the model when there was no banking crisis. Kuhn would probably like this.