Guide Building a Science of Economics for the Real World

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The first reason I thought about changing subject is that all is not well in science research. Even prestigious short-term positions such as junior research fellowships look increasingly like extravagantly titled post-docs with little chance of progression. None of this encourages researchers to stay in science. For my colleagues and I this meant very difficult choices. Meanwhile, I was starting to develop feelings for economics. Rather than the rules that govern the behaviour of particles, it is concerned with the rules that govern the behaviour of people; in many ways a much more complex problem.

I began to learn that, just as working as a physicist had taught me to see the world in a revelatory new way through the lens of the laws of nature, so economics could reveal a new vista: Economics can tell us how to make everyone better off, for instance through trade , how to change incentive structures to get better outcomes for organ recipients, and, less importantly but just as interestingly, why popcorn is so expensive at the cinema. We usually point to science, technology, engineering and medicine as the drivers of what is good about the modern world, but I think economics has a role to play that is every bit as important: And while the lack of trust in economists is troubling, I see it as an exciting challenge rather than a reason to steer clear of the subject.

So, on 5 October , I stood in front of the Bank of England on my first day of becoming a researcher in economics, ready to switch particles for people. Working at a central bank means that the policymakers who can steer the course of the economy are just down the hallway, and are eager to put the best research into practical use for the public good. The kinds of questions occupying central banks right now are some of the big questions of the age: How does the interconnected and global economy work?

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How can we design economic systems to be more robust and to deliver better outcomes for everyone? How might the rise of the robots affect jobs, or climate change affect financial stability? These are also truly unprecedented times for macroeconomics.

The Future of Economics Uses the Science of Real-Life Social Networks - Evonomics

What Lewis does so well is give the reader a lot of fun while actually making a number of serious points. You can pretty well read this book on the beach for amusement, but there is a point there. I believe it might hit the big screen. Brad Pitt has apparently bought the film rights.

Hearing: Building a Science of Economics for the Real World

He must have connected with Lewis in some way. Yes, and he explains the interaction of geography and science with economic development. Why has there been greater economic development in Western Europe than in other parts of the world? Diamond traces his answer over 13, years, through the development of agriculture and the particular places that were conducive for the development of crops and domestic animals that became critical to economic development.

You also had the crops in Europe that allowed for the development of agriculture. If you are brought up with the rationalist tradition of standard economics, you just never make the sorts of connections that Diamond makes. This segues nicely to your final pick, which looks at why some countries are richer than others.

He provides an explanation for why Western Europe was the cradle for modern economic growth and looks at the development of the institutions that made modern economic development possible. Landes provides the best account I know of these kinds of developments. He argues that it was a combination of climate, political competition and attitudes to science and religion that resulted in the first industrial revolution in Britain.

To me, there is a pluralism theme that is common to most of the elements that he describes. Here I mean pluralism in the sense of freedom of experiment in economic terms and freedom of thought in political and intellectual terms. The last couple of decades have seen rapid economic growth in China. Will the relative lack of pluralism there inhibit future development, given the pivotal role it seemingly played in the growth of western economies? Or indeed has the lack of pluralism inhibited growth there in the past? One of the big questions of economic history is why economic growth did happen in Western Europe and not in China years ago.

I think that pluralism is the story. Most of Western Europe was an area that encouraged freedom of thought and experiment whereas China, until very recently, has not. It does continue to restrict freedom of thought, but much less now than it did. Economic pluralism and political pluralism seem, in principle, separable. Five Books aims to keep its book recommendations and interviews up to date. If you are the interviewee and would like to update your choice of books or even just what you say about them please email us at editor fivebooks.

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Since we are enrolled in the Amazon international affiliates program, we receive a small percentage of any product you buy via links from our site at no extra cost to you. So the assumption that people make choices in isolation, that they do not adopt different tastes or opinions simply because other people have them, is no longer sustainable. The choices people make, their attitudes and their opinions are influenced directly by others and the medium across which this influence spreads is social networks.

Commonly, social networks are thought of as purely a web-based phenomenon: These online social networks indeed can influence behaviour, but it is real-life social networks — such as family, friends, colleagues — that are even more important in helping us shape our preferences and beliefs, what we like and what we do not like.

The fact that a person can and often does decide to change his or her preferences simply on the basis of what others do is known in economics as network effects.

Why the focus of policy needs to shift away from prediction and control

Also called network externalities or demand-side economies of scale, network effects pervade the modern world. Network effects have in fact been pervasive throughout human history. A crucial feature of human behaviour is our propensity to copy or imitate the behaviours, choices and opinions of others. We can see it, for example, in the fashions in pottery in the Middle Eastern Hittite Empire of three and a half millennia ago.

And we can see it today in the behaviour of traders on financial markets, where the propensity to follow the herd can lead all too easily to the booms and crashes experienced by economies around the world. Networks are especially important in finance. When, in September , Lehman Brothers went bankrupt, it precipitated a crisis that almost led to a total collapse of the world economy and a repeat of the Great Depression of the s.

It was precisely because Lehman was connected into a network of other banks that the situation was so serious. Incredibly, neither the systems of financial regulations which were in place, nor the thinking of mainstream economics that influenced policy so strongly, took any account of the possibility of such a network effect.

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They misunderstood completely the dynamics of financial networks and the possibility that such networks would not reduce risk but instead would trigger uncertainty and upheaval. A world in which network effects are a driving force of behaviour is completely different from the world of conventional economics, in which isolated individuals carefully weigh up the costs and benefits of any particular course of action.

A world in which network effects are important is a much more realistic description of the human social and economic worlds which actually exist in the 21st century. Incentives, of course, have not disappeared as a driver of human behaviour: This is the world that conventional economic theory describes. It is not wrong, but it is often misleading. It offers only a very partial account of how decisions are made in reality, where network effects can have far greater influence on behaviour than incentives.

Behavioral Economics For Dummies® by Morris Altman, PhD

Network effects, in fact, can completely swamp the impact of incentives, leading to very different outcomes to the ones intended by those who altered the incentives, whether they are companies or public policymakers. Network effects require policymakers, whether in the public or corporate spheres, to have a markedly different view of how the world operates.

They make successful policy much harder to implement and they help explain many of the failures of policies that are based on the view that incentives, rather than network effects, are the key drivers of behaviour. Understanding the influence of network effects and harnessing our knowledge of how they work in practice, however, opens up the possibility of far more effective and successful economic policies.

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  6. We might reasonably reflect that we are very much better off than we were in, say, the middle of the 20th century. Over this period, we have had a great deal of state activity, of public policy interventions in both social and economic problems based on the model of economically rational agents: Network effects and copying are entirely absent from this model. So why do we need a new perspective on policy at all?

    A distinguishing feature of the social and economic history of the second half of the 20th century is the enormous rise in the role of the state throughout the western world. Gradually, many of the functions previously within the domain of the third or private sectors have been embraced within the public sector. But the percentage share of the whole economy accounted for by the spending of the Federal government then was not much more than half of what it was under Ronald Reagan 50 years later. Likewise, the most avowedly socialist government in the history of the UK was that of Clement Attlee from to Yet the share of the public sector in the economy as a whole under Attlee was less than it was during the government of Margaret Thatcher — , renowned for her robust approach to the privatisation of state activities.

    The intellectual underpinning of the burgeoning activity of the state has been provided by mainstream economics. Paradoxically, a theoretical construct which purports to establish the efficiency of the free market has justified an enormously enhanced role for the state.

    Why I left physics for economics

    It is not just the sheer size of the public sector, but the range of private activities which the state now tries to influence or control: Generations of policymakers have been raised to have a mechanistic view of the world, and a checklist mentality: It is a comforting environment in which to live, being seemingly dependable, predictable and controllable. If markets, for whatever reason, are unable to function in practice as the theory suggests they should, then regulation, taxes, incentives of all shapes and forms, are justified. They are justified in order to make the imperfect world conform to the perfect one of economic theory.

    Economists slip all too easily into the attitude that their core theory does not merely purport to describe how the world actually is, it is a prescription for how the world ought to be. The world view of free market economic theory is precisely one in which rational agents are able to make optimal decisions and achieve the best possible outcome in any particular set of circumstances. And so behaviour can be influenced by the appropriate set of incentives selected by the authorities. Indeed, we see a vast array of taxes, subsidies and benefits, all aimed at achieving precise and detailed outcomes.

    We have now had over 60 years of this vision. And yet, the stark fact is that the combination of large-scale state activity and a mechanistic intellectual approach to policymaking has simply not delivered anything like the success that the founding fathers of the post-second world war social settlement imagined would be the case. Deep social and economic problems remain.