Brooks speculates that this modern history of economics will consists of five acts, starting with “ . . . the era of economic scientism: the period when economists based their work on a crude vision of human nature (the perfectly rational, utility-maximizing autonomous individual) and then built elaborate models based on that creature.” Paul Krugman called such models, an “idealized vision of an economy in which rational individuals interact in perfect markets . . . gussied up with fancy equations” in a recent NY Times Magazine article, How did Economists get it so Wrong?
Act II is when “brave economists” started to question this idealized, abstract view of economics. Such brave economists started to point out that people are not really perfectly rational and do not always make totally objective decisions. Some human behaviors cannot simply be explained in terms of narrow self-interest, like having children and behaving altruistically.
Act III is the ongoing global economic crisis. “This act is a climax of sorts because it exposed the shortcomings of the whole field. Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong - helping to wipe out $50 trillion in global wealth and causing untold human suffering.”
This then brings us to Act IV, “the period of soul-searching that we are living through now. More than a year after the event, there is no consensus on what caused the crisis. Economists are fundamentally re-evaluating their field.” Brooks, then gives his prediction for how the story concludes:
“In Act IV . . . economists are taking baby steps into the world of emotion, social relationships, imagination, love and virtue. In Act V, I predict, they will blow up their whole field. Economics achieved coherence as a science by amputating most of human nature . . . [but] the moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics. At the end of Act V, economics will be realistic, but it will be an art, not a science.”
I very much liked David Brooks’ OpEd, but I don’t quite agree with his Act V epilogue. In my opinion, the moral of this story is not that economics is more art than science. What we are seeing here, is another manifestation of the arrogance of power that we all have to guard against because it inevitably leads to trouble. We have often seen that if we are not careful, power will invariably lead us humans to arrogance and pride, whether we are successful business executives, politicians, athletes, academics . . . or economists.