I somehow missed this piece by Robert Nadeau in Scientific American when it came out earlier this year, and I thought it made for good Sunday/holiday reading.
Nadeau’s criticisms are admittedly pretty broad and similar observations have been made elsewhere (although Nadeau does add some useful historical detail), and a short piece by a non-expert is always vulnerable to criticism. But that doesn’t mean that Nadeau isn’t on to something. The propensity of economics to start from abstraction is limiting, yet once certain constructs become codified via textbooks, they become part of the discipline’s world view.
For instance, around the time of the release of the IPCC report and the Stern report (which endeavored to assess the econonic cost of climate change), there was considerable discussion of how to properly characterize the costs and risks of inaction, and the failure of market-based approaches (Brad De Long had a fine post). There have been some debates within the profession about the neoclassical orthodoxy and heterodox economics (see here and here for examples).
Now if you want to read a fair minded yet in some ways devastating critique, and a well-written, entertaining and informative one at that, you must go immediately to Deidre McCloskey’s essay, The Secret Sins of Economics. McCloskey is a real economist, a Professor of Economics, History, English, and Communication. Some academics I know regard the article as fundamental, yet also note it hasn’t gotten the traction they think it deserves (it is because McCloskey is not only cross disciplinary, but transgendered to boot?).
From Scientific American:
The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.
The physical theory that the creators of neoclassical economics used as a template was conceived in response to the inability of Newtonian physics to account for the phenomena of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann and other physicists devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.
The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.
Strangely enough, the origins of neoclassical economics in mid-19th century physics were forgotten. Subsequent generations of mainstream economists accepted the claim that this theory is scientific. These curious developments explain why the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions:
The market system is a closed circular flow between production and consumption, with no inlets or outlets.
Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
There are no biophysical limits to the growth of market systems.
Nadeau chose to focus on the assumptions that run afoul of environmental issues; others can be added (e.g., people act independently on the basis of full and relevant information).