An interesting debate in the New York Times dissects the failings of the way Economics 101 is taught in schools. Its participants concur that although the 2008 financial crisis has shaken our basic assumptions and sharply highlighted the failing of our economic models, we continue to mistakenly teach the subject as we did before.
However, not only do we continue to teach economics the same way, but also still rely on the subject to make key policy decisions despite the field’s obvious faults. The inefficacy of conventional monetary policy tools in the West has already highlighted how flawed our basic assumptions are. Even with most Western government’s central banks pushing the accelerator pedal, as interest rates near zero and central banks continue to pump money into the economy, they remain unable to stimulate growth or create jobs. We must acknowledge the limits of our models and rethink some of our fundamental notions, lest we continue to make the same mistakes.
To begin with, we need to bring back the "social" aspect of the social science when it comes to modelling decision-making. We ought to accept our humanness and failings; we’re emotional, irrational, we make mistakes and our surroundings, environment, and peers heavily influence our choices.
This argument, of course, isn’t new — social scientists have heavily criticized economists for their misguided basic assumptions for decades. However, as a global movement that promotes social good is growing increasingly visible, the need to re-think key tenets is being starkly highlighted. Rising inequality is leading to an increasing amount of people looking to do meaningful work that has lasting impact. There is strong evidence that a whole generation is looking beyond personal gain and profit as social enterprises continue to blossom, fewer millennials apply for traditional banking and consulting jobs and an increasing number of MBA programs teach social enterprise.
In addition, financiers are acknowledging the limits of their models and looking for new solutions as well. Financial innovation is moving beyond trying to increase market "efficiency" and profit, and considering social and environmental impact. Social impact bonds that attempt to align private sector investment and public sector interests with desirable social outcomes are already in use in the UK. The field of impact investing is estimated to grow up to ten times in the next decade as philanthropists, venture capitalists and fund managers look to use their wealth to make a difference. In line with this thinking, the English government has just launched a £600m fund that aims to invest in charities and social enterprises to help grow the social investment market. Even a new currency that attempts to put a value on social capital is gaining momentum.
Hearteningly, there are organizations that already acknowledge the limits of our models and knowledge and are trying to remodel the field. The new economics foundation (nef), a UK-based think tank, attempts to do "economics as if people and the planet mattered" by working on projects that allow people to live better and healthier. Additionally, an innovative team of researchers from MIT is propagating the field of experimental economics, which encourages the testing of assumptions and models before using them in policymaking. The group has set up Abdul Latif Jameel Poverty Action Lab (J-PAL) to analyze human behaviour based on randomized evaluations instead of equations. Moreover, groups such as The Economics of Ecosystems and Biodiversity (TEEB) are trying to find ways to value ecosystem services to account for the loss of biodiversity in economic terms, in order to allow people to make more sustainable choices.
The field of economics originated in order to study the distribution of scarce resources. In the midst of population growth, climate change, impending resource scarcity and rising inequality the subject is more relevant than ever before. However, it must evolve as people’s behaviour and perceptions continue to change. It’s time we began to re-evaluate our models of limitless growth- perhaps beginning by putting a value on the future, instead of discounting it.