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This article first appeared in Forum, The Edge Malaysia Weekly on November 26, 2018 - December 2, 2018

We navigate life through our mental maps, which are drawn and shaped by our education and life experience.

It is never easy to change our mental maps. In the 16th century, the Catholic church had difficulty coping with the challenge from the Reformation, which came from the Protestant countries of England, Holland, Prussia and Northern Europe. These countries were rebelling against the dominance of the Catholic Church in Rome and, essentially, fought for separation of national sovereignty from religion. Differences in values and thinking led to the bloody Thirty Years’ War (1618 to 1648) mainly in central Europe.

Similarly, in the early 20th century, classical Newtonian physicists found Albert Einstein’s theory of relativity and the newly quantum physics of Nils Bohr a complete revolution. These are paradigm shifts, requiring reorienting our paradigms or frames of reference. As philosopher of science Thomas Kuhn (1922-1996) recognised, “professionalism leads, on the one hand, to an immense restriction of the scientist’s vision and to a considerable resistance to paradigm change … scientific revolutions are inaugurated by a growing sense … that an existing paradigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way.”

Einstein (1879-1955) basically used thought experiments to profoundly change our thinking on spacetime, through becoming aware of the relativity of simultaneity — that “absolute simultaneity” does not exist. Indeed, “Einstein realises that energy and mass are two facets of the same entity, just as the electric and magnetic fields are two facets of the same field, and as space and time are two facets of the same one thing, spacetime.” (Corelli 2017)

In other words, we cannot artificially separate two or more facets of the same thing conceptually as “absolutes”, because everything is relative. This was a major change from classical physics, which had clear absolute concepts. If that is the case in physics, the same seems to apply for economics. There is no such thing as pure economics, because economics cannot be separated from politics, psychology, sociology, history and other social science disciplines describing or explaining human behaviour.

Indeed, we need to re-think radically the concepts of “state” and “market” as separate entities, since, like Einstein’s “timespace”, both concepts are different facets of the same thing and are essentially inseparable. If philosopher Koryzbski is correct that Western thinking took a different turn by ignoring what he called the non-Aristotelian system, then we should move away from linear, cause-and-effect thinking into a realm where we can think organically and holistically about how systems and parts interact with each other in non-linear terms, with complex feedback and often unpredictable outcomes.

Just as relativity and quantum theory introduce complex relationships and conditions of uncertainty into our theories of nature, different economic factors cannot be separated from each other arbitrarily in economics because they are parts of the same thing, such as savings and investments. Uncertainty is the essence of economic life, rather than an unmeasurable residue.

This is, of course, very uncomfortable territory for mainstream economics thinking, but inevitable as the accumulation of evidence from biology, physics, anthropology, psychology, neuroscience and genetics all come together to suggest that the brain and human consciousness cannot be separated from the body. There are patterns of relationships that we can only discover through the scientific method.

In Kuhn’s words, “first, an accumulation of observations, second, a preliminary formulation of some kind of ‘principles’, (which always involve some unconscious assumption); and, finally, as the number of observations increases, it leads to the revision and usually the rejection of unjustified, or false to fact ‘principles’, which ultimately are found to represent only postulates.”

We are perhaps half way towards the journey to a new economics paradigm. Two new fields are beginning to make headway that may make the breakthrough into New Economic Thinking.

The first is the breakthrough in the economics of information, which in the last 40 years has provided a deeper understanding of market failures, the lack of robustness of the standard neo-classical market equilibrium model, the rise of technology and social inequality, and new insights into alternative policy options. (Joseph Stiglitz, 2017)

The roles of the state and the market are defined by the two fundamental theorems of welfare economics. The first theorem is usually taken as theoretical confirmation of Adam Smith’s “invisible hand” hypothesis that “competitive markets tend towards an efficient allocation of resources”. This has the important policy implication of minimal interference in the market by the state.

The second theorem states that out of all possible Pareto optimal outcomes, one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over. As Nobel Laureate Stiglitz has consistently argued, the Arrow-Debreu theorem that arrived at the analytical confirmation of free market optimality depends on very restrictive assumptions of complete markets, free competition and perfect information.

In the real world of imperfect information or incomplete markets, markets are not Pareto optimal. Indeed, the perfectly efficient market requires virtually no state, but that cannot be right, since state and market are inseparable, being both institutions for human economic and social interactions.

In other words, the perfect efficient market is only a single special case out of a whole range of very imperfect markets, regulated by imperfect states using imperfect information. Efficient markets are not the norm, but the exception. No pretence of perfection can absolve market players and state officials of having to make decisions under uncertainty, the outcomes of which are a whole range of sub-optimal situations, with even greater uncertainty over the long term.

The second area of promising breakthrough in changing the current economics paradigm lies in Narrative Economics, propounded by Nobel laureate Robert Shiller. Because of the complexity of factors and uncertainty, human beings use narratives to provide “a simple story or easily expressed explanation of events that many people want to bring up in conversation or on news or social media because it can be used to stimulate the concerns or emotions of others, and/or because it appears to advance self-interest” (Shiller 2017, p.4).

Shiller wants the field of economics to be expanded to include serious quantitative study of changing popular narratives. Indeed, what he has actually done is to apply scientific methodology to the uncovering of why people use narratives either to fool themselves or fool others. That is what political economists did before the arrival of quantitative economics. They provided more convincing narratives of what was happening in order to advance either an ideology that legitimises certain policies or interests.

This return to more qualitative narratives of patterns of history, present behaviour and interaction between different groups, nations and markets, bolstered by drawing on quantitative data and evidence from a variety of sources, means that the economic narrative become part, albeit an important part, of the whole arena of social debate and choice in the Anthropocene age.

Man has become so dominant over Mother Nature that he now has the capacity not only to destroy nature but the whole of mankind. Whether we are wise enough to avoid such a catastrophe is still up to us, of which the new Narrative Economics must play a part.

That is the story of the economics paradigm that is now unfolding


Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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