Piet Keizer on the Bumb, Bust, Bump movie
Tuschinski Theater, Amsterdam Tuesday 26 may, 16.00 h. première!
The movie is about the incapability of neoclassically educated economists to foresee the financial crisis 2008, and it deals with the problems of the neoclassically orientated politicians and media economists in diagnosing the actual situation. It offers serious criticism on the neoclassical dominance, and is presented in a funny Monty Pyton-like way.
The paradigm of the movie
The movie focusses on the rationality axiom of the neoclassical analysis, which is
responsible for the fact that markets and market economies are considered stable systems: always on the road towards equilibrium. The paradigm of the movie states that people are always and everywhere irrational. In bump periods investors are overoptimistic and during busts they are overpessimistic (Keynes, 1936; Minsky, 1982). Many commentators refer to the latest results of behavioural economics, which is a cooperation between orthodox economics and cognitive and behavioural psychology (Kahneman, 2011). The lesson, which people should learn from history is that what goes up, should go down (Akerlof, Shiller, 2009).
When we take a closer look at the argumentation of the interviewed economists, we see a variety of ‘causes’. According to some the FED should not have increased its interest rates. According to others the banks should not have accepted subprime mortgages. Other explanations refer to the terribly high leverage ratio’s, or to the fact that the models, which describe the functioning of the economies do not contain a financial sector. The common denominator of these ‘causes’ is the axiom of the irrational actor, and the analysis sticks to the financial markets. Apparently economic actors have the wrong model in mind. So, we should make a more realistic one, which assumes irrational actors, and teach the results to all people. Then we can change the institutions, and everybody knows why.
Critique of the behavioural-economic approach of the movie
This is way too simple. First, nobody in the movie has delivered an appropriate definition of (ir)rationality. For a long time cognitive psychologists ignored the role of emotions in thought processes. In behavioural economics irrationality is about systematic cognitive errors, without referring to the emotions, which are the ultimate cause of these systematic errors (Keizer, 2015). Second, nobody has brought in the findings of the sociology of financial markets, as if it does not exist. Third, nobody referred to developments on the labour markets, and radical-economic and Austrian analyses are ignored. So, both the neoclassical as well as the behavioural economic approach appears problematic. It means that a simple substitution of behavioural economics for neoclassical economics is not the solution to our theoretical problems.
The need for pluralism in economics
A first principal problem is the impossibility of establishing objectively what is the right interpretation of actual situations. That’s the reason why we need more pluralism and democracy in human science. Theories are based on a series of axioms, which are more or less realistic. But they have in common that cannot be observed empirically. It is, for instance, impossible to establish empirically who is irrational and who is not.
A second principal problem is the absence of an analysis about the way in which the combination of psychological and sociological factors might lead to explosive situations. If irrational actors group together and form each other’s social context, irrational subcultures emerge, especially by exorcising critical persons. The financial crisis was possible, because many prestigious economists and politicians, are operating in networks, in which they constantly justify each other in their policy-stands (Rothkopf, 2008). But in the sixties and seventies of the 20th century the same type of networks were formed in circles of European trade unions and left orientaed political parties (Keizer, 2015). It led to a structural profit squeeze in Europe, which made their economies fragile, and unable to smoothly deal with the two oil crises during the seventies.
A third major problem is the statement in the movie, that we cannot change human nature. Humans are always and everywhere irrational – that is the nature of a human! Neoclassical economists also endorse the statement about human nature being constant. Since they consider economic actors to be rational, they are drawing the conclusion that they are able to take care of themselves – no-one knows better than the person himself what are his needs. Mistakes are not the result of irrationality, but of lack of information, especially about the future. When we all accept the other as a free individual, who can take care of himself, the spontaneuos economic institution is the free market!
When we consider human nature as constant and irrational, how can we tame irrationality? The movie answers in a typical behaviouristic way: by changing our systems, we can change our behaviour. We should recognize, however, that ‘systems’ are designed, implemented and managed by irrational actors. They all have their own goals, their own dreams and their own trauma’s. Conflicts will be abound, and the results will – by definiton – be bad for the powerless.
So, we can only create sustainable systems of economy and society, if the traditional economic and political control-mechanisms are complemented by ‘systems’ of personal and social control. Only prudent persons and organizations stick to their economic constraints and accept legal rules, as set by their democratically elected goverments (Smith, 1759).
A multidisciplinary-economic approach: Keizer (2015)
Keizer(2015) offers an extensive treatment of the methodological characteristics of orthodox/neoclassical and heterodox economic approaches. The book draws the conclusion that economics can only function as a theoretical foundation for empirical research if psychological and sociological analysis form an integral part of the so-called multidisciplinary-economic model. Many psychological and sociological approaches are discussed. In the end psychic logic and social logic offer the mechanisms, which rule the mind and the social world, respectively. They are integrated with the orthodox economic world. In this way economy and society can be managed by means of the four control-mechanisms, as discussed above. Each mechanism is a necessary condition for a sustainable society, although there is some substitution possible.
Conclusion
In conclusion, neoclassical thinking needs competitors. Pluralism and democracy must rule research and educational programmes. There is not one approach, which can claim objectivity,and monopolize the search for truth. The BBB-movie is a nice instrument to promote a turn from neoclassical domination to a truly pluralistic way of thinking.
Piet Keizer, Professor of Economic Methodology, Utrecht University School of Economics, 02-06-2015
References
Akerlof, G.A., R.J. Shiller (2009), Animal Spirits. How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, Princeton: Princeton University Press.
Kahneman, D. (2011), Thinking Fast and Slow, London: Penguin Books.
Keizer, P. (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: MacMillan.
Minsky, H. (1982), Inflation, Recession and Economic Policy, Brighton: Harvester; Armonk, N.Y.: M.E. Sharpe.
Rothkopf, D. (2008), Superclass. The global power elite and the world they are making, London: Macmillan Publishers.
Smith, A ([1759], 1982), The Theory of Moral Sentiments, Indianapolis: Liberty Fund.
Pietkeizer.com 