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Random musings from a libertarian, tech geek...
Monday, August 20, 2007 - 05:40 AM Permanent link for Phelps on Econ
Phelps on Econ

I really liked this formulation from Nobel Prize winner Edmund Phelps on Capitalism vs. Econ -

...I am having a lot of fun thinking about capitalism and trying to imagine how economics would have to be re-written to capture the heart of that kind of system.” Traditional economics, he explains, sees the world as if it were a plumbing system. “It’s basically rooted in equilibrium – things work out as people expect them to do.” Capitalist reality, however, “is a system of disorder. Entrepreneurs have only the murkiest picture of the future in which they are making their bets, and also there is ambiguity, they don’t know when they push this lever or that lever that the outcome is going to be what they think it is going to be – there is the law of unanticipated consequences. This is not in the economic text books, and my mission, late in my career, is to get it into the text books.”

I've always described this to laymen as the difference between Physics and Engineering.   Both systems of thought are true and have much to say to each other, for sure.   However, Economic thinking hasn't evolved to enough of a point that we readily cede the unique value found in Capitalism -- by contrast, physicists will readily acknowledge that they aren't engineers.  To too many (academics and non-), what's currently described as Econ subsumes capitalism.  

"Business" and "Finance" as an education / research system certainly comes close to filling the gap.  However, there's still quite a bit of middle ground between where the firm / industry centered approach found in biz leaves off and the economy-wide study that's the focus of today's economics.   As Marginal Revolution points out, some emphasis can be found in "heterodox" schools of econ like the Austrians which inject dynamism and discovery as core features of the economic process. 

However, where Phelps really hits the nail on the head in this interview (as well as this prior ones that I've seen from him) is that he recognizes how central cultures and institutions are to achieving this dynamism...


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