What are the limitations of economic models in describing or explaining economic phenomena in real life? What are the main differences between what economic students are taught in class via their textbooks and what we actually encounter in markets?
In a conversation-style session titled “Economics Crossing Boundaries: Possibilities and Constraints” at the 4th Bangladesh Economics Summit hosted by the Economics Study Center (ESC), Professor Wahiduddin Mahmud, Chairman of the Economics Research Group, tried to explore and answer these questions.
The lecture was moderated by Dr Atonu Rabbani, Professor, Mushtaque Chowdhury Chair, Health and Poverty, BRAC James P Grant School of Public Health.
ESC President Namira Shameem opened the session by welcoming the audience to the eight-day programme.
Based on his book, Markets, Morals and Development, Professor Mahmud began his discussion by emphasising quantitative aspects of economics based on the model of a rational consumer and how it falls short of fully explaining major events in the global economy including the 2008 global financial crisis.
While the advent of fields like behavioural economics and finance has addressed the truly irrational behaviour of human beings in decision making on a small scale, this is yet to be implemented on a macroeconomic level.
More importantly, Professor Mahmud argued that despite the widespread inequality and environmental degradation resulting from the belief in the free market or even neoliberal capitalism, economics continues to be looked upon as the cure-all to the world’s problems.
He explained that we only hope to attain sustainable economic development as developing nations do not depend on positive economics based on western models and rather on economics that is interdisciplinary and more attuned to the cultural and socioeconomic context.
Professor Mahmud also highlighted the importance of fusing both moral philosophy and economics to address the limitations of traditional economics in dealing with inequality.
“If a rich man employs a poor man to work 12-hours a day in exchange for
food and shelter, is that fair? Even if both parties are better off from the interaction, one party is clearly benefiting more than the other,” he remarked.
When asked about the discrepancies between what students learn in their textbooks and what they encounter in real life while applying economic theories, Professor Mahmud pointed out that Adam Smith’s tenet of a self-interested economic actor does not hold up to scrutiny.
This happens especially in the light of John Nash’s game theory, where although in a one-off game market participants are inclined to be selfish, in repeated interactions they are going to be cooperative.
However, he did agree that in the age of information where the market and consumer data is widely available, the Marshallian system of computing and optimising for equilibrium prices may be applied.
Professor Mahmud reminded students that developing nations host a wide variety of markets that are not as homogenous as those in the West which signals huge research potential for the field as a whole.
Finally, he emphasised that economists and policymakers should not focus on development for development’s sake and instead focus on improving social welfare and reducing corruption.
In improving the various aspects of the economy and decision-making, the synergy between economics, psychology, law, politics and even literature is essential. Without a reliable framework for trust, civility, law and order, markets cannot function efficiently in a developing economy.