Why I am not a neo-Newtonian

Imagine if physicists were divided into rival camps; in one corner, there are the neo-Newtonians, who follow a model of the universe as set down by Newton and then modified by Einstein. They insist that the universe must be determinate, claim that the Bell inequality “disproves” quantum physics, and claim that there’s is the only science with testable results. Meanwhile there are the Feynesians, who use a quantum model. They claim that the Born probabilities are the fundamental law of the universe, mock the neo-Newtonians for their bizarre belief in this “gravity,” and claim that there’s is the only science with testable results. Both sides spend their time trying to advance their own models and tear down the opponents, and fight for public recognition and institutional power. The two sides have been locked in a death-match for over 30 years, and the relative strength and weakness of the sides changes based more on fads and fashion than any new evidence.

In short, physics would be almost as bad as economics.

Don’t tell me that the problem is that no-one has a proper working model of the economy. The two major scientific breakthroughs of the 20th century are general relativity and quantum physics, and the two theories are at present incompatible. Yet both model the world brilliantly. Physicists say that’s fine. Both are valuable but incomplete theories, and let’s try and find out more. Same should go for economics.

What I like about this Recalculation concept is it shows how major (infra-marginal) economic disruptions combine with modern business models to frustrate economic transitions. Very few workers are directly making widgets, and it’s quite easy to increase widget production without taking on more workers. When human capital is so important, and so many workers are using that human capital to make not widgets but organisational capital, economic transitions are extremely destructive of capital. Yet I think one of Keynes’ most valuable insights was the one Keynesians are reluctant to talk about, these “animal spirits.” Note that he was not talking about “consumer confidence” – a term we hear far too much about – but rather investor confidence. And note that what is needed to fix a Recalculation is precisely that investor confidence; for investors to use trial and error to work out new business models and methods of production to profitably satisfy consumer wants. And sure, demand for money matters too. And sure, Real Business Cycle theory probably matters too. And rational expectations might matter too. And so on.

I don’t see anyone claiming that Recalculation is a complete theory of all recessions. It is not even beholden to any particular theory of what caused the housing bubble. It’s the people who claim they have a complete theory of everything who are almost certainly wrong.

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