AM18B Entanglement

This short lecture explains the key methodological concepts according to which this course has been designed. These concepts are what make this course in macro drastically different from conventional courses.

1. Explain, using historical examples and evidence, why ONE economic theory cannot fit all historical contexts. Explain how, as economic systems evolve and change, theories to study such systems must also evolve and change. Use examples to illustrate.

The reason economic theory cannot fit all historical contexts lies in the origin of the theory itself. Theory emerges out of observations and understanding of historical events. Therefore we can say that theories are formulated to explain historical events for example, the great depression led to the emergence of Keynesian macroeconomics. Keynes developed his General Theory in order to explain the causes of the Great Depression and devise a solution for that particular situation. Similarly, emergence of Capitalism led to a more individualistic outlook towards life, replacing the traditional orientation towards social responsibility.

2. Explain how history itself is shaped by the theories which are used to study history. Give examples. Explain how, together with 1, this illustrates "Entanglement" -- theories cannot be studies without historical context, and history cannot be studied without use of theories.

Theory shapes history by determining actions of individuals at micro level. Policies with long lasting effects and persistent beliefs are shaped by theory. These theories may or may not be correct but they happen to be widely accepted and therefore, determine the actions of individuals. The theory that dominates at any point in time reflects the interests of the rich and powerful. According to Marx the powerful rule by consent i.e. the powerful elite promote and propagate theories that serve their interests by manipulating the behavior of the masses, which in turn shape the events that unfold. For example, in USA socialized medicine is not favored by the people because the big pharmaceuticals and media propagates this as harmful, although in the neighboring Canada the socialized medicine system is in place and working. Similarly after the Global Financial Crisis (GFC) the banks were bailed out instead of the mortgages, based on the Too Big To Fail (TBTF) point of view.

Therefore, theory shapes history and history gives rise to theory, a phenomenon which is also known as “Entanglement” i.e. history and theory are tangled with each other. Theories emerge to explain historical events and the dominant theories shape behaviors that drive historical events.

3. Explain how conventional economic theory is taught without any reference to historical context, which is why it is sterile and unable to explain any real historical events, like the Global Financial Crisis.

The problem with the conventional way of teaching Economics is that theory is taught without alluding to the historical events that led to its emergence. So we do not really find out what the purpose of presenting the theory was. Instead students are taught that theory is based on certain axioms that abstract from reality, followed by the deductions based on the theory. Goal of the theory is to provide correct deductions. However, the strength of the theory to correctly explain any real life phenomenon depends on how realistic the underlying axioms are. This is different from Friedman’s idea that as long as the theory makes correct deductions, the link between the axioms and reality is not important. Because of this the theories seem divorced from the ability to correctly assess real historical events. For example, none of the existing dominant macroeconomic theories incorporated the possibility of a financial crisis.