Yes, that’s right, traditional economics is failing, but then we knew that. We hear talk that we’re out of the recession, but for a lot of people that doesn’t seem to be true. Many businesses are out of the recession and the “market” seems to think we’re out of the recession. However, what does it mean when the market is out of the recession? A lot of the market runs on high frequency trading, so the market can make money without a lot of people participating. Based on traditional economics theory, these markets should behave in a specific manner and they aren’t.

Slate calls this the difference between salt water and freshwater economics. Where the freshwater economics is based upon a lot of the traditional neoclassical theories, while the salt water economics is what the market traders are using. They’re using physics or other sort of network models that aren’t included in traditional economics theories.

Many of them have begun to use various forms of evolutionary economics, because it works. However, there’s a disconnect between the market and many of the leading theorists in Academia. Why? because those economists have made a career out of developing these theories. I believe that economics is at the beginning of a paradigm shift and it’s going to be painful. A lot of things are going to be changing because of this paradigm shift.

We’re staring at the end of jobs within the next 40 years, not all jobs, but a huge amount of the works force is going to be automated. Google’s working on industrial robotics with Foxconn, multiple companies are working on driverless cars, a few companies have developed drag and drop software so you don’t need to know how to code to develop software which will automate work because you build in your process rather than building your process around the system. This is radically going to change work. In the Race Against the Machine book it’s clear we’re going to be seeing changes in how our society works.

We’re going to be entering a time period where traditional economics doesn’t work and neither does capitalism. A blog post I read the other day has an interesting discussion of how we can move beyond capitalism (based on Star Trek). By the way, when I’m saying capitalism isn’t working, what I mean is that it’s not going to work to fundamentally keep the majority of the people working or provide any realistic relief to non-working people. It will be working quite well for a subset of the population that figure out how to survive or thrive in that economy. The question at that point becomes not what we think our economy is or should be, but what we value as a society.

I’ve talked about this in other posts in the past, however, I think that when we are looking at the “market place of applicable ideas” and we see that the people that should be influenced the most by economic theory AREN’T using it, but our government is, we have a serious problem. People at banks making huge sums of money on trading should be influenced by economic theory because they deal with vast sums of money and are actively driving a huge portion of our economic activity (valuable or not is another question). If they don’t see value in using those theories, then our leaders that are still applying them need to seriously rethink what theories they are applying to “manage” our economy.

When the prevailing theory in a discipline is failing, for the discipline to survive it must move beyond it. Typically the new theories that save it come from outsiders and indeed in economics it has – from two sources, Biology and Physics. Hopefully our leaders and teachers can see it before our current economic theories destroy us all.