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Narratives in economics offer an organizing principle, a sense of order and ensuing justice, of an inexorable drive toward well defined (though, perhaps, hidden) goals, ubiquity of meaning, being part of a whole. They strive to answer "why’s" and "how’s". They are dialogic and prescriptive (=provide behavioural prescriptions). The client (let's say, a politician) asks: "Why am I (and here follows an economic problem or behaviour". Then, narrative is spun: "The situation is like this not because world is whimsically cruel but because...and if you were to do this or that situation is bound to improve". The client is calmed by very fact that there is an explanation to that which until now bothered him, that there is hope and - providing he follows prescriptions - he cannot be held responsible for a possible failure, that there is who or what to blame (focussing diffused anger is a very policy instrument) and, that, therefore, his belief in order, justice and their administration by some supreme, transcendental principle is restored. This sense of "law and order" is further enhanced when narrative yields predictions which come true (either because they are self-fulfilling or because some real "law"- really, a pattern - has been discovered).
IV. Current Problems in Economics
Neo-classical economics has failed on several fronts simultaneously. This multiple failure led to despair and re-examination of basic percepts and tenets:
1. The Treatment of Government
Government was accorded a special status and special treatment in economic theory (unlike other actors and agents). It was alternatively cast as a saint (seeking to selflessly maximize social welfare) - or as villain (seeking to perpetuate and increase its power ruthlessly, as in public choice theories). Both views are caricatures of reality. Governments do seek to perpetuate and increase power but they use it mostly to redistribute income and not for self-enrichment.
2. Technology and Innovation
Economics failed to account for role of innovation in growth and development. It also ignored specific nature of knowledge industries (where returns increase rather than diminish and network effects prevail). Thus, current economic thinking is woefully inadequate to deal with information monopolies (such as Microsoft), path dependence and pervasive externalities.
3. Long Term Investment Horizons
Classic cost/benefit analyses fail to tackle very long term investment horizons (periods). Their underlying assumption (the opportunity cost of delayed consumption) fails beyond investor's useful economic life expectancy. Put more plainly: investors care less about their grandchildren's future than about their own. This is because predictions concerned with far future are highly uncertain and people refuse to base current decisions on fuzzy "what ifs". This is a problem because many current investments (example: fight against global warming) are likely to yield results only in decades ahead. There is no effective method of cost/benefit analysis applicable to such time horizons.
Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com.
Visit Sam's Web site at http://samvak.tripod.com