Constructive Economics is the design, construction, implementation, and analysis of new economic structures. It’s about building things, making them real, and treating them as solid objects worthy of respect, admiration, study, and further improvement. Above all else: make it real.

Less Talk, More Rock

So what does making it real look like?

Most profoundly, it involves the rejection of most equilibrium analysis and game theory. Game theory is only relevant inasmuch as it gives prescriptions for the strategy that you should be playing — like the minimax result for two-player zero-sum games and dominant strategies generally. To presume precisely how other people will behave is arrogant.

A canonical work in Constructive Economics would include the design, implementation, and analysis of a novel structure. Of course, such projects take a lot of time (and often, money) to implement, so making them real may not be directly feasible. But we should also embrace descriptions of practical systems that could be implemented, where here practical means a workable solution to an issue people are actually encountering. Research that might apply to auctions, doesn’t. At the same time, just because a market already exists shouldn’t exempt it from study. Markets should be regarded as natural phenomena, and their outputs should be subject to the Scientific Method. Just how do markets work, anyway?

Now let’s talk about what isn’t constructive:

• Making real stuff is not the same as discarding un-real stuff. Work that describes what’s not possible should be treated warily. Oftentimes, such impossibilities are driven by modeling assumptions that don’t hold in practice. It’s much better to observe something actually happening in the real world and work back from that (e.g., The Rural Hospital Theorem)

• Constructive Economics rejects the developing movement which argues that people are best modeled as perfectly rational agents that can’t solve NP hard problems. This is grafting two unrealistic paradigms on top of one another, producing a Frankenstein of shitty modeling.

Where Do We Go From Here?

Constructive Economics means embracing new fields. We need to pay more attention to details that are usually ignored, like interaction interfaces, which can have huge impacts on results. Furthermore, some of the most innovative economic structures of the last decade have emerged from outside the academic community, on Wall Street. Nobody in Computer Science writes papers on new kinds of mortgage bonds or interest rate swaps — but why not? Can’t we make a better VADM?

It also means abandoning some of the things we’ve traditionally regarded as sacrosanct. Rationality flies right into the garbage the moment you start seriously looking at the behavior of real people. Common knowledge of joint probability distributions? Half the people using your market don’t even know what a probability distribution is. Independent private valuations? Hell, even I’ve bid twice in an eBay auction. Worst-case bounds and hardness results? You might be surprised to find out how powerful CPLEX is.

There’s lots of overlap with these ideas and other parts of Econ/CS: Behavioral game theory and average-case analysis, to name a couple. What makes Constructive Economics different? Back to the first dictum: make it real. When I think about traditional, non-constructive, economic thinking, the image I find most appropriate is that of “lecturing birds on flying”. Birds already fly pretty well. Let’s start building airplanes.