09/19/2014 02:35 pm ET Updated Nov 19, 2014

Robots Are Not Just Taking Over Jobs -- They're Taking Over Economics As We Know It

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Economists have been reacting of late to evidence of prolonged structural unemployment by raising the science-fiction specter of robots taking over all sorts of human jobs. What has attracted far less attention is the way in which robots have been taking over modern economics.

This is not to call the economics profession robotic, but rather to highlight that computers have influenced the way economists think about people and markets, and furthermore, how markets are increasingly coming to be defined by computers. Back in 2002, I described in a book Machine Dreams the ways in which game theory and rational choice was highly informed by the spread of electronic computers. I cited the science studies term "cyborg science" to designate the machine-like turn in orthodox choice theory: treating people as part machine, part human. Now, more than a decade later, the trend has intensified to the point of becoming apparent even to people uninterested in the history of economic thought.

Markets, in orthodox economics, are supposed to give expression to the wants and desires of humanity by channeling them through the price system. However, this can only work if most people have the ability to instill some order into what they think they want and engage in calculations of prices to act on those desires. People who can't manage that level of structured thought are tarred with the epithet of being "irrational."

Of course, that pejorative is unfair, since it might be the case that some people simply don't want to act the way economists dictate. They may value spontaneity or want to break out of the rut of old ways of acting. In any event, there are many academic papers demonstrating all manner of violations of this "rational choice theory" over the last half-century.

Empirical disconfirmations have not deterred the economics profession. Lately, they have escalated the dependence upon machines to either render the supposed irrational behaviors moot, or, in the most extreme cases, to eliminate the pesky human element altogether. This has taken at least three formats.

In the first, some economists admitted the irrational tendencies of the populace, but felt the right response would be to reconfigure the environment to "nudge" people to behave the way that the theory deems correct. In a number of policy innovations associated with Cass Sunstein (among others), such as a change in rules forcing people to opt out of enrolling in 401(k) retirement plans rather than initiating the choice, behavioral economics works behind the scenes to render people more like dependable robots, following the algorithms designed for them by economists. Sunstein was part of the Obama administration from 2009-2012, putting such principles into practice. The "nudge" techniques have probably been the least important version of reducing people to predictable machines, at least within economics.

A second, more important instance is the rise of the profession of "market design" within economics. There, the economists started out by suspecting that people had a pronounced tendency to not tell the truth in their market behavior. So, short of torturing them, the doctrine arose that changing the rules of markets could force humans to shape up and act more rationally, avoiding mendacity, regret and a further list of bad outcomes. This profession began to claim, starting in the 1990s, that they could produce almost any outcomes policy makers desired. This in turn led to them forming for-profit firms which offered to produce boutique markets for both governments and corporations, especially in the eventuality of the privatizations of previously administered decision procedures.

The reason the economists felt so confident in offering their services, is that they were grounded in a theory which stated that the market system was an information processor, or computer, whose ability to process and transmit information far outstripped the ability of any human being whatsoever. Since humans were being portrayed as relatively slow and painfully unaware of their own thought processes, human psychology was becoming downgraded in importance. It was therefore legitimate to build markets that would produce outcomes dictated by the patrons who paid to have the boutique markets built. This happened most famously in the auctions selling off electromagnetic spectrum to be used by mobile phones and other electronic devices, but spread to instances of privatization of water rights, the placements of interns at various hospitals and even an abortive attempt to sell off toxic assets in the economic crisis.

This practice of building boutique markets on spec for a subset of firms who wish to skew the operation of market pricing towards their benefit has taken on its third, ultimate apotheosis in the finance sector. There, as predatory techniques to take advantage of slower human participants has reached an advanced state of development, we observe the phenomenon of thoroughly automated high-speed trading, where millisecond advantages in access to information lead to profits reaped by automated computer trading.

The flurry of interest generated by Michael Lewis' Flash Boys has tended to focus attention on front running as an illegitimate activity. But this ignores the far greater significance of the phenomenon of computers essentially pushing humans out of the market because, as economists have already insisted, they cannot be trusted to react properly and express their true desires through the market process. In effect, machine algorithms have come to totally constitute the market as ideal information processor, leaving mere fleshy humans on the trash heap. Even now, after a brief flurry of concern, financial markets are becoming further automated, at least until the next crisis.

People often mistakenly get the impression that modern economists care deeply about individual choice. Instead, robots are increasingly used to supersede human choices. The orthodox economics profession, who bear important responsibility for this trend, make their careers by justifying the robot takeover of markets.