[This longish essay was just published at Real World Economics Review Blog. It is addressed to the “heterodox” community, those diverse economists of various schools that are not the dominant neoclassical school, though otherwise it is not particularly technical.]
Much of the current discussion of reforming economics focusses on the need for pluralism, particularly in teaching curricula, and very recently again on RWER. Pluralist teaching is seen as challenging, because heterodox economic ideas are diverse, have little coherence, and are to a significant extent mutually incompatible.
This theme crops up frequently in discussions on RWER. Now Cameron Murray, in the first issue of Inside, published by the Institute for Dynamic Economic Analysis, proposes to identify over-arching themes that can bring out the relationships among the various approaches. This is commendable but it will not, on its own, result in a reformed economics.
[I expanded the introduction to the original post and sent it to Real World Economics Review Blog, where it is now posted.]
The challenge, and reactions to it
Many economists, and more non-economists, agree that economics needs new ideas, given the comprehensive failure of the mainstream to foresee the Global Financial Crisis and its continuing failure to lift the US and Europe out of deep recession or depression.
[In preparing a pitch to some possibly supportive people, I realised I have not spelt out in brief form the argument that economies are complex self-organising systems. There is a straightforward logic, it is not simply a preference pulled out of the air, or the depths of my psyche.]
Many economists, and more non-economists, agree that economics needs new ideas, given the comprehensive failure of the mainstream to foresee the Global Financial Crisis and its continuing failure to lift the US and Europe out of deep recession or depression. Yet few seem to know where to start, and there seems to be little agreement on how much the subject needs to change. When proposals appear that might begin to address fundamental problems, many economists seem to recoil, and others seem simply to fail to recognise that the proposals have any relevance.
[After a break for family business and time out, here is a bit of vindication.]
Olaf Storbeck is the International Economics Correspondent with Handelsblatt, Germany’s business daily. Based in London, he is writing about current economic research. Here he interviews Andrew Haldane.
Andrew Haldane is the Bank of England’s Executive Director for Financial Stability. I recently talked to him about the crisis of contemporary economics and the way forward.
You are vocal critic of mainstream macro economics. How does this square with the tradition of central banks who historically have been very conservative institutions.
[I’ve wanted to write about this for a long time, and the September issue of Scientific American finally provoked me. They talk about exceeding our evolutionary limits, living beyond 1oo, manipulating ourselves to be smarter (but no mention of wiser), and so on. So, another long essay.]
The term appropriate technology was popularised after E. F. Schumacher’s pivotal work Small is Beautiful. Schumacher argued against the modern economic pathology of endless physical growth, which of course cannot continue on our finite planet. He argued further that some technology only promotes endless growth, or it distracts us from more important things in life, and is therefore not beneficial. Technology that supports a fulfilling life and is compatible with a steady-state or slowly shrinking physical economy he called appropriate technology.
As for technology, so for science. A common assumption by scientists is that if a challenge is there then it is fair game to address it. In fact it is commonly presumed that freedom of enquiry, a central ingredient of an open democratic society, justifies such an attitude. However we need to recognise that such freedom comes with responsibility. This seems to be recognised regarding human cloning, for example, where strong legal and social restrictions have commonly been imposed.
Prior to the twentieth century, science had built up a picture of the universe as a giant clockwork. Starting with an investigation of mechanics by Galileo, a series of “laws” had been inferred, and these laws were extremely successful in describing the physical world. It seemed that the world had been reduced to causes and effects that were precisely known, and therefore it would tick inexorably along according to those laws. This view was very discomforting to philosophers and theologians, among others, because it seemed to eliminate free will, and to imply that our fates were all sealed at the beginning of time. The neoclassical theory of free markets is firmly of the clockwork universe kind.
However science underwent three revolutions during the twentieth century, revolutions that profoundly changed scientists’ views of the universe.
The Nature of the Beast: how economists mistook wild horses for a rocking chair.
Mainstream free-market economics fundamentally mis-identifies the nature of market economies. Its record is of retarded growth followed by disaster. It counts costs as positives instead of negatives. It is blind to how the present banking system destabilises the economy. It is relentlessly materialistic and adversarial. It ignores most of what we know about real people and the real world.
The result is pseudo-scientific gobbledygook, and the unstable, inequitable, undemocratic, destructive and unsustainable mess known as the global economy.
The Nature of the Beast draws out the real nature of market economies using modern knowledge of systems, human behaviour, ecology, biology and physics. It points the way to stable, prosperous, democratic market economies that can support people, societies and the living world into the indefinite future.
A complete manuscript of The Nature of the Beast is available for comment. It is under a password, so as not to upset potential publishers, and so I can keep track of who is looking at it. I would love to have feedback of any kind.
Use the Books and Downloads menu above, or go here.
A sample, the first 16 pages, can be downloaded without password.
[After a 6-month break I have returned to working on The Nature of the Beast. A new version of Chapters 1-4 is available for download and comment – use the links at the top. More will follow soon. To whet your appetite, here is a sample, from the Introduction.]
The Global Financial Crisis, also known as the Great Recession, is the biggest economic malfunction since the Great Depression. You might think that those in charge when it happened, and those who designed the economic system within which it occurred, would have been chastened and purged, to be replaced by those who saw the crash coming and those who warned that the design of the economic system was prone to such failures.
However few of those responsible have been purged, and few seem to have felt chastened. Rather, they claim that no-one could have seen the crash coming. If that were true, what exactly has the economics profession been doing for the past eighty years? Everyone knows there was a Great Depression. Would it not be a top priority to figure out how it happened, so we might see the next one coming, or better still avoid the conditions that would trigger a depression? One might think so, but that is not how the great bulk of the profession has spent the past eighty years.
Many people, including many heterodox economists, understand that the neoclassical equilibrium approach to understanding economies is futile and misleading , because modern economies are far from equilibrium. The neoclassical prediction of equilibrium or near equilibrium requires a string of patently absurd assumptions. However the development of better theories seems to be significantly hindered by a feeling that any superseding theory has to be thoroughly quantified before it can be useful, and a feeling that the neoclassical theory has set a benchmark for sophisticated mathematics that must be matched before another theory can be respectable. Less fundamentally there seems to be a common perception that empirical insights can only be gained through elaborate statistical treatments of observations.
Here I offer some discussion from my experience as a natural scientist, and some examples regarding the Global Financial Crisis, to counter these hindrances. Continue reading →