Neoclassical economics is without scholarly integrity. It does not belong in universities. It certainly should not be the dominant source of policy advice to governments.
Most scholarly disciplines, be they history, physics or ecology, have a conception of appropriate standards by which the evidential basis of an argument is presented and the reasoning leading to conclusions is explained. The goal is to shed light on the workings of the world, and a criterion for a successful study is that observations or records are consistent with the study’s conclusions.
Neoclassical economics, the strand of economics that has dominated world policies for several decades, fails these criteria. Its conclusions are regularly contradicted by developments in the real world. A dominant criterion for a successful study is that its logic is internally consistent; it thus confuses mathematics with the science it claims to be. It is variously claimed that assumptions on which a theory is based don’t matter, or that the better the theory the more unrealistic the assumptions, or that all theories are wrong. It imagines its theories are useful approximations to reality, and fails to appreciate that more reasonable assumptions can lead to radically different conclusions, so its theories may be deeply misleading.
[Just out at Pearls & Irritations. Lately I’ve been avoiding politics, it’s bad for my health. Especially after the Eden-Monaro by-election, in which almost everyone retreated to their usual tribal habits. Never mind drought, six megafires, floods, virus … Hard to fathom.]
Andrew Fisher, three times PM
Dear Labor. Has anyone among your parliamentary cohort noticed that neoliberalism is a failure? Has it occurred to anyone that promoting selfishness and making people insecure is a recipe for people to turn on each other and shred the social fabric? Does anyone think it might be time to stop being Liberal-lite? Time to champion the battlers and stop pandering to the fat cats? Time for a Labor party to remember why it was founded?
The current lesson is stark. Private aged care facilities that are under-staffed, under-resourced and disgustingly incompetent at care. Insecure, untrained ‘security’ guards fail to maintain hotel quarantine, and become virus spreaders instead. That is where outsourcing and privatising has got us.
The neoliberal program never achieved more than mediocrity and overall it has failed even on its own terms. Worse, it has corrupted government, fractured society and visited destruction upon the Earth. This failure flows from two false premises at the heart of neoliberalism: the libertarian claim that people should be rugged individualists, and the neoclassical claim that free markets usually will automatically optimise an economy.
Behind the votes for Brexit and Trump lies a simple perception: the system is rigged in favour of the rich. That perception is accurate. People may lash out at scapegoats and follow false prophets, but their disgust and alienation are quite justified. Trump promised to break up the cozy club at the top, and many people said Yes.
Two extracts published at Pearls and Irritations, here and here.
Part I presented the evidence that economies in the free-market era delivered only mediocre performance before crashing in the disastrous Global Financial Crisis. Part II showed how the standard theory of free markets bears no useful resemblance to real economies, and its application amounts to pseudo-science.
Returning to the GFC now, there is a particular reason free-market economists claim the GFC was unforeseeable: debt and money play no role in their standard equilibrium economic models. They claim one person’s debt is another person’s asset, and so aggregate “demand” is not affected by debt. This would be true in a barter economy, or if the banking system was based entirely on savings, for only in those cases would the extra purchasing power of the borrower be balanced by the reduced purchasing power of the depositor.
[Another sample from The Nature of the Beast, from Chapter 11: Economic Fire. Another downloadable instalment will be available after Easter.]
Almost every institution involved in the financial system is, in the jargon, highly leveraged. This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does highly leveraged mean? It means that you are betting a small amount on a large return. If the return is positive, you make a handsome profit. However if the return is negative you lose not only your stake but potentially everything you own.