Economists Don’t Know What They’re Talking About
The walking dead
In 1994 Paul Ormerod published a book called The Death of Economics1. He argued economists don’t know what they’re talking about. In 2001 Steve Keen published a book called Debunking Economics: the naked emperor of the social sciences2, with a second edition in 2011 subtitled The naked emperor dethroned?3. Keen also argued economists don’t know what they’re talking about.
Neither of these books, nor quite a few others, has had the desired effect. Mainstream economics has sailed serenely on its way, declaiming, advising, berating, sternly lecturing, deciding, teaching, pontificating. Meanwhile half of Europe and many regions and groups in the United States are in depression, and fascism is making a comeback. The last big depression spawned Hitler. This one is promoting Golden Dawn in Greece and similar extremist movements elsewhere. In the anglophone world a fundamentalist right-wing ideology is enforcing an increasingly narrow political correctness centred on “free” markets and the right of the rich to do and say whatever they like. “Freedom”, but only for some, and without responsibility.
Evidently Ormerod and Keen were too subtle. It’s true their books also get a bit technical at times, especially Keen’s, but then they were addressing the profession, trying to bring it to its senses, to reform it from the inside. That seems to have been their other mistake. They produced example after example of how mainstream ideas fail, but still they had no effect. I think the message was addressed to the wrong audience, and was just too subtle. Economics is naked and dead, but never mind the stink, just prop up the corpse and carry on.
Oh, but look! The corpse is moving. It’s getting up and walking. Time to call in John Quiggin, author of Zombie Economics: how dead ideas still walk among us4. Perhaps he’ll show us how to shoot it in the head, or whatever it takes to finally stop a zombie.
Well, I think it’s clear we can’t be too subtle. We need to speak in plain English, to everyone, and get straight to the point. Economists don’t know what they’re talking about. We should remove economists from positions of power and influence. Get them out of treasuries, central banks, media, universities, where ever they spread their baleful ignorance.
Economists don’t know how businesses work, they don’t know how financial markets work, they can’t begin to do elementary accounting, they don’t know where money comes from nor how banks work, they think private debt has no effect on the economy, their favourite theory is a laughably irrelevant abstraction and they never learnt that mathematics on its own is not science. They ignore well-known evidence that clearly contradicts their theories.
Other academics should look into this discipline called economics that lurks in their midst. Practitioners of proper academic rigour, like historians, ecologists, physicists, psychologists, systems scientists, engineers, even lawyers, will be shocked. Academic economics is an incoherent grab bag of mathematical abstraction, assertion, failure to heed observations, misrepresentation of history and sources, rationalisation of archaic money-lending practices, and wishful thinking. It missed the computational boat that liberated other fields from old analytical mathematics and overly-restrictive assumptions. It is ignorant of major fields of modern knowledge in biology, ecology, psychology, anthropology, physics and systems science.
Though many economists themselves may not realise it, economics is an ideology rationalised by a dog’s breakfast of superficial arguments and defended by dense thickets of jargon and arcane mathematics. The ideology is an old one: the rich and powerful know best, the rest of us are here to serve them.
The latest guise of this ideology is called neoliberalism (and also known as economic rationalism, market fundamentalism, Thatcherism, Reaganism and neoconservatism). It espouses “free” markets and minimal government: just the ticket for the rich and powerful to do what they want. “Freedom”, in this world view, does not really mean freedom, it means freedom of the rich from restraints imposed by the rest of us, usually through government. It means freedom to manipulate markets, the media and society for the benefit of a minority. It severely constrains the freedom of most of us. Neoliberalism is the sun-worship of the modern Pharaohs.
These claims may be a little controversial. While many will instantly recognise truths from their own experience, others might say yes, but not all economists are so ignorant. Well, it’s true I have overstated the case. Only most economists are so ignorant. So I’ll refer to mainstream economics, to distinguish it from various marginalised schools of thought and individuals, some of whom do actually have something useful to say about how economies work. For the in crowd, I’m talking about neoclassical economics, the economics built around the abstract neoclassical theory, the one that predicts economies are usually close to equilibrium and market crashes are impossible.
However everything I have said is true about mainstream, neoclassical economics. It is pseudo-science, and its adherents have no idea how economies work. That is why they allowed the US sub-prime mortgage bubble to blow up and burst, precipitating the Global Financial Crisis, and why they are making things much worse with austerity policies. Plenty of people saw the Global Financial Crisis coming, and warned about it, and plenty of people are now pointing out how austerity only makes things worse. But mainstream economists are blinded by irrelevant concepts and gross ignorance, and can see none of this.
I do not mean to malign economists personally, they are undoubtedly genuine people wanting to improve the world. However they have been sorely misled. They have been pumped full of equations and required to master difficult mathematical manipulations. This has left them and their professors little time to critically examine assumptions, history, relevant observations, other fields of knowledge and alternative possibilities. Most will have moved into a busy job and never had much chance to reflect on such things. However the profession collectively, and its leaders, are guilty of intellectual laziness, at best, and more plausibly of hubris. University professors are supposed to be continually renovating their field, bringing in new knowledge and new approaches, identifying inadequacies, finding more useful conceptions.
If you think I am being a bit harsh, I am not alone in this judgement. Here is a relatively “respectable” economist (meaning he was able to get at least a good second-rank academic job, at the University of Texas, in spite of his views). His name is James Galbraith5, and yes he is the son of the famous iconoclastic Harvard economist John Kenneth Galbraith.
Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. As a general rule – as one might generally expect from a gentleman’s club – this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not re-examine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.
This remains the essential problem. As I have documented – and only in part – there is a rich and promising body of economics – theory and evidence – entirely suited to the study of financial crisis and its enormous problems. This work is significant in ways in which the entire corpus of mainstream economics – and including recent fashions like the new “behavioral economics” – is not. And it brings great clarity to thinking about the implications of the Great Crisis through which we are still passing today. But where is it, inside the economics profession? Essentially, nowhere.
It is therefore pointless to continue with conversations centered on the conventional economics, futile to keep on arguing with Tweedledum and Tweedledee. The urgent need is instead to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time. The urgent task is to make possible careers in those areas, and for people with those perspectives, that have been proven worthy by events. The followers of John Kenneth Galbraith, of Hyman Minsky and of Wynne Godley can claim this distinction. The task now is to increase their numbers and to reward their work.
There have been severe critics of mainstream economics for a very long time. Steve Keen3 cites in particular Piero Sraffa6 writing in 1926, John Meynard Keynes7 writing in 1936, and Hyman Minsky8 writing in 1977, but he also recites the names Blatt, Garengani, Goodwin, Kalecky, Kaldor, and Veblen “to name a few”. These people were not just criticising aspects of economics, they were saying that the central theory of free markets, which is known as the neoclassical theory, was wrong.
More recently, here is US economist and commentator Dean Baker9, co-winner of the Revere Award of the World Economics Association and co-director of the Center for Economic and Policy Research in Washington DC:
The news that the UK, with negative growth in the fourth quarter of 2012, faces the prospect of a triple-dip recession, should be the final blow to the intellectual credibility of deficit hawks. You just can’t get more wrong than this flat-earth bunch of economic policy-makers.
They’re pretty much batting zero. They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the eurozone and, especially, the UK.
By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set – preferably, something that doesn’t involve numbers, or people.
So most economists should be retrained for a job more suited to their skill set. (But not for poetry, or we might end up with more Vogon poetry, the third-worst poetry in the universe. On reflection, poetry relates to people and their perceptions, so economists can be ruled out of that profession too.) If any economists can demonstrate that their favourite theory bears some passing resemblance to the real world, they should be allowed to apply for another job using some of their present skills, but not as an economist, nor in an economics department.
Economies are not separate from societies, much less dominant over societies. Economies are the way societies make their living. If there is any pretence of democracy, then a society can choose to be however it wishes, and the economy would then, sensibly, be tailored to support that kind of society. So an economy is a subordinate part of a society. In a functioning biosphere, a human society is in turn subordinate to the biosphere, at least if it desires its descendants to be around for anything like as long as its ancestors.
Therefore the term economics needs to be superseded by something more expansive. The old-fashioned term political economy at least allows that human society is involved, if we generously interpret politics as the means by which we arrive at collective decisions. So Departments of Political Economy could be allowable, at least until we arrive at a more concise title than the Department of People, Societies, the Ways They Make Their Livings and Their Relationships With the Rest of the Living World.
A possibly appropriate term might be socionomy. It already sounds like a combination of sociology and economy. It might also suggest including the more material and quantitative aspects of society, with no disrespect to sociology intended. Later in this book you will encounter the term sociocracy, a more intrinsically social way of governing, so together they might allow room to conceive how our societies work in new ways.
Staying with political economy for the moment, the less benighted ex-economists might then apply to be Political Economists. Many of them would still fall at the second hurdle, due to the culture shock of encountering scholarly integrity, whereupon they too would be consigned to the communes and salt mines. Those few economists who made it into a new department would be stimulated and guided by their encounters with academics from other fields, who would bring knowledge, creativity and rigour.
A modest amount of investigation, using readily available observations and some modern ideas to make sense of them, readily shows there is no basis in theory or practice for the claim that free markets are the best possible way to organise an economy. That is the central tenet of neoliberal ideology, and it has dominated the world for the past several decades. So neoliberalism is wrong, and the fact the world is in a big mess is not a surprise.
The same investigation reveals that central planning of economies will not work either. Economies are much too nimble, lively, dynamic for that. Economies are more like living systems than clockwork mechanisms, which ought not to be a surprise since at least some components of economies – people – are living beings, as distinct from the calculating robots mainstream economists assume us to be. So an exclusively socialist economy is not much good either, as the Soviet Union and China found out.
Further investigation, using modern systems concepts with a dash of ancient wisdom, suggests economies, and living things, do not thrive if they are based exclusively on competition, to the exclusion of cooperation. Neither do they thrive if they are based exclusively on cooperation, to the exclusion of competition. That disposes of the two great twentieth-century ideologies. Neither old capitalism nor old socialism is any good, so we ought to give up fighting wars over them.
A bit of reflection will reveal that both competition and cooperation are important – in our daily lives, in our families and in any community. A healthy life balances our personal needs, and the expression of our uniqueness, with the needs of our family, community and society. That is normal. The neoliberal reliance exclusively on competition is an unhealthy aberration, just as much as the communist reliance exclusively on cooperation was an unhealthy aberration.
This line of thinking leads us towards a potentially much more productive way of thinking about economies. A herd of wild horses is potentially very powerful, but only if they can be tamed, harnessed and sensibly guided will they become useful to us. Similarly, markets are clearly powerful, but they need to be understood, harnessed and guided if they are to do beneficial work for us. Markets can be guided by managing the incentives under which they operate, with some regulation of obviously harmful behaviour.
If we rid ourselves of the ridiculous concepts currently imposed on our economies, there is a far healthier kind of economy waiting for us to try, and to learn its ways, neither socialism nor capitalism but transcending both. The mixed, social democratic economies of the post-war decades are the nearest approximation so far to what is possible. The period roughly from 1950 to 1970 saw the greatest gain in wealth of the greatest number (in the “developed countries”) of any modern period. GDP growth was high, unemployment was ridiculously low by current standards (averaging only 1.3% in Australia and around 3% in the OECD) and inflation was low. This was true even though governments involved themselves quite a lot in the economy.
For all the hype over the past few decades about freeing up markets, deregulating, privatising and all the rest, the resulting performance never matched the performance of those post-war decades. GDP growth was slower and unemployment was much higher. Median wages in the United States have hardly changed for thirty years, and inequality everywhere increased. Then came the big crash of the GFC, which ought to have totally discredited market-fundamentalists, but the evidence was already strong that freed markets were not working as well as the managed markets of the post-war decades.
However we can do better than social democracy, better than an uneasy truce between opposing ideologies based on simplistic views of human nature, and instead embrace and balance our innately opposing tendencies to cooperation and competition as natural and healthy. That balancing is what makes life unpredictable, and rich.
The resulting economies could also be made compatible with the natural living world, which is good because at present we are rapidly ruining the world that is our total and exclusive life support system. It would be possible, in other words, to live well while being nice to others and having the natural world thrive around us.