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What’s wrong with economics?

by Frank Stilwell on December 18, 2017

Failure to anticipate the global financial crash that began a decade ago was expected to precipitate embarrassment, if not a major crisis, for the economics profession. Even the Queen of England publicly asked why economists had got it so wrong! Ten years on, the storm has evidently been weathered without fundamental change to mainstream thought and practices. Public attitudes to the economics profession exhibit more scepticism but, for the economists themelves, it is pretty much business as usual.

The core of mainstream economics taught in in most university courses remains essentially unchanged. Moreover, because serious engagement with the history of economic ideas in the curriculum is rare these days, students are left with little understanding of rival schools of thought or exposure to the idea that progress in the discipline may not be straightforwardly linear and additive.

Successive generations of students have criticised the curriculum offered by university economics departments, here in Australia and elsewhere around the world, because they regard their courses as based on misleading assumptions, as being of dubious relevance to understanding the real world, and politically biased towards pro-market views. Progressive academics, sharing similar disquiet, have sought to develop alternatives to the neoclassical orthodoxy, including strands of post-Keynesian economics, institutional economics, Marxist economics, feminist economics and ecological economics.

The Journal of Australian Political Economy (JAPE) is one of the key journals for articles that challenge the mainstream theory and explore alternative approaches to the analysis of modern capitalism, to public policy and to strategic thinking about economic change. Its latest issue, just published, presents a re-examination of orthodoxy, its conceptual underpinnings and the challenges faced in developing constructive alternatives. Its focus is on both continuity and change. Continuity within the mainstream comes from its core theories in microeconomics, macroeconomics and econometric modelling. Change comes from newer sub-fields such as behavioural and experimental economics, ‘new’ institutional economics, and the applications of game theory. Mainstream economists describe these latter modifications as evidence of disciplinary dynamism, novelty and diversity. Diane Coyle has called the result ‘soulful economics’ while David Colander has argued that the resulting ‘internal heterodoxy’ within mainstream economics renders the political economists’ ‘external’ critique redundant. But is this really so?

The articles in the new JAPE present a challenge by looking at the philosophical foundations and methods of mainstream economics, critically assessing particular sub-fields within mainstream economics, discussing the conceptual problems that limit its coherence as a basis for public policy formulation, and considering the implications for developing heterodox alternatives.

An article by Tim Thornton from La Trobe University leads off by looking at the recurrently awkward relationship between mainstream economics and supposedly cognate social sciences. Can economics really claim to be ‘the queen of the social sciences’? Why does it not draw more from other fields of inquiry within that broader arena of knowledge? And what are the implications of this for proponents of a more genuinely interdisciplinary approach? Thornton argues that the obstacles to internal reform are such that other institutional options need to be considered.

An article by Tony Lawson from the University of Cambridge follows on by criticising economists for their lack of attention to ontology and hence their failure to consider alternative ways of seeing the world. He argues that the mainstream economists’ obsession with mathematics regrettably sets those more fundamentally important issues aside.

In a somewhat similar vein, Uruguayan political economist Andres Blanco’s article draws on the philosophy of science to identify basic assumptions and features of mainstream economics that render the discipline useless for explanation, prediction and prescription. Blanco argues that mainstream economics is ideology, not science.

Also wresting with the characteristics of orthodoxy, particularly in a university teaching context, former Greek Finance Minister Yanis Varoufakis argues that there are fundamental elements of ambiguity. He suggests that thoughtful economists face a parallel with the challenge posed in the classic movie ‘The Matrix’ – whether to swallow the blue pill or the red pill. The former results in conformity to a fundamentally flawed orthodoxy whereas the latter involves posing difficult questions that consign you to ‘outsider’ status. What’s it to be: comfortable complacency or questing for uncomfortable truths?

Particular aspects from within the modern mainstream economics portfolio then come under critical scrutiny. Shaun Hargraves Heap from King’s College, University of London, a leading contributor to the application of game theory in economics, points to some of the important conundrums involved in this exercise, concluding that there is much to be gained by engagement with political economy.

David Primrose, the newest member of the JAPE editorial collective, follows on with a critique of behavioural economics, focusing on its failure to banish homo economicus despite recognition of the more complex and ‘irrational’ economic behaviours occurring in the real world. Rather, the rational, calculating ideal is retained as the norm towards which people may be steered by policies based on behavioural economic reasoning. Please raise your hand if you want to be ‘nudged’ into acting more rationally!

Next, Jon Mulberg from the Open University in the East of England directs our attention to the field of environmental economics and policy. Like Primrose, he draws on ideas and concepts from Foucault in presenting an analysis of discourse, power and governance, pointing to the role of mainstream economics in a process of domination. Mulberg explores what would be entailed in developing an alternative approach that puts nature at the centre of the discipline and a Green new deal as a policy focus.

Then, to complete this cluster of themed articles, Samuel Meng from the University of New England shows fundamental flaws in the way in which econometrics is constructed, challenging the claim of mainstream economists to be able to engage in effective quantitative analysis and forecasting by the use of modelling.

The next set of concerns relate to the judgments embodied in mainstream economics when applied to public policy prescriptions. Miriam Bankovsky and John King from La Trobe University point to attempts by earlier generations of mainstream economists to develop a theoretical ‘welfare economics’ as a basis for moving between economic analysis and policy prescriptions. However, inherent conceptual problems made it a failure, leading to its general disappearance from the curriculum and economists’ tool kits. In effect, a major avenue of investigation has turned into a blind alley. But economists still commonly seek to be prescriptive, although they have no sound basis for doing so. At the very least, therefore, they need to be more explicit about their ever-present ethical presuppositions: better blatant than latent. One avenue though which mainstream economists exert influence in public policy is cost-benefit analysis but, as George Argyrous from UNSW shows in the next article, this is also subject to significant flaws, particularly as practised within the Australian public sector.

Next come a substantial cluster of review essays and book reviews. Each of the three major review articles considers political economic alternatives to mainstream economic orthodoxy. Susan Schroeder looks at Capitalism, Marxian political economist Anwar Shaikh’s recent magnum opus, assessing its strengths and weaknesses as an integrated analysis of the economic system. Geoff Dow looks at the four volume set of articles by Geoff Harcourt, Peter Kreisler, Joseph Halevi and John Neville who apply their post-Keynesian analyses to contemporary economic issues. A third review article then considers David Harvey’s work with particular reference to two of his recent books that focus on the dynamics and contradictions of capital, situating Harvey’s Marxist analysis in relation to other political economic traditions that also reject equilibrium economics. Then comes John Quiggin’s review of a book written by a former Morgan Stanley executive, exposing flaws in mainstream economics in the wake of the global financial crash.

Finally, to conclude this special issue of JAPE on ‘what’s wrong with economics’, there are reviews of eight recent books that are directly relevant to its theme. This cluster of interrelated reviews point to some directions of critique which may not have been fully developed in the earlier articles, including the neglect of ethical considerations in mainstream economics; the severe limits of its central ‘narrative’ and false claims to scientific method; the failure to provide a pragmatic approach to managing the real world of business; the under-questioned assumption of endless economic growth; the complicity of mainstream economics in the reproduction of global poverty; the neglect of the history of economic thought; and the problems arising from blindness to the history of economic thought and insights from heterodox economics.

What impact can this collection of articles in the new JAPE be expected to have? Only someone totally unfamiliar with mainstream economics would expect much direct response from within the economics profession, let alone any changed behaviour by the mainstream practitioners. Even generating some defensive response is probably too much to expect. Remaining aloof and/or oblivious to external critics has evidently become part of the dominant ethos within the economics profession. To some extent this may be just institutional inertia, but vested interests are also at stake. These are partly the vested interests of professional economists themselves, protecting past intellectual investments while working in universities or selling their services directly in the capitalist marketplace. There are also the ultimately more powerful interests of corporate capital and its supportive ideological superstructure.

Indeed, ‘taking the red pill’ does require some personal courage in engaging, however indirectly, with these powerful forces. Yet there is a social imperative to do so, if we are concerned with progressing knowledge and using that knowledge to contribute to a more stable, equitable and sustainable future for humankind. As the real world throws up ever greater problems of economic instability, economic inequality and ecological unsustainability, merely sandbagging territory to secure the dominant position of a dysfunctional orthodoxy will not suffice. Study and research in political economy is all the more important.

Frank Stilwell
Emeritus Professor of Political Economy at the University of Sydney, co-ordinating editor of the Journal of Australian Political Economy (JAPE), and Fellow of the Academy of Social Sciences in Australia.

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