But what really engendered this was this excellent program from the BBC; Teaching Economics after the crash. It's just over half an hour, and well worth listening to in full. As much as I hate transcribing stuff, I just has to jot down some of the more salient parts of the broadcast. Particularly revealing are those with "heterodox" economists Ha-Joon Chang and Steve Keen, who I mentioned in my last post:
Aditya Chakrabortty (program host): Then there's the divide between mainstream economics, and all the other perspectives. What does that mean? Well, listen to this. Two economists go down to the pub. No, it isn't a setup for an unpromising joke, but a conversation between Danny Clark, LSE professor and self proclaimed Neoclassical--he's on the ginger ale. And, sipping fizzy water, Dr. Ha-Joon Chang, Cambridge economist, and decidedly heterodox in his views. Their different approaches mean they see the world completely differently, even on the simple matter of getting a drink:
Danny Clark: "As a neoclassical based economist, we construct a collection of alternatives, and then we look at those options and we say, 'what is it that I can do given the time, given my budget?' and of those that are feasible, I choose the best option. But Ha-Joon, you like us to think about things differently."
Ha-Joon Chang: "I think that humans are more complex. We are creatures of habit. And also peoples' preferences are shaped by the environment. For example when I first came to this country in the 1980s it was very rare for working class people in this country to drink wine because it was almost an act of class treachery to drink it. Today they are drinking wine. One reason might be that they are more willing to break out of this class consumption pattern which you didn't see in the 1980s and this is an interesting insight that you can learn from studying Marxist economics."
Rational choice theory, as sketched out by Danny, begins by treating humans as walking calculators who know what they want and how to get it. Following Marx, Keynes and others, Ha-Joon on the other hand assumes that we are much more social and easily influenced.
Outside the saloon bar, Danny's way of analyzing the world is the one that dominates economics faculties. Ha Joon? Well, listen to how being outside the mainstream has affected his Cambridge career:
HJC: "A life of persecution and struggle, if I may put it that way. They don't promote you, telling the students that you are a crank. They shut down your course which happened to me. So, yeah, I mean it's a very unpleasant life, and of course they'll have a good excuse. They'll say, 'Oh, he hasn't published in this top journal.' And then people like me go out in the real world and write books for the popular market and sell 1.5 million copies. They say it is still not good enough because you cannot trust the ignorant masses. But then success in the market is the best indicator, but when it comes to their turf they don't admit it."
The way modern academics get ahead is by publishing articles in the most prestigious journals in their field. Except in economics there's a problem. Professor Steve Keen is another non-mainstream economist:
Steve Keen: "Neoclassical economists edit all the major journals - the Economic Journal, the American Economic Review, the Quarterly Journal of Economics. All of these journals which are top-ranked are in fact filtered by neoclassical economists as editor. That means that people like myself don't get published in those so-called leading journals. And it's really as if you had just a [core?] religion where it just happened that the Vatican edited all the top journals, and therefore anybody who wrote as a Muslim or a Buddhist would be ranked as a low-quality religious person."
Aditya Chakrabortty: "If that were to be the case, then we wouldn't have the teachings of the Buddha, and we wouldn't have the Koran."
SK: Yeah exactly. Well we would have them, but they wouldn't be read. They'd be minority, truly minority elements, and they'd be forever battling against a totally dominant Catholic church. In economics, just one particilar majority sect has the monopoly on teaching economics across the whole globe.
The result is to make the subject narrower than its ever been.
Aditya Chakrabortty: "I'm going to name you some famous economists of yesteryear, and you tell me whether you think they'd get published in top journals. Let's start with John Maynard Keynes. Would he get published in the American Economic Review?"
SK: "No. Where he talks about the monetary system and instability and the role of uncertainty, that goes against what the modern mob call 'rational expectations,' and they think if you dont have rational expectations in your model, that's really bad."
SK: "So his vision about uncertainty, lack of information, and instability, would also be rejected from any mainstream journal."
AC: "I'm not having much luck. Let me try Schumpeter."
SK: "Schumpeter would get rejected because he had a cyclical vision of capitalism."
AC: "Hyman Minsky."
SK: "Oh, absolutely not!"
These legendary names may not have much of a future in academia, but they were the precisely the ones who proved most useful to understanding the crash and its aftermath. Yet over the past three decades, the economists who follow their teachings and other traditions outside of the mainstream have been weeded out of their departments.
The picture painted by both students and nonmainstream economists is of a social science that's [more] keen on being a science than having an accurate grasp of society. Yet over the past thirty years it shaped our society and our politics more than any other discipline.
Audio footage of former President Ronald Reagan: "Ive always felt the nine most terrifying words in the English language are, 'I'm from the government, and I'm here to help.'"
Dr. Victoria Bateman teaches economic history at Cambridge:
Victoria Bateman: "At the fundamental root cause of the crisis is the belief of economists in the free market capitalist system. And the result of this growing faith that really began in the 1980s with the rise of Margaret Thatcher and with Reagan in the U.S. The result of that belief was a liberalization of markets, privatization, the rolling back of the state, deregulation of the financial sector, and so we began to experience full-blown capitalism. That it could be set forth, free reign, and the result would be low unemployment; inflation that was under control; respectable, even high, economic growth rates. The result was that on the eve of the global financial crisis, economists were looking ahead and envisioning a rather rosy future, you know, we were basically on the Titanic with all the great glory that this free market capitalist model promised. And economists were entirely unaware of some of the problems that this was creating behind the scenes."
Take mainstream economics out of the textbooks and into the real world, and what do you get?
HJC: "The world economy has grown much more slowly..."
Ha-Joon Chang, author of "Economics: The Users Guide:"
HJC: "...has become much more unequal, and has become much more unstable. So growth being slowed down means that living standards [don't] rise as fast as it could have. [?] financial crisis creates unemployment; increasing inequality harms social cohesion and the society becomes more unpleasant to live in. So the human cost of having [the] wrong kind of economics has been enormous."
But the really big blow to the standing of mainstream economics came from the meltdown in 2008. It was a crash that hardly any economist saw coming. And the ones who did were almost all from outside the mainstream. Among them was Steve Keen, author of "Debunking Economics:"
Steve Keen: "Everything that they did about setting up an armchair view gave them a view effectively of a village from 5,000 years ago before credit and money had been invented. And that's how they try to model modern capitalism."
AC: "You said economics doesn't really take much account of money and banks and debt. But a lot of people listening will think, hang on, that's exactly what economics is about, isn't it?"
SK: "Exactly. And the people who are listening are right and the economists are wrong. The mainstream mantra basically says that money is just a veil over barter, what's actually going on behind all those money transactions is in fact just people exchanging one commodity for another, and money is basically irrelevant. All money gives you is the rate of inflation; it doesn't tell you anything real about the economy. And they then drill that into people's heads in first year, and if they survive all the way to a Ph.D they actually believe it."
AC: "So you're saying, effectively, that mainstream economics misses out on how banks actually function, and in doing so they basically miss out on the creation of debt, right? And therefore that when we have a huge crisis caused by too much debt, mainstream economics is no help to us whatsoever."
SK: "No, half of [??] don't even bother looking at that information. So rather than saying we have to monitor bank lending and look at how big it is compared to the GDP and whether it is growing or shrinking at the time, they basically say 'ignore it.' There are many, many steps at which that model falls over, but they continue to teaching it because it's this nice, coherent, neat, plausible, and wrong model of the world, and then that gets in peoples' minds and it becomes the religion of economics..."
But then how will mainstream economics, and by extension the society it interprets and shapes change? Max Planck once observed that science progresses one funeral at a time. Not a bad joke for a German theoretical physicist. But it's also a serious point--that only by replacing the champions of an old idea will you get rid of the idea itself. Which is why Victoria Bateman looks to her students to save her subject:Teaching economics after the crash (BBC Radio 4)
VB: "Really what we need is fresh thinking, young minds. And I say this to my students, that when they're reading the textbooks, this is not the end state of understanding, that we still need to find a path forward, and actually it's their experiences coming in from the real world out there could potentially be the savior of the subject."
Maybe. But most undergraduates only hang around for three years. Their opponents on the faculty will be there for life. And, says economic historian Lord Robert Skidelsky, the graybeards have vested interests on their side:
Robert Skidelsky: "You have an establishment. And that establishment is very durable. And very few people break the mold of it. The ideas in office, the ideas that succeed, are ideas that are usually acceptable to the power-holders in society. They're the ones that are called 'scientific,' and all the others are called 'nonsense.'"
If, as critics say, mainstream economics is deluded, then it pays to be deluded. The rich and powerful reward those academics who come up with scientific-sounding reasons for why they should have wealth and power, says billionaire George Soros.
George Soros: "Well, lets take this fundamental misconception in General Equilibrium Theory which is that in General Equilibrium produces the optimal allocation of resources. And markets, being perfect, allocate resources the most efficient way. Now this happens to be false, because markets are not perfect. But its a very convenient belief for those who are benefiting from financial markets - the rich and powerful."
Paul Samuelson once said, 'I don't care who writes a nation's laws, or crafts its advanced treaties, if I can write its economics textbooks.' He should know, he wrote perhaps the biggest selling economics textbook of all time. The people who write the replacement set texts will be producing the instruction manual for our society...
And related: Sack the economists (Real World Economics Review):
After reading yet another cri de coeur from yet another frustrated economist, I thought perhaps we need to spell out the message in all bluntness: we need to sack the economists (the mainstreamers). We also need to derail their baleful ideology. That means we need to disband the departments of neoclassical economics, so the poison is not passed on to any more hapless generations.
When I say “we”, I really mean “we, the people”. The job can’t be done by a small band of isolated reformers. That means people need to be informed and persuaded. They need to be spoken to in terms they understand; not everyone, but opinion leaders and interested laypeople, of whom there are many.
Thus was I moved to write the short ebook: Sack the Economists and Disband Their Departments.
The title may seem to be a bit confronting at first, but the book is a concisely argued case, not a rant. The bluntness is justified by the fundamental flaws in mainstream economic ideas. There are not just one or two flaws, there are many. Neither are they just obscure theoretical flaws.
For example, private debt is ignored in mainstream macroeconomic models and thinking. It is ignored because, supposedly, “one person’s debt is another person’s asset”. But that would only be true if loans comprise 100% savings. They don’t of course, somewhere between 90% and 100% of a new bank loan is new money created out of nothing. That means loans affect the money supply, the purchasing power available to the economy. As debt rises and falls, so the economy booms and busts. Steve Keen has been leading the way explaining and demonstrating this, for example in Debunking Economics. This seems to be the most immediate reason why the mainstream utterly failed to foresee the 2007-8 Global Financial Crisis.
At an even more mundane level, the near-universal use of Gross Domestic Product as a measure of economic success, and by implication of quality of life, does not even qualify as basic accounting. This is because the GDP measures “activity” involving money, but makes no distinction between useful, useless and harmful activity: the cost of cleaning up pollution is added to the GDP. This would be like a shop keeper entering all his transactions (income and costs alike) in the credit column of his ledger, adding them up, and claiming his business is booming.
What is needed of course is a balance sheet. It would also be helpful to separate economic, social and environmental factors. All of these things are available, but they languish because politicians love the GDP and mainstream economists fail, collectively, to point out the falsity of using GDP as a measure of welfare.
The so-called efficient markets hypothesis is a joke. If all financial market players made independent assessments of relevant information and their mean assessments were accurate, then there could be no market crashes. It is well known that many market players follow trends, not fundamentals, so their assessments will not be independent. If players assessments become correlated, in other words if they behave as a stampeding herd, then their mean assessment can be seriously in error, and subject to sudden correction. That of course is what happens in a market crash, and every crash invalidates the hypothesis. (Can I have my pseudo-Nobel Prize now, please?)
The central absurdity of mainstream economics is of course the neoclassical theory, and its prediction that free markets will bring about the General Equilibrium. It is hard for a scientist like myself to conceive that this theoretical abstraction could have survived for a century or more, let alone become the dominant paradigm. It is based on absurd assumptions, and there are many manifestations of disequilibrium in real economies that contradict its main conclusion.
Financial market crashes are obvious manifestations of disequilibrium, but so, for example, are extreme and increasing inequalities in wealth (an instability in the distribution of wealth), and the exponential growth to dominance by a few firms in many market segments (commonly due to economies of scale and the coloniser effect, both of which are excluded from the theory).
The neoclassical assumptions should disqualify it from serious consideration anyway. We are all assumed to have complete knowledge, to be able to predict the future, to be immune to fashion, to social and psychological pressures, and so on and on. If you drop these assumptions you predict a very different kind of system: a far-from-equilibrium, self-organising system that probably qualifies as a complex system. The neoclassical theory can never be even a rough first approximation to such a system. Rather, it is completely misleading.
As well as silly assumptions, there are also important things missing from mainstream thinking. For example, why is the pivotal role of ownership not highlighted as a dominant determinant of the flow of wealth, and responsibility? There are many possible kinds of ownership, but our system is dominated by only a few, and they tend to favour the wealthy. Why is social credit almost universally ignored. This is the term often used Henry George’s followers – a modern systems term might be emergent community wealth, the wealth that accrues from the proximity of businesses, people, infrastructure, above and beyond the individual investments. It is this wealth, that belongs to no individual entity, that is allowed to be captured by land speculators, thus facilitating one of many economic injustices. Then there is the monetary system, perhaps the most important and most neglected economic factor of all.
Sack the Economists lists seven readily identifiable mechanisms that transfer wealth to the rich, from the rest of us. Neoliberals rail against “wealth transfers” that attempt to re-balance the distribution of wealth, but are oblivious to copious transfers in the other direction. This is an example of rhetoric that can be turned back on neoliberals. Other examples given in the book are social engineering, political correctness and class warfare.
Mainstream economics is incomplete, grossly misleading and destructive. It reflects the gross ignorance and long-term intellectual isolation of its practitioners. It uses a lot of fancy mathematics, but this does not mean it is science. The mathematics can’t disguise the fact that mainstream economics is not science – it is pseudo-science.