By: Adam Strømme
Editor-in-Chief, Economics & International Relations Student
After the crash of 2008, many were understandably mad. Mad at the greed of speculative financiers; mad at the ineptitude and willful ignorance of regulators; mad at the lack of punishment of those responsible; and mad at the perpetual austerity the bailouts had now offloaded onto the public. But perhaps more than any one group of people not directly implicated in the crisis that people have become mad at is economists.
And it’s not just the people on Main Street. In a high-profile denunciation, even the Queen couldn’t avoid sparking controversy when she questioned how nobody at the London School of Economics had managed to pick up on the impending crisis. “Why did nobody notice it?” Her Majesty asked, understandably confused by the dramatic yet seemingly obvious explanations she was being given. And she had a valid point: if some of the most esteemed economists in the world could miss the 2008 crisis, then how much did their models really grasp the fundamentals of the modern economy?
If some of the most esteemed economists in the world could miss the 2008 crisis, then how much did their models really grasp the fundamentals of the modern economy?
Some ears in academia also pricked up at the challenge. Although notoriously bland and technical from the outside, arguments over the fundamentals of economics unquestionably remain the fiercest of any discipline in the social sciences.
Manning the line of heretical economic positions arose new groups like the Post-Crash Economics Society, Rethinking Economics, Evonomics, and the Institute for New Economic Thinking, each sprung from the conviction that a profession dedicated to the study of market forces and human well being was failing to do both. False premises with economic modeling like competitive and efficient markets, perfectly rational actors, and a near conspiratorial fear of State involvement in markets in any form had led much of the profession from discipline to dogma. Orthodoxy had managed, they concluded, to explain away reality through a theoretical architecture which impossibly managed to marry myopic cynicism of government with unadulterated optimism for the market system. These criticisms were not without merit.
Economists must learn once again to not only describe, but to dream.
But most of the profession has opted to simply ignore these challenges. Rather than engage with them in the spirit of free scientific inquiry, criticisms of these new movements largely rest upon appeals to authority and the presumed dislike of undergraduates of the increasingly onerous amount of mathematics now baked into the profession. That even Ivy League professors have complained about the rise of “mathiness” over rigorous intellectual foundations, and that this emphasis has resulted in the near complete absence of economic history within the profession is, to them, of little relevance. The mainstream hurls charges of ignorance and utopianism and students and critics reproach teachers for complacency and dogmatism.
Both are mistaken. This entire discussion is not of idle significance; in a world of chronic underemployment, rising poverty, stagnant industry, environmental degradation, and worsening public health, forceful solutions to the acute problems of the global economy must be met with a combination of creativity and rigor.
Economists must learn once again to not only describe, but to dream.
Economics in general went through three major phases: The Ricardian Revolutions, the Keynesian Revolution, and the Neoclassical Revolution.
The Ricardian Revolution, which helped found Classical economics, provided a rigorous foundation for some aspects of economics, but its construction during a brutal depression and widespread industrial disorganization imparted a naturalistic, zero-sum outlook to economics. Building upon the brilliant but inconsistent works of Adam Smith, David Ricardo introduced crucial concepts like comparative advantage, diminishing marginal utility, as well as the ill-fated labour theory of value (as opposed to the more familiar modern subjective utility theory, which relates value to supply and demand). With Smith and Ricardo, the Classical school of economics was born, and would rule economics departments worldwide for over a century. Even Karl Marx, now touted as the challenger of orthodoxy, build much of his theoretical foundations upon Ricardo’s work. As the famous sociologist Karl Polanyi summed up the orthodoxy of the day: “Where Ricardo and Marx were one, the nineteenth century knew no doubt.”
But when the global economy lurched definitively into crisis in the 1930’s, the Ricardian model had no answers. It’s painfully abstract worldview, made worse by the labour theory of value and Enlightenment-era faith in the sheer rationality of the marketplace, couldn’t explain the crisis.
Into the breach stepped John Maynard Keynes.
By emphasizing the role of psychology in investment, and dispelling the theological aura surrounding market forces which had hamstrung the old school, Keynes helped provide a platform for action through government involvement which could save Capitalism from itself, and courted other economists to take whacks at the old Classical school model.
Far from patient incrementalism, many key elements of modern economics were born of this spirit of radical critique. Few recall his explanation for the title of his most important work, The General Theory of Employment, Interest, and Money was because the Ricardian school, in making patently absurd assumptions like constant full employment, was “tied up with their very special assumptions, and cannot be adopted to deal with the more general case.” Hence to these “special theories”, Keynes juxtaposed “The General Theory.” To Ricardo’s orthodoxy, Keynes’ dynamite.
The Keynesian revolution also ushered in ample opportunities to experiment, and alongside these experimentations there were important developments in the fields of national accounting and econometrics. With a more solid empirical foundation, figures like Paul Samuelson and Simon Kuznets were able to provide a concrete floor from which to begin economic analysis whereas the Ricardian school was largely forced to rely on abstraction (the so-called “Ricardian Vice”). Unfortunately, the reliance of empirical methods and accounting upon the existing economic framework meant that assumptions became increasingly submerged beneath mountains of data that was often used to explain a range of phenomena.
The Modern Turn and the Necessity of History
For this reason the modern phase of economics is really not a new phase at all. It is rather a rehashing of the Classical school, retooled to compensate for the most grievous attacks levelled by Keynes and other economists of a similar stripe. But economists inside governmental or business circles have taken in stride far more of the Conservative implications of this “Neoclassical Synthesis” than the more radical conclusions of the Classical school’s second wave critics. To believe otherwise flies in the face of the current debacle of austerity politics.
Yet many academic economists have convinced themselves that the Neoclassical Synthesis was precisely that, a synthesis, rather than an abrupt turn of face away from many crucial elements of the Keynesian system. A listing of a Neoclassical wishlist, at least in practice, emphasizes unrestricted capital flows, privatization, low taxes, and a watchman state bound by austerity economics, all of which would be utterly alien to the Keynesian. Slowly, surely, the radical Keynes who once boldly declared that “in conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible” and that as a result “the duty of ordering the current volume of investment cannot safely be left in private hands” was converted into the Keynes of minor homilies about the paradox of thrift and sticky prices.
No wonder, then, that so many students in the post 2008 world fail to see the potential latent within mainstream economics. Thanks to the sanitizing effect of the Neoclassical Synthesis, they have come to see much of the monolith of orthodoxy as a homogenous whole, a discipline founded by those ignorant of the deleterious side effects of unfettered markets and indifferent to measures of well being beyond inflation, GDP, and an obsession with the size of government rather than its function. Economists, in training their students in these approaches, have failed to remember the wider purpose of economics, and in so doing have set the rigidity of their orthodoxy on a scale against the respect of their students and the wider intellectual community.
Keynes once famously wrote an economist “must be mathematician, historian, statesman, [and] philosopher—in some degree. He must understand symbols and speak in words” and that “no part of man’s nature or his institutions must be entirely outside his regard.” In this belief he was surely right. But with respects to the teaching of economics at nearly all universities, he was also completely ignored. Surely it would be an impossible to expect teachers to train students in the realities of economic policy as well as all of these things independently. But their unwillingness to descend from the ideal world of theory into the profane world of actually existing economics in order to demonstrate the real constraints and impact of economic decision making is a profound disservice to a profession with a disproportionate impact upon the well being of society as a whole. It is also, ultimately, what economists are inevitably required to do, despite the best attempts of economics to remain “ensconced in a Ricardian world” of special theories and absurd assumptions, as Keynes put it.
Economics and “The Study of Man”
Economics was not always this way, and it has historically been proudly eclectic in choosing to give space in non-specialized courses to both the historical and political dimensions of economics alongside the essential realm of theory and econometrics. Today, by contrast, rather than be vocal about the real costs of policy and the interests they involve, often the role of economists in public debate has to become either the devil on the right shoulder regarding government policy independent of the whims of the market, or an angelic soothsayer on the left about grotesque inequalities within the economic system or the dysfunctions of market economy more broadly.
We forget the cost of our new, peculiar brand of economics, but protest movements against mainstream economic around the globe are reacting largely unconsciously against them. Although more empirical than ever, the assumptions of the models purporting to explain phenomena remain in a proverbial dark age, such that in the same essay in which he bitterly condemned the rise of mathiness, Paul Romer also protested that “Presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand. There is no intent to deceive because no one takes it seriously. Perhaps our norms will soon be like those in professional magic; it will be impolite, perhaps even an ethical breach, to reveal how someone’s trick works.”
“Presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand.”
Today, some of the largest sleights of hand remain unchallenged. In a Neoclassical world of atomized individuals and commodities racing for purchase, there is no room for social institutions which cannot either adopt the profit motive or seek refuge within the shrinking umbrella of the State. As a result the world of possibilities appears at first glance to be constrained to those which operate by these very mechanisms. Indeed, to argue against them appears to fight the very definitions of social rationality themselves. Through that very same sleight of hand, political initiative is shuffled behind the rhetoric of economic necessity. The result is an economics of the void, where radical critique is unrealistic by definition and the failure of theory and policy is irrelevant in a world where there is no conceivable alternative.
Underpinning this whole worldview is a sense that the conclusions of the mainstream economist can be understood in some sense as being “value free.” This, as more perceptive critics have laid emphasis upon than their mainstream opponents, is pure fantasy. Economic historian Richard Heilbroner summarized this reality forcefully when he observed that “the economic investigator is in a fundamentally different relationship vis-à-vis his subject from that of the natural scientist” and thus the “advocacy or value-laden interpretation becomes an inescapable part of social inquiry – indeed, a desirable part.”
While the abstraction of Classical and Keynesian economists often led them astray, it also clarified the methodological divisions between competing schools of thought in more stark terms than is often seen in intensely empirical academic research today. It also required them to take broader view of the social system which they were engaged in describing. The disappearance of this core element of economics, and its gradual degradation into a mere study of “incentives” has obscured what Alfred Marshall considered the discipline’s “more important” role, namely, as “a part of the study of Man.”
It is time this spirit of inquiry is revived, so that economics can return to being a truly social science.