…that’s a large part of what economics is – people arbitrarily, or as a matter of taste, assigning numerical values to non-numerical things. And then pretending that they haven’t just made the numbers up, which they have. Economics is like astrology in that sense, except that economics serves to justify the current power structure, and so it has a lot of fervent believers among the powerful.

Kim Stanley Robinson, Red Mars

It is natural to think that if we want to talk about the economy we should turn to economists. The trouble is that mainstream economics is a product of the existing system (as much as it has shaped the system) and therefore not conducive to creating something new. Reductionism, questionable assumptions and ideological bias are the major issues in this respect and are worth elaborating on.

 Reductionism: a desire to appear scientific has driven economics from the very beginning. Both the physiocrats and Adam Smith were strongly influenced by Isaac Newton and the ‘natural philosophy’. However, there was a problem: science deals with physical bodies and forces, while the economy involves human interactions that can be very complex, messy and volatile. Scientific method, at least at that time, did not cope well with complexity (Newton famously conceded that the three-body problem[1] was beyond his comprehension). So, the first economists had two options: either to expand on the method or to simplify economics. As the former carried a risk of being seen as unscientific, unsurprisingly the latter option (reductionism) won. Mainstream economics has more or less continued on that trajectory right through to today. By and large, it still disregards real life in favour of abstract models and mathematical formulas. Its faux-scientific principles make a clean theory out of a dirty world. For example, Robert Lucas, the father of rational expectations theory, claims: “Economic theory is mathematical analysis. Everything else is just pictures and talk.” On that basis, rational expectations theory claims, for instance, that a government stimulus to the economy is almost always unnecessary or damaging. But then, if you don’t pay heed to reality, you can use maths to come to any conclusion you want. The above may be an extreme example, but idealised market conditions are assumed by most conventional economics, even though they never exist in real life. Critically, people and their interactions are grossly simplified or even excluded from the equation. And yet, it is people who create and run the economy. The same people who usually do not have the resources, assets, sufficient information or even desire to behave as expected. Furthermore, the economy is an open system that interacts with other social and natural systems. If this context is ignored, we can get at best a poor and at worst a distorted picture of the economy. So, an interdisciplinary approach is called for, but mainstream economics is anything but. It is not surprising that such reductionism can lead to questionable assumptions.

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Shaky assumptions: the failure of traditional economics to understand the complexity of human psychology is part of its tragic mismanagement of the world (Boyle & Simms, 2009, p.67). Arguably the most infamous example is a conviction that we can build economics on an assumption that people always act rationally in their own best interest. This may sometimes be the case, but often people do not act rationally or in their self-interest (e.g. a son helping his elderly mother is not acting in his best interest as, economically speaking, he would be better off in terms of time and money if he didn’t[2]). As far as rationality is concerned, when making economic decisions, copying others and following prevailing trends is far more common (individual stock market investors are a good example). The same applies to other assumptions, such as that people are driven by incentives. Do people act because of incentives? Sure they do. Do people act only because of incentives? Certainly not. In fact, research is unequivocal that intrinsic motivation (doing something because we like it or because we find it meaningful) is often far more important. And, of course, sometimes people act (or do not act) despite incentives. In a nutshell, economics is based on assumptions that eliminate from humankind nothing less than humanity itself. This is followed with another assumption – that if acting rationally in one’s self-interest is good on an individual level, it must be good at higher levels of social organisation too. But this is far from true. The self-interest of an individual may not coincide with the interests of the company they work for, let alone larger society (e.g. they may have personal incentives to take unreasonable risks that could be detrimental to their company). If you start from such shaky assumptions, you are not going to arrive at meaningful conclusions, however immaculate the maths is. Even worse, this can legitimise ideological biases.

Ideological bias: besides a drive to appear scientific, many economists have had a competing drive to influence and shape the economy. The 19th century split between positive economics, which advocated sticking with science, and normative economics, which openly embraced the desire to influence, was the result of a tension between the two positions. This conflict was not an accident, as the attempts to influence the economy were often based more on Humian sentiment[3] than on scientific rationality. In other words, rationality is used as a tool not to come to conclusions, but to justify premeditated ones. How is this possible? As already pointed out, economic models are always simplifications. If you simplify a complex picture, you can choose what you leave in and what you leave out, and choices do not have to be based on objective, scientific criteria. One economist can pick up certain elements and connect them in a system that responds to her sentiments (inclinations, preferences, etc.); another may choose different pieces and connect them to create a different system. Economic models, being abstractions and simplifications, are therefore open to ideological bias, as an economist can decide on the basis of their preferences what will be a figure and what will be a background. As a result, despite the mountain of evidence that an economy based on unrestrained free-market ideology does not work well in practice, it still dominates the Western academic world. There are several reasons why intelligent scholars in this field would perpetuate a particular ideology and fail to see – or simply ignore – what may look obvious to everybody else:

  • Sponsorship: dominant theories may be at odds with reality, but they fit the needs of the wealthy and the powerful. Before and after the neo-liberal counterrevolution their advocates were showered with support, prestige, and well-lubricated career trajectories (a far-right economist, James Buchanan, who won a Nobel Prize in 1986 and was bankrolled by the Koch brothers[4], is a good example). Why are the wealthy bothered at all? Because in a democratic society, it is important to sell change to the masses and pacify them. The message those ideologists were supposed to spread is that a neo-liberal economy is the best possible system and that being poor, disempowered and disfranchised can only be one’s own fault. As being a mouthpiece for the financial elite brought benefits and prestige, a sufficient number of economists jumped on the bandwagon. To avoid cognitive dissonance, they had to persuade themselves that this ideology was right and start believing in it. They could be very passionate about defending it, while ignoring denying and ridiculing any inconvenient truths and facts.
  • Careerism: Another reason a particular brand of economics retains its magnetic hold is that it provides a safe basis for career advancement in academic institutions. A game of beating other academics in constructing theoretical models matters more than the extent to which that model reflects the real world. The latter can be safely ignored because it is the method and mathematics, rather than outcomes, that are evaluated. For example, Alberto Alesina of Harvard University and his co-authors long argued that austerity economics could generate economic growth despite a weakening economy. And yet, even IMF economists (led by Olivier Blanchard) made it clear that this is not the case in practice. One would expect that economic theorists would take heed of such empirical findings and change or modify their theoretical model, but this is rarely the case. As John Maynard Keynes quipped, it is better for reputation to fail conventionally than to succeed unconventionally. It is not surprising that there are relatively few reformers – departing from established norms is a too big career risk.
  • Indoctrination: students are taught a dominant paradigm obscured in abstract and mathematical formulas, and if they want to get their degrees and pass their exams, they’d better take it all in. According to recent research, economics students exposed to neo-liberal ideas appear more selfish than students of other subjects – this applies to those who chose to study economy as an option, rather than as their core subject, which suggests it is not a case of selfish people choosing to study economics, but economics classes making them more selfish.

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The intention here is not to show mainstream economists in a bad light. They are not much different from anybody else. It is just that those who embark on an academic career in this field are almost inevitably affected by the above factors and many start taking small, incremental and not unreasonable steps in a particular direction. It is worth remembering that by doing so, these economists are consistent with the ‘philosophy’ they are asked to advocate. Those who claim that people act rationally in their self-interest are also likely to act rationally, not in the interests of their students, larger society, or the truth, but in their own self-interests. The trouble is that they don’t sell the fruit of their labour as such (because nobody would then buy it), but as an objective, universal, academically robust, even scientific truth, which has had serious consequences. By providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crises that came before it back to the early 1980s). More broadly, they have advanced theories that justified the policies that have led to an increasing disparity between economic goals and the goals of society as a whole, as well as pushed for policies that weakened the prospects for long-term development in developing countries. They also supplied arguments that insist that all those economic outcomes that many people find objectionable, such as rising inequality, sky-high executive salaries, or extreme poverty in some parts of the world, are really inevitable and justified. In a nutshell, economics as it has been practised in the last few decades has been worse than irrelevant – “it has been positively harmful for the economy and most people” (Chang, 2011, 247-8).

So should we abandon economics? Absolutely not. Some economists are finally getting their act together and valiantly shedding the ideological baggage that many in their profession still carry, in an attempt to grapple with the complexity of their field. They talk to psychologists, sociologists, environmentalists, complexity theorists, and others. In a sense, real economics is only starting now. How is this possible at all, given the pressures we mentioned? As we entered the 21st century, the neo-liberal ideologists were no longer considered important by those who have used their wealth to pull the strings. Theories and ideas have never been of any intrinsic value to such people; they were always the means to an end – but there was no battle to be fought any more. The battle was won, so those who fought to establish these ideas could be discarded, like soldiers after a war. An unintended consequence of this is the new economics starting slowly to proliferate, at least on the fringes. These new economists first came from small, rather than large, mainstream institutions and were mainly focusing on micro-economics rather than the bigger picture. And then the 2008 crisis took place. The dismal failure to predict the crisis made it very clear that something was wrong with mainstream economics. That was an impetus for a number of economists (some of them from the top universities such as Cambridge and Oxford) to deconstruct the existing economic dogmas and offer worthwhile alternatives, such as Kate Raworth, Ha-Joon Chang, Andrew Simms, Paul Krugman, Dan O’Neill and growing number of others. We can build on that momentum and perhaps go even further, by connecting the dots and making a synthesis that is fit for the future. Let’s stop taking capitalism for granted, and see what is possible.

[1] Modelling the motion of three (rather than two) celestial bodies in relation to each other.
[2] Let’s assume, for the sake of the argument, that no inheritance or any other instrumental gains are involved.
[3] Scottish philosopher David Hume (1711-1776) thought that our views are driven more by emotions (that he called sentiments) than reason.
[4] See Democracy in Chains by Nancy MacLean, 2017.

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