A different perspective on modern economics (revised)

Part of an ongoing “Economic Myths Debunked” series.

Economics is often portrayed as being independent, devoid of value judgements, and immune to ethical or ideological influence. Over the past thirty years our politicians and policymakers, many economists in the media, and most economics textbooks have encouraged us, in the words of Harvard professor Dani Rodrik (2009),  “to think of economics as a discipline that idolizes [sic.] markets and a narrow concept of (allocative) efficiency.”

The mainstream view

The general public, media and indeed economic students have all been subtly indoctrinated with an emphasis on demand and supply (also called the model of perfect competition) as the central theoretical structure of an immutable reality: “…a world of perfect markets in which given resources are allocated as if by an invisible hand in a way that maximizes[sic.] the value of total production. The belief that this model approximates how markets operate in the real world is often referred to as ‘market fundamentalism’.” (Hill and Myatt, 2010, p.4)

[It is essentially a laissez-faire view. The core belief is that markets are efficient and that governmental attempts to ‘interfere’ with markets necessarily create inefficiencies. (ibid, p.264) They give the impression that markets generally are sufficiently competitive that (for the most part) they lead to efficient outcomes; that minimum wages and unions are harmful to workers themselves; and that government regulation is either ineffective or harmful. (ibid, p.1)]

Further still, most are under the impression “that economics is a value-free science; that economists have an agreed-upon methodology; and they know which models are best to apply to any given problem.” (ibid, p.1)

Most of this is myth.

The reality

“Value judgements pervade economics and economic textbooks. These value judgements reflect a social and political philosophy and can be called an ideology or world-view. It is one that textbook writers are implicitly attempting to persuade the reader to accept.” (ibid, p.1)

The point is not so much to claim that this ideology is wrong, but simply to point out that it exists, and that there are always alternative views that one ought to consider. Hill and Myatt agree with Rodrik (as quote in the first paragraph) that the typical text offers a view that ‘idolizes markets’ – “usually not in a crude way, but in a subtle way through its choice of themes, and through its emphasis on demand and supply (also called the model of perfect competition) as the central theoretical structure.” (Hill, 2010, p.4)  Australian economists Prof. Steve Keen goes further, implying that because the values that pervade the textbooks are so subtly woven through they present themselves as  neutral, yet only by absence of alternative views. A whole generation now exists that thinks  “neoclassical economics [is] economics.” (Keen, 2011, p.9)

Neoclassical, mainstream, economics  presents hypotheses and policy prescriptions with surprisingly little or no supporting evidence, or (worse) it ignores inconvenient contrary evidence. Indeed, what neoclassical economists don’t admit is that even their fundamental “totem of supply and demand” (as Keen refers to it) is based on an initial assumption that would leave the most ardent supporter of “free-markets” with their jaw planted firmly on the ground.

“Scientists … check their theories and models against observations of the real world at every opportunity. The central theory of the currently dominant stream of economics has not been properly checked against real economies for over a century. If it had, it would long-since have been abandoned.” (Davies, 2012)

Particularly, many  supporters of market fundamentalism, the modern free-market theory (or academically, the neo­clas­si­cal theory), are actually ignorant (or misinformed) about the foundations this theory is built upon and the assumptions of its economic models. It comes as a shock for many when they find how little this widely revered theory has to do with science and reality in the real world. When people who seem to vehemently support ‘free-markets’ start stating how they think they work and the basis of their understanding, they don’t realise that they ironically showing how much they don’t support market fundamentalism!

In 2000, a group of economics students in France circulated an open letter to their professors declaring ‘We wish to escape from imaginary worlds!’ and deploring the ‘disregard for concrete realities’ in their teaching.  They asked for less dogmatism and more pluralism of approaches. Since then, petitions and open letters have appeared in the United Kingdom and in the United States. (For details, see www.paecon.net.)

Forthcoming blogs

My aim with the forthcoming blogs on economics topics is to open up your views on economics; to see things in broader terms; to understand the differences and similarities in the many schools of thought outside of the current neoclassical dominated world view and hopefully to think more critically when presented with economic ‘facts’ and ‘discussions’ by the media, economists,  and politicians.

Contradictory to what neoclassical economists insist, economics is not an immutable science or natural force with set physical laws; it is socially and philosophically driven, morally adaptable and is fundamentally controllable. The “free market” as is defined by the political ‘right’ and neoclassical economics is not natural or inevitable, and does not exist outside government. Markets aren’t “free” of rules; the rules define them.

I want you to imagine how you believe economics should look and behave; and then be an influence that can make that change. In the words of Akerlof and Shiller (2009, p.173):

‘There is then a fundamental reason why we differ from those who think that the economy should just be a free-for-all, that the least government is the best government, and that the government should play only the most minimal role in setting the rules. We differ because we have a different vision of the economy.’

Postlog: Myth of the ‘free-market’

ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, http://www.huffingtonpost.com/robert-reich/free-market_b_3935173.html (extract)

Who should decide on the rules [of the ‘free-market’], and their major purpose? If our democracy was working as it should, presumably our elected representatives, agency heads, and courts would be making the rules roughly according to what most of us want the rules to be. The economy would be working for us; we wouldn’t be working for the economy.

Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game.

Not incidentally, these are the same people who want you and most others to believe in the fiction of an immutable “free market.”

If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.” We can make the economy work for us, rather than the other way around. But in order to change the rules, we must exert the power that is supposed to be ours.

Bibliography and Cited Works

  1. Akerlof, G. A. and R. J. Shiller (2009) Animal Spirits: How human psychology drives the economy and why it matters for global capitalism, Princeton, NJ, and Oxford: Princeton University Press.
  2. Davies, G. (2012) The nature of the Beast – How economists mistook wild horses for a rocking chair, Ebook, Online: Geoff Davies.
  3. Hill, R. and Myatt, T. (2010)  The Economics Anti-textbook: A critical thinker’s guide to microeconomics, Black Point, Nova Scotia: Fernwood Publishing.
  4. Keen, S. (2011) Debunking Economics: The naked emperor dethroned?, London and New York: Zedbooks.
  5. Rodrik, D. (2009) ‘Blame the economists, not economics’, Guatemala Times, 11 March, available at www.hks.harvard.edu/news-events/news/commentary/blame-the-economists

If you have an area of economics, or political philosophy that you would like to see discussed in these blogs, or questions that you feel need to be addressed, please let me know via the comments below.