The current prevailing economic paradigm in academia, business and government is so-called "neo-classicism," (hereafter "orthodoxy") based in part on the musings of Milton Friedman and his disciples of the "Chicago School," but adopted by many economists before and after.
Orthodoxy is "neoclassic" because unlike classic economics, represented by thinkers such as Adam Smith and David Ricardo, Orthodoxy is more extreme in holding the unfettered market as the holy grail. Orthodoxy is bolstered by an imposing superstructure of mathematical equations--purporting to prove that its tenets are as solid and irrefutable as the law of gravity.
As mentioned, one of those major tenets is the infallibility of the unfettered market. Left to its own devices, the magic market will effect the best uses for all available resources and distribute the products in the most beneficent available manner--all without human intervention.
In this best of all possible worlds, everyone gets appropriately rewarded for his or her contribution to the commonweal, and there is an enduring, if occasionally shifting, equilibrium between supply and demand in an ever-growing economy. Market crashes and depressions simply cannot occur.
But, alas and alack, the real world doesn't appear to fit the paradigm very well. Are hedge fund managers really orders of magnitude more valuable to society than, say teachers? Or cops? Or researchers in disease? And about that equilibrium thing: how did the crash of 2008 happen?
At the London School of Economics in 2009 Queen Elizabeth II is purported to have asked the economic savants present why they had failed to anticipate or warn of the coming catastrophe. None had an answer.
But not everyone was so clueless about the coming catastrophe. One maverick economist named Steve Keen (of whom more anon) saw it coming and called it in the first edition of his book. Some others also saw it coming and used their perspicacity to make a fortune.
But orthodoxy's devotees remain unfazed. In the blog "Crooked Timber," that fearless free-marketeer Alan Greenspan is quoted as saying;
Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque.With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.
To which the blogger tartly responded “With notably rare exceptions, Russian Roulette is a fun, safe game for all the family to play,”
But in the face of this disconnect between the orthodoxy's tenets and the real world, some heretics are emerging who are attacking the verity of the paradigm.
The attack is coming on two major fronts: theoretical and empirical. The maverick Australian economist mentioned above, Steve Keen, has published a book with the straight forward title "Debunking Economics." The book is now in its second edition.
Keen goes after the purported mathematical support for orthodoxy. He traces the roots of the movement to the philosopher Jeremy Bentham's ideas on "utilitarianism," Bentham posited that all humans are essentially automatons seeking pleasure and avoiding pain. The early neoclassicists interpreted this as meaning pleasure equals financial advantage and pain equals deprivation.
So, in considering this financial-advantage-seeking automaton, the orthodox economists came up with the famous nice, smooth, downward-sloping demand curve intersecting with the nice, smooth, upward-sloping supply curve. The point of intersection is the equilibrium point between supply and demand and represents the most "efficient" production quantity. Considering a single consumer faced with one commodity to buy, the notion more or less fits. The consumer will buy until surfeited, and the producer won't wittingly produce beyond that point.
The problem, as Keen sees it, is that in considering the marketplace as a whole, with its myriad of products for sale and individuals with a myriad of mostly subjective and differing needs and desires, not to mention purchasing power, you can't simply sum up those needs and desires (what unit do you use, and how do you measure?) to derive a demand curve for the market as a whole, and without that, you can hardly derive a convincing supply curve.
Keen asserts that neoclassical economists themselves discovered this unwelcome result 60 some odd years ago but have since obfuscated and buried the truth by various evasions and totally unrealistic assumptions such as a "representative," i.e., single, consumer faced with a "representative," i.e., single, commodity to purchase. The problem of aggregation is, accordingly, simply assumed away.
My summary obviously barely skims the surface of Keen's analysis. But I hope it will whet the reader's appetite for more. The book should be required reading for every person having a hand in making public economic policy.
But aside from the weakness of the mathematical case for orthodoxy, the empirical basis is even weaker. This weakness is thoroughly exposed in another recent book, "Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics," by Mark Buchanan.
Buchanan is a physicist, but he has studied economic issues, and in particular the stock market, for years. His critique of orthodoxy begins with what he calls "the equilibrium delusion." Buchanan notes that the market's historical record is replete with panics and crashes, the 2008 crisis being only the latest.
The crucial thing, I'll argue, is getting past the archaic fixation on equilibrium, and adopting concepts from the science of "nonequilibrium systems" of which the earth's atmosphere and ecosystems are natural examples. Beyond mere metaphor, there are deep reasons to think that financial crises really are closely analogous to atmospheric storms and related natural upheavals in physical systems. Understanding such events means grappling with the concepts of positive feedback and natural instability.
Buchanan shows how positive feedback loops (read vicious circles) render the financial markets "chaotic" rather than equilibrium systems, and how the invention and marketing of "derivatives," touted by orthodox economists as making the markets "more complete," actually creates more positive feedback loops and thus increases instability.
Along the way, using concrete examples and empirical studies, Buchanan demolishes orthodoxy's concept of "economic man" and shows how much irrationality is often involved in economic activity and decisions. Just for example, orthodoxy completely ignores how individuals are influenced by others. To me Buchanan completely knocks in the head Maggie Thatcher's dictum that there is no such thing as society. One might as well argue there is no such thing as water--only individual atoms of hydrogen and oxygen.
Buchanan's book is more accessible than Keen's, but both together thoroughly destroy the notion that orthodoxy is a science. Both should be read by policy makers, and in my ideal world would be required reading in any university beginning economics course.
In my estimation, orthodoxy is a political agenda masquerading as a science. It should be relegated to other pseudo-sciences such as astrology, phrenology, and palmistry.
