A short time ago, I published a Diary entitled What's Wrong with Economics Today. In that Diary I enumerated in rather dramatic language some of the reasons why I believed Classical Economics and the role played by economists in our society today has failed, remains a pernicious influence on society and is fundamentally invalid.
Some of the criticisms of that Diary, appeared to question my qualifications to make those, admittedly dramatic, statements. To which I can only respond "I calls them as I sees them". That is all anyone can do.
Others seemed eager, for some reason, to defend the fundamental basis of Classical Economics and the role played its practitioners, the Economists. Essentially they seemed to be saying that it must be valid because a lot of smart people believe in it and it uses mathematics. As for the smart people, I direct them to the Mill's quote below. As for the mathematics I refer them to Godel's Theorem that puts in question all mathematically based science that is not empirically verified (the efficacy of which Heisenberg put in doubt). In much of Classical Economics empirical verification is hard to find.
In this Diary I intend to elaborate on that previous discussion a bit and hope to address some of the concerns expressed.
What was affirmed by Cicero of all things with which philosophy is conversant, may be asserted without scruple of the subject of political economy--that there is no opinion so absurd as not to have been maintained by some person of reputation. There even appears to be on this subject a peculiar tenacity of error--a perpetual principle of resuscitation in slain absurdity.
--John Stuart Mill (1844), "Review of Thomas Tooke, 'An Inquiry into the Currency Principle' and Robert Torrens, 'An Inquiry into the Practical Working of the Proposed Arrangements for the Renewal of the Charter of the Bank of England, and the Regulation of the Currency'," Westminster Review 41 (June), 579-98.
I believe that Classical Economic Theory, as it has been presented since the 1970's (whether in its macroeconomic or microeconomic variety), generally portrays itself more or less as an essentially deterministic system that pro-ports to explain and predict human behavior in certain environments. And, yes I know that many economists say that they merely study the sum total of individual decisions and draw conclusions from that data. They then tell us that based on those studies that is how we probably will behave in similar circumstances. Unfortunately it rarely tells us if that behavior is good or bad (that, after all, is the job of politics or religion) or who benefits or even if the behavior has been manipulated and by whom and for what purposes.
Then, despite this lack, it all too often and to my mind seeming without justification proceeds to the conceit that its internally generated rules are fundamental to the organization of society including social relationships, production, consumption and the like. Stripped of its academic pretensions, what it seems to want us to believe is that if we just leave the rich and powerful alone to do what the rich and powerful do, why then almost like magic we all will become better off (unless of course, the rich and powerful need a handout from the rest of us).
If my characterization of Classical Economics is even partially accurate and fair, I find that among many objections I have to it is that it is abhorrent and suffocating to society and ultimately wrong because among other things it fails to account for the fundamental fact that individuals and society itself may chose and are free to chose a different path than that they set out for us. Or as Franklin Roosevelt observed:
But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings.
Franklin D. Roosevelt
Of course most economists, even some of the most ardent supporters of Classical Economics, recognize its limits. For example:
Markets depend upon a form of politics in which relations among agents are governed by rules of property and contract. These are among the distinctive technologies of power and obligation in market societies, generating a variety of micro-sovereignties, disciplinary regimes, and coercive forces.
The Properties of Markets. Timothy Mitchell Version 10 January 2006 (See also Performing Economics, Donald MacKenzie (To be published)
All well and good, but he goes on to point out that:
To argue that the power of economics is performative is not to argue that its power necessarily lies in getting people to adopt its (mis)representations; rather, in helping to constitute the apparent border between the market and the non-market, economics contributes to the work of socio-technical mechanisms that reorganize how people live, the political claims they can make, and the assets they can control. Its particular role, I argue, is in formatting a form of exclusion-inclusion.
Unfortunately this uncharacteristic acknowledgement that there are some things "within" economics and some things "outside" its purview has not led to any appreciable humility among its practitioners. There are those today (like representatives of the World Bank, Hernando De Soto and others) who to travel to the so called "Third World" countries urging them to abandon traditional social and customary relationships that are "outside" of classical economics and bringing it "within" by breaking up community based structures that share the resources upon which they survive so that they may be bought and sold in the market and ultimately removed from the community.
What usually happens is that after a brief period, a certain sector of the society (usual those actively involved in the transfer of those community resources) experiences a certain enhancement of what they have been led to believe is "Prosperity" only in the long run to watch future generations lapse back into the poverty of the masses except now they are bereft of those meager community resources they once had, since those now reside in the ever-grasping hands of the few, the rich and powerful who remain remote and unconcerned with the community that previously survived on those resources and who never tire of congratulating themselves for their brilliance and superiority for having avoided falling into that morass of deprivation that they themselves created.
In developed nations, this destruction of a society by removing resources from the community and into the hands of the rich and powerful few is represented by the calls for things like "securitization" and "privatization" and the like.
The above quote of course refers to the conflict between the validity of macroeconomic versus microeconomic models. Macroeconomic models many conservative economists maintain are at best obscure (except for those they agree with), especially those of the Keynesian variety that recognize non-economic influences like history and politics.
The orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess. This false rationalization follows the lines of the Benthamite calculus. The hypothesis of a calculable future leads to a wrong interpretation of the principles of behavior which the need for action compels us to adopt, and to an underestimation of the concealed factors of utter doubt, precariousness, hope and fear. John Maynard Keynes, The General Theory of Employment
On the other hand these defenders of the way things are, often assert (as essentially does Mitchell in the quote above) microeconomic models based as they are on mathematics are just the thing to rely on. One has written:
The need for adequate micro-foundations in macroeconomic models was increasingly felt and expressed in the late 1960s by a new generation of mathematically trained economists. Modern Economics and its Critics, 1 Partha Dasgrupta.
And we all have seen how well that worked out.
In other words," OK" they say, "we agree Classical Economics is not a theory of everything, but if you bring everything into our system our theories demonstrate that everything will work out fine and we all will be better off". And, "oh by that way we will tell you what it means to be better off and for that matter when you are so, trust us and, if things do not work out fine it 'isn’t market failure, it is government failure' (Dasgupta)".
What they do not tell you is that it will not work out fine. Their system is both faulty and incomplete.
Why you may ask? Because among other things their system fails to include social externalities such as fraud, corruption and yes politics (not to mention the externalities of the commons).
James Galbraith who in testimony to Congress pointed out the failure of many Classical Economists to recognize that anti social behavior (in this case fraud) was a real threat and it was not and could not be dealt with in their theories or recommendations. ( Economists may have chosen to ignore it, but then the question becomes why.)
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this - but most did.
Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.
Ladislau Dowbar, a Brazilian commentator on Economic's carries this argument further:
To turn your back on politics is a relief. It's easier to say that economics overlooks the discourse and focuses on practical achievements: the enterprises built factories, provide jobs, finance roads, while politicians discuss. This way, the economy would be nice and progressive, the politics distasteful or corrupt. Simplifications seldom yield good results, yet they satisfy our instincts. Remember, it was the great political movements, regularly branded subversive in the initial stage, which in their times achieved the abolition of slavery, the end of colonialism, the rights of the employee, the political inclusion of women and today continue to struggle against economic inequality, against the destruction of the environment, for rescuing of the cultural richness of our lives, against the system of financial speculation, for access by all to basic goods such as water, food, education and health. The democratization of the economy may well become an axis for building a more humane life. To extract oil more quickly, to sell out the Amazon more efficiently, will lead us where? Ladislau Dowbor, Economic Democracy, Strolling Through the Theories.
Then there is Brad DeLong who writes:
One of the embarrassing dirty little secrets of economics is that there is no such thing as economic theory properly so-called. There is simply no set of foundational bedrock principles on which one can base calculations that illuminate situations in the real world. Biologists know that every cell runs off instructions for protein synthesis encoded in its DNA. Chemists start with what the Heisenberg and Pauli principles plus the three-dimensionality of space tell us about stable electron configurations. Physicists start with the four fundamental forces of nature. Economists have none of that. The "economic principles" underpinning their theories are a fraud--not bedrock truths but mere knobs twiddled and tunes so that the right conclusions come out of the analysis.
What are the "right" conclusions? It depends on what type of economist you are, for three are two types. One type chooses, for non-economic and non-scientific reasons, a political stance and a political set of allies, and twiddles and tunes their assumptions until they come out with conclusions that please their allies and their stance. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones and the skeleton that emerge will teach lessons and suggest principles that will be useful to voters, bureaucrats, and politicians as they try to guide our civilization as it slouches toward utopia. (You will not be surprised to learn that I think that only this second kind of economist has any use at all.) Brad Delong "John Stuart Mill vs. The European Central Bank"(http://delong.typepad.com/sdj/2010/07/john-stuart-mill-vs-the-european-central-bank.html)-- "Grasping Reality with Both Hands" July 30 2010.
Unfortunately, even Delong who I have great respect for (along with Krugman, Galbraith and other so called Keynesians), seem to me to miss the point.* It does not matter if there is a greater or lesser demand for bonds, or for cash or for quality investment vehicles, if there is no industrial policy to assure that there are goods being made and jobs created, if there is no environmental policy that maintains the availability of the resources that we all depend upon, if there is no educational goals, no social rights. They, Delong included seem to me to be saying if we only do this particular thing then the recession will end or inflation will be controlled and we will all somehow get back on the road to happiness and prosperity. Not so. Without the industrial, environmental, social educational policies they are no more than glorified ponzi schemes that benefit only those who bury their assets in their backyards or secrete them in their "survival shelters". Even Keynes himself had a viable working industrial economy to work on. Where are the industries and the resources of the United States today?
Why is this so? Why has a system been created that manifestly is wrong and appears to so often exclusively benefit the already rich and powerful? Well lets look back almost 2500 years where in Xenophon's The Economist, Socrates states:
It would seem, it is the part of a good economist (15) to know how to deal with his own or his employer's foes so as to get profit out of them?
Was Socrates and therefore I and many others too simplistic? I will leave it to the reader to "follow the money" as they say.
So, what can or should we do? Perhaps we should ponder the words of the great Brazilian social commentator Celso Furtado who in his seminal work Global Capitalism tells us:
If the world had evolved in obedience to the canons of a pure capitalism, income would be more concentrated than what occurs today. However, since the 19th century, the contesting social forces were very militant in Europe and interfered with the structures of political power, opening space for important structural reforms,such as the reduction in the workday.
The above demonstrates that the formation of modern societies reflects not only the appearance of new techniques, but also that it has been a process with wide social projection. It was thanks to the pressure of social forces that salaries rose, following improvements in productivity; that systems of social security were established; and that policies of assistance were defined for less developed regions. By modifying the profile of income distribution, these
new political forces changed the physiognomy of the society and, paradoxically, engendered within it new forms of dynamism.
Maybe we should get together and identify what sort of society we want, sort of like the founding fathers of the American Republic did when they got together and decided what sort of political regime they would like to live under and wrote it down in the Constitution. After all, there were no rules at the time that the formation of an effective government must follow. ((Although the conservatives at the time did mention that things like the "divine right of kings" were ordained, (much like the Republican Party's belief in the American free enterprise system), by God himself.))
Once we do identify the society we want then we can call in the economists, and lawyers and sociologists and all those other experts to show us how to get there. That is if they are not all too busy already working for those few happy with the way things so far have worked out for them.
Although as Keynes observed "in the long run we all will be dead", society goes on and our children and our children's children depend for their happiness, prosperity and perhaps their very existence upon what we do today. Future society and our descendants have given us their proxy. We vote for them as well as for ourselves.
I republished the original Daily Kos version of What is Wrong with Economics Today in a slightly edited form in my blog Trenz Pruca's Journal
* In fairness to Delong and the Keynesians they appear to agree with me that we have to get our house in order and define the society we wish to live in before any of the competing economic prescriptions will have any significant effect in the long run.
Bonus Quote:
I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country.
Thomas Jefferson