By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory. The views expressed in this interview are not those of his employer
Ever since the Enlightenment many societies have moved away from justifying their existence and formulating their aims through recourse to religious language. Gone are the days of the ‘Great Chain of Being’ which justified the natural and social orders all the way from the plants and trees through the commoners, via the nobility and the King all the way up to God the creator. What replaced these ideologies were ideas about ‘Progress’ – how the good society was attained through Progress and what such Progress would look like. Progress, it was said, was to be grounded in the scientific method; what had worked so well to uncover natural processes could also be applied to engineer society.
It was in the 19th century, however, when the ideologies of Progress really began to blossom and flower. One was economics, of which we will have more to say about below. Another was phrenology. Phrenology was a science that claimed that a person’s character – including his capacities and his dispositions – were contained within his skull and could be determined by studying his skull carefully. Today few take this seriously – although many still recognise that phrenology was an early progenitor to so-called ‘neuroscience’. But throughout the 19th century these ideas were enormously popular – one popular English work sold more than 300,000 copies!
What made phrenology so popular was what also made economics so popular at the time: it gave a rationale for a society based on Progress and also provided a blueprint for how this could be achieved. The phrenological doctrine, being so vague in its pronouncements, was highly malleable and could be used to justify whatever those in power needed justifying. So, for example, in 19th century England phrenology was used to justify laissez faire economic policies by emphasising unequal natural capacities amongst the population while in early 20th century Belgian Rwanda it was used to justify the supposed superiority of the Tutsis over the Hutus.
In my book The Reformation in Economics I take the position that modern economics is more similar to phrenology than it is to, say, physics. This is not at all surprising as it grew up in the same era and out of remarkably similar ideas. But what is surprising is that this is not widely noticed today. What is most tragic, however, is that there is much in economics that can and should be salvaged. While these positive aspects of economics probably do not deserve the title of ‘science’ they at least provide us with a rational toolkit that can be used to improve political and economic governance in our societies.
The Ideology at the Heart of Modern Economics
The curious thing about modern economics is its almost complete insularity. Its proponents appear to have very little notion of how it applies to the real world. This is not the case in normal sciences. Take physics, for example. It is extremely clear how, say, the inverse squares law applies to experienced reality. In the case of gravitation, for example, the inverse squares law makes experimentally testable predictions about the force exerted by, say, the gravitational pull between the sun and the earth.
Modern economics – by which I mean neoclassical or marginalist economics which relies on the notion of utility-maximisation as its central pillar – completely lacks this capacity to map itself onto the real world. As philosophers of science like Hans Albert have pointed out, the theory of utility-maximisation rules out such mapping a priori, thus rendering the theory completely untestable. Since the theory is untestable it cannot be falsified and this allows economists to simply assume that it is true.
Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Such books read in an almost identical way to the fashionable books of 19th century phrenology. The economists address everything from parenting to crime to the Ku Klux Klan by filtering it through the non-experimental theory of utility-maximisation – a theory that has not and cannot be verified and so the author and reader alike take it entirely on trust.
Such systems of ideas are ideological to the core. They are cooked up independently of the evidence and are then imposed upon the material of experienced reality. We are encouraged to ‘read’ the world through the interpretive lens of economics – and when we ask for evidence that this lens uncovers factually accurate information we are confounded with circular arguments from the economists.
Large-scale public policy is also filtered through this lens. This is done by constraining the study of macroeconomics – that is, GDP growth, unemployment, inflation and so on – by tying it to the theories of utility-maximisation. All macroeconomics today must be ‘microfounded’. This means that it must have microeconomic – read: ‘utility-maximising’ – foundations. In reality, as I show in the book, these foundations are anything by ‘micro’. Rather, what is done is that the entire economy is seen to be dominated by a single uber-utility-maximiser and all the conclusions flow from there.
This may seem like odd stuff but it is built into the theory as a sort of foundational delusion. The arbitrary, non-empirical theory of utility-maximisation assumes primacy to all considerations of actual statistical facts, intuitions about human motivations and even basic assumptions about what should constitute a properly moral view of man. What we end up with is not just a crushing, anti-inquiry ideology but also a lumbering failure of a system of ideas that has no hope in extracting relevant information about the real world.
What Is To Be Done?
Is economics then to be thought of as a failure? Must we scrap economics and try to find other ways to describe and address our economic and political problems? In this regard, my book claims to lay out a new path – albeit one that has been intuitively followed by some economists, most notably those in the heterodox camp. This new path is based on two key interrelated premises.
The first is that we have little insight into what actually motivates human beings. For this reason theories that rest on assumptions about human motivation – like utility-maximisation – must be thrown out and the study of the economy must be undertaken by examining large economic aggregates. In short, micro must be tossed off the throne and the crown must be handed to macro. The second premise is that we must not be overly concerned with highly precise ‘models’ of the economy. Instead we must take what I have come to call a ‘schematic’ approach. A schematic approach involves building tools that can be integrated into how we understand the world around us without assuming that these tools provide us with an exact description of this world. This schematic toolkit – which I begin to lay out in the later chapters of the book – can then be used to approach the study of actual economies.
These may seem like rather simple rules. But when applied to economic theory they generate rather radical results. At the same time they greatly constrain the amount of wisdom that we can assume economists to have; given these premises no book like Freakonomics should ever be taken seriously and should probably even be written in the first place. In that sense, they may appear to militate against Enlightenment optimism. This may well be so, but I would argue that they are arrived at through rational Enlightenment-style inquiry and so should be taken seriously even by proponents of Enlightenment Progress. After all, phrenology eventually fell in the face of rationalistic criticism.
In the book some of the issues around uncertainty and free will are also explored. Implicit in some of the book’s central criticisms is that societies are not to be understood in a deterministic manner. Unlike billiard balls, social forces are not subject to deterministic laws. In one sense this is unfortunate as it means that our understandings of social and economic processes must always be of a contingent and not-too-precise nature. But on the other hand it is optimistic in the sense that it attributes an agency to human beings to create the world around them that mainstream marginalist economics stripped away by imposing the limited utility-maximiser framework on everyone from Mother Theresa to Hitler.
This also creates an opening for a proper discussion of ethics and morality. Although this is not dealt with directly in the book – it would surely require another ten volumes – the framework does reopen awkward questions surrounding morality and ethics. Some self-professed social scientists, nervous that these questions have been passed to us from the world religions, would prefer to do away with any moral and ethical questions. But this was always a fantasy – even the most hardened anti-ethicist, unless they are serving life for serial-killing, has a system by which they determine right from wrong.
All that I have said here is rather abstract. But a good portion of the book is not and I do not want to give that impression. It contains chapters that deal with inflation, profits, income distribution, income determination, financial markets, interest rates, investment and employment. It is not simply a book of methodology but rather one that tries to also provide the basic building blocks of a theory that can be applied to understand really-existing economies. In this sense, I hope that it is again more optimistic than many mainstream economics books that leave the reader without any capacity to apply the supposed ideas that they have absorbed by reading them beyond mere chest-puffing at dinner parties and moral condemnations of the social safety net.
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We dont have Departments of Astrology. Just dump it call it business data and stick it in business schools or departments. It is not science or social science it is the worst ever pseudoscience with blood all over its hands see previous post.
You could call it a branch of political “science” (also not a science). At least it would be honest. Everything proposed or concluded in economics classes will be known to simply be political preferences or ideas, not real or valuable beyond that.
I have always been proud that my alma mater, U.C. Santa Cruz, conferred degrees in “Politics” thanks to the influence of Sheldon Wolin’s protege Jack Schaar and J Peter Euben, who rightly saw that “politics,” like all the so-called social sciences, was anything but a science. Once you reject the silly notion that “politics” or “economics” is a “science,” it is easy to talk about the moral and power relationships between human beings which should be studied and exposed.
When I was sending out periodicals for the University of Toronto in the 1960s, one of the major ones was the Canadian Journal of Economics and Political Science. One professor indicated to me at the time that economics was succeeding in breaking away fro politics, which he thought to be eventually disastrous for both fields.
Later, as a mature student in 1970 (I was about 10 years older than the first year students), I was assigned a perpetual C for the term because I challenged the professors definition of economic science. Definition: the allocation of scarce resources to alternate uses. My responses: since when is a science defined with adjectives. Take out the qualifiers and you have: the use of resources–ecology.
Still later, in the 90s, i was friend with an economics professor at an east-coast Canadian university, as well as neighbour of a retired Economics professor, ironically named Galbraith. Both decried the direction of so-called economics at the time. My friend said he had to perform like a song-and-dance man to get his students to pay any attention to the micro-economics he was supposed to teach.
In my perception, giving something an economic value is best explained as being an exercise of moral judgement.
A holistic understanding of the natural world is needed, therefore I believe the first rule of economics that should override all others is one that would correct the false assumption that humans are separate from our environment and superior to all other species. That separation and illusion of independence, particularly endemic to the European mentality, has caused us to denigrate nature as though we must dominate and subdue it to satisfy our needs and desires, and the result now in full evidence is the wholesale destruction of habitat and ecocide that inevitably lead to omnicide. We have allowed our population to exceed the carrying capacity of the earth and have used technology without regard for the consequences, thus contradicting the meaning of homo sapiens and assuring our extinction.
Um, what’s your evidence that this is somehow a European mentality?
I think he means “Western” mentality, which seem true enough.
Here is a nice piece of phrenology, a portrait of Henry James.
http://n7.alamy.com/zooms/a5fad1324a3b45fe9417ff65912ff8d7/henry-james-american-born-british-novelist-and-writer-1843-1916-most-af8heb.jpg
Phillip’s comments regarding the “Great Chain of Being” are apropo. This is “Western” in a sense, “Christian” more particularly. It tells the underclass they are special while at the same time justifying and encouraging their subservience (i.e., the underclass is told they are disconnected on the one hand, but totally “connected” (that is, have a “place”) on the other hand (which they should not try to rise above)). The implication that other societies where greater “connection” is somehow recognized are somehow immune to stratification and dominance by a ruling elite, somehow more “wholesome” or “gentle” or “sane”, has very little evidence in its favor that I have ever seen. It’s rather faddish to criticize “the West” for all the ills of the world. And “the West” certainly has left a trail of suffering and destruction across the face of the planet. But other societies have their own mechanisms for justifying and encouraging subservience. And a religious “feeling” of the connectedness of all things is not a substitute for the scientific insights of the discipline of ecology, brought to us by a “Western” mode of thought and enquiry.
No matter what society we live in, the problem of just governance, the aggrandizement of the elite and the suffering of the masses, remains the same.
The superiority of man is present in all monoteistic religions, you could argue. And they were not born in Europe or America. Polyteistic religions are a different breed, on that issue.
A much more elegant solution would be to incorporate Energy and Mass to economic equations and to start thinking of money as a storage of value like a battery is for energy. There isn’t a conservation of value though, like there is for mass and energy; but an equations that balances value addition with money creation (national debt) should be feasible. Steve Keen has started doing some of this.
https://youtu.be/olB7zQ3MojE
I am though the first two chapters of Philip’s book. So far so good – likable prose style and promising subject matter.
What passes for the science of economics has become politicized and scientifically compromised to the point that the only thing that makes sense is to burn it with fire. Data has stopped playing a role in development of economic theory and selected snippets of it are occasionally dragged out only if they support the latest concoction that comes to their mind.
To paraphrase from Yes Minister, real economists don’t sully their elevated minds with anything as sordid as data. It’s much easier to make a a bunch of unrealistic assumptions, for example “trade deals don’t affect trade balance and employment”, and just to build their model from there. The fact that these kind of missteps are not stamped out by the profession shows that fire is the only answer.
Economics is to ecology as phrenology is to neuroscience?
Always thought the problem was that economics should be descriptive, not prescriptive. Maybe a parallel in how science came out of “natural philosophy”.
That’s an exact quality of MMT. MMT describes how money works, but does not prescribe what should be done with it. That MMTers are usual liberal merely reflects the fact that MMT describes how the social state can be paid for. MMT does not however say it should be paid for. That is left as a value judgement.
As MMT is not ideological, tho some are at great pains to have it so, this at times – seems tactical. I think after so many decades of – special interest – groups funding and fiddling around with economics in academia its prudent to leave the judgement aspect to the political sphere.
There is a need to distinguish between the natural sciences like physics, chemistry, and biology and the social sciences like sociology, political science, social psychology, and anthropology. Both types of science use empirical evidence when developed well and their theories are usually evidence based, though they are not identical. Mainstream economics, that is, neoclassical macroeconomics, is an exception to this. It should also be noted that microeconomics, the economics of the individual, household, and firm, is generally evidence based, and even uses experimentation not unlike psychological research programs. From this perspective, MMT, a macroeconomic theory, that is, an economic theory of the nation state, is clearly a social science, while neoclassical economics, which is supposedly similar, resembles a cult.
This seems to me to be an over reaction to the specious nature of current mainstream economics, compounded by a misunderstanding of the role of determinism and uncertainty in physics. What most characterizes physics is not the absence of uncertainty, but the specification of it. Just because the current dominant economic dogma has it wrong is no reason to throw out determinism.
The analogy to billiard balls is a poor analogy to social systems. The physical forces that determine an earthquake, for example, may not allow us to precisely predict the moment in time when the quake will trigger, but that doesn’t make earthquakes “non-deterministic”. OK, the point is taken that societies are not billiard balls. There is still plenty of room to hope that social forces may be sufficiently specified to allow useful predictions. Throwing out determinism is not a royal road to morality. The moral quandary of the present day is how to reconcile determinism and morality, each of us as individuals and all of us as a society, not to force a choice between them.
Because we are not billiard balls, we do not have to accept that the morality of society is merely the sum of all the individual moralities of all the individuals composing it (“market” morality). We can allow for the social construction of a moral code and the imposition of that code on society’s constituent individuals. None of that necessarily takes us outside of determinism. Because previous generations got some of the laws of physics wrong does not mean the laws of physics did not exist at that time. Because current economists make absurd assumptions does not mean no science of economy is possible. But a “non-deterministic” ‘science’ is no science at all.
I abandoned Econ. as a major when I was a senior in college (mid 70’s) because what was being taught had little to no relationship to what I observed in the real world of human beings (as opposed to the “Homo Economicus” that econ. theory depended on).
My father made the money that paid for my tuition & books through sales. As a sales manager for a major insurance co. he was always looking for recruits who could “sell air conditioners to Eskimos”. If, in fact, the “information symmetry” that econ. theory depends on existed, then his job could not have existed.
I was also influenced by an econ. prof. who told me that an econ. degree was worthless unless I wanted to teach it or work for the gov’t.
I think most NC readers will understand the “shorthand” phrase “First, assume a can opener”
I didn’t like econ either. I went with finance.
Elites always invent ideologies, which are like operating systems, in order to maintain control over the minds of their subjects. Economics, great chains of being, Mandate of Heaven. It’s all the same.
Along that vein, I will watch for the high priests of economic literature’s take in Philip’s book. I follow a bit of emerging science through the www and find that when a new hypothesis better fits the observations, the existing way of looking at the world resists by ignoring, or perhaps ridiculing the new hypothesis rather than trying to falsify it. Science indeed. Add the power of “Maximizing Marginal Utility” idolatry captured by the elite, and I will be very interested to see the sorts of reviews it gets. Of course, I will also read the book.
I agree with the author, but am dismayed as well.
Rant Warning:
Does he not understand Science and the Scientific method?
Hypothesis
Thesis
Experiment – Repeatable by independent parties, Experiments.
Proof.
That’s Science, That’s physics. Read Joule’s biography to understand the method.
Economics is NO science because there is no way to conduct an experiment, a repeatable experiment.
In addition the mathematicians have discovered and codified Chaos or Catastrophe Theory, and the attendant Black Swans, in the last 50 years, which provides a solid foundation to understand economics, and its absolute unpredictability.
Because us humans are driven by fear and greed, consequently: Presume a rational actor (economics 101) is invalid.
There is not ONE mention of chaos in this article, which is the governing mathematics behind Economics in the world we inhabit, work, play, are born and die.
There is an old expression: Before putting pen to paper, please engage mind.
End Rant.
If one wants to asserts that humans are rational, please explain the fashion industry.
Or “boys and their toys.”
The phrase which I believe fits economics in its current form is: “the intelligence is being fixed to the policy”. The ideological objectives have dictated what constitutes accepted Economics for decades.
Economics is not science. As practiced in this country it is closer to a belief. Or a cult. It serves a predetermined result, and that result coincides with whatever offers the most benefit to the wealthy.
The Marketplace is revered, but the capture of our government by the wealthy, and the degree to which a small investment in lobbyists can generate billions of dollars in profits, never to seem to discussed, let alone expressed mathematically in modeling.
There was a time when the supply/demand relationship was at the center of economics’s societal measurements, and may have approximated a predictable outcome with proper parameters. No more.
Economics for me seems a lot like gambling on horses. There are set of rule-like generalities: ie some horses run better in wet than dry, this aged horse tends be better over this distance etc. You then gets a set of (ever changing) probabilities (ie the odds). The rest is luck.
Economics is NO science because there is no way to conduct an experiment, a repeatable experiment.
By this reasoning astronomy isn’t a science either. Nor is archeology. Nor is anthropology. Nor is linguistics. Nor…
There are many areas of study where a physics-like approach is neither possible nor desirable. That does not mean they are invalid. Or not a science. A reality-check is important, but formal experiments are only one type of reality-check.
Economics isn’t like physics, and a large part of the problem I think is it keeps trying to be like physics. Perhaps if it started trying to be like linguistics — to pick a possibility — it would work better.
This is wrong. You are failing to take into account what are known as natural experiments. Pilkington is aware of this. Science is not as simple as you describe. As a quick intro, I recommend, Jerry Ravetz’s The No-Nonsense Guide to Science (2006). Also cf. my comment above.
I did. The result is my most logical, formal and theoretical-scientific book on “Consequential Macroeconomics”. Write to me at chesterdh@hotmail.com for an e-copy, its free when you explain why you want to see it.
In an even larger sense, we have substituted ideology for religion. Consider capitalism, privatization, democracy, the profit motive, materialism, utility maximisation, and, yes, even the scientific method. We worship these just as ardently as we did the Grecian or Egyptian pantheon of gods in the years b.c.e., and the Christian, Jewish, and Islamic characterizations of god/Allah up to the present era.
The unquestioning acceptance of these belief systems filters our perceptions of reality and blinds us to the infinite number of possibilities that exist outside of those frames of reference. In fact, those systems have indeed become our religion and stepping outside of them frequently incurs the same stigma and scorn formerly accorded to religious heretics who were often burned at the stake. One doesn’t need to spend more than a day reading a layperson’s guide to quantum mechanics to get an idea of what happens when you set your mind free of those confining boxes.
I highly recommend Morris Berman’s book, Coming to Our Senses, where he traces western history from the beginnings of Christendom to the modern day in the context of heresy. (That’s a simplistic but reasonably accurate synopsis.) It’s a dense read and when I first sat down with it in the early 90s, I could only manage a few pages at a time and then had to take two or three days to digest before coming back for more. I read it again ten years later and it made even more of an impact the second time around. Without exaggerating, I can honestly say that it profoundly shaped my world view to the point that I now view all belief systems skeptically and try to place them in a larger context.
Pilkington’s description of economics as an unassailable belief system rings true to me. Not unlike religion (the Crusades, the Inquisition, the Conquistadors, right on up to ISIS), economics has wreaked and is wreaking havoc across the globe. Who knows what wonders await us when we start thinking out of that box.
I am perhaps most interested in this. Will look for the book. I always get something from reading Pilkington’s posts.
I think everyone is going a bit silly here. I certainly agree that the dominant current practices of, and teachings about, economics belong in history’s dustbin and the sooner the better. But, that notwithstanding, there have been, and continue to be, so many economists who have done so much work that is of great insight and whose voices, if they were heeded by TPTB, would make the world a better place, e.g., Michael Hudson, Dean Baker, John Galbraith, …. Just because most nineteenth century physicists believed in the existence of the aether to explain the transmission of light, doesn’t mean that we should have then dispensed with physics. Yes, I know it’s much harder to prove or disprove something in economics than it is in physics, but both “hard” sciences and “soft” ones can be corrupted (try spending some time with an open mind looking at the learned hysteria on both sides the global warming fracas). But economics, the study of the production, transfer and distribution is going to remain with us and so will its attendant aspects of making policy predictions and offering policy solutions.
The argument is that the “policy predictions” of economists are not based on anything like a reliable scientific approach – in contrast to climate predictions, which are.
By reliable scientific approach, I mean one constructs a theoretical argument and makes a prediction, then one compares that prediction to experimental and observational data, and by that comparison, judges the usefulness of the theoretical model.
For fossil fuels and climate, the prediction is that burning fossil fuels will increase the levels of atmospheric CO2; that was verified by observation and experiment (all the extra CO2 might have been absorbed by the oceans, that would be an opposing theory). Then, one predicts (based on physical theories) that increases in atmospheric CO2 cause the climate to warm, again, a prediction verified by observation (note 2015 and 2016 were the warmest years on records.)
Compare that to various economic predictions based on “econometric modeling”:
(1) NAFTA trade agreement would not result in job losses in the United States.
(2) Deregulation of the California electricity market would result in lower rates for consumers.
(3) Elimination of Glass-Steagall rules on investment vs. commercial banking would be good for economic growth.
If climate models had made such predictions that varied so much from the actual outcomes (i.e. if 2015 and 2016 had been the coldest years in several decades, for example), the entire basis of their models would have been called into question and the whole question of fossil fuels, CO2 and climate would have to be reconsidered – but economists just forge blithely ahead, not paying attention to these gross failures, trotting out the same discredited arguments year after year as “policy predictions” and “policy solutions.”
It’s like Lysenko in the old Soviet Union – despite failure after failure, that guy kept his academic appointments for decades because he promoted an ideology that protected the interests of the leaders of the Soviet Union.
My apologies for using the theory of anthropogenic global warming (AGW) as an example of how a scientific issue can bring forth a lot of idiocy from both sides of the divide. As I well know, and should have reminded myself, even suggesting to the adherents of AGW that something is amiss with their understanding of the matter is like trying to tell Clintonistas that Hillary’s problems had more to do with Hillary than with Putin. They just don’t want to hear it. Anyway, I said that both sides of the AGW debate often go over the line. Your arguments in support of your point of view are not terribly persuasive, which is not to say that others could not make better arguments in support of your contentions. On the other hand, while I don’t want to take the time to contest your points here, I would easily recommend any number of sources of information that could do that task more effectively than I can. I used to believe very strongly in the AGW arguments, but because I had respect for many people who disagreed (including quite a few professors and engineers) I took the time to read books and articles from both sides of the divide. I would suggest you do the same. I’m still not totally convinced that one side or the other is completely correct, but I am certain that making allegations that one side’s arguments can be classified as a form of Lysenkoism is, as I alluded earlier, comparable to what I expect to hear about politics from committed Clintonistas. Curiously, Richard Lindzen, the once-celebrated atmospheric physicist who became a bad guy when he objected to the AGW theory said things similar to what you say about Lysenkoism, but he was talking about your side of the debate. As I said, there’s idiocy on both sides of the divide and that idiocy is most in evidence when people assume that anyone who disagrees with them are either fools or dishonest.
But my main point, which seems to have escaped you, was that while a lot what passes for sound economic thinking is dangerous nonsense, there are economists whose analyses and recommendations need to be heard; and it’s not a great idea to say that all economics is bunk. That may be a comforting nostrum, but it won’t help anyone sort through or make sense of our predicaments.
I (think I) don’t have a problem with the field of economics attempting to apply scientific rigor to the work done. I am just sick of gospel being peddled to us with the same air of authority as rigorous theory. Right now, I am recalling John Oliver’s hit-piece on Jill Stein’s (and by proxy Bernie Sander’s) student loan relief ideas. He spent the better part of the rant tossing out “reasons” why it wouldn’t work without once mentioning that it all hinged on a politico-cultural paradigm. There was and continues to be absolutely zero reasons via natural law that any of it could not be done. I suppose political difficulty translates to breaking a law of thermodynamics these days.
The danger is, many well meaning though naive citizens look at economics with the same sense of awe as physics, unable to parse the ideological majority from the fragments that reveal some truth.
Consider the source of the “economic equations” that descibe things like utility. They were based on 19th-century physical equations (since displaced by quantum mechanics):
https://www.scientificamerican.com/article/the-economist-has-no-clothes/
Notice that another field closer to economics than is physics, human psychology, never attempted to construct “psychological equations” for the prediction of human behavior along these lines. The most likely explanation for the rise of “mathematical economics” in academic institutions is that it can be used to promote any notion you like (deregulation of electricity markets, unrestricted international capital flows, subprime mortgage bundling, etc.) with “mathematical rigor.” Then it’s simply a matter of getting those economists to write articles in major newspapers, testify to Congress, etc. to get one’s agenda across. This is not science, of course, this is propaganda.
The second point is that even if you could come up with economic equations, their utility for forecasts would be severely limited, due to chaos (aka ‘sensitive dependence on initial conditions’) in the equations – arising out of unpredictable human behaviors and other factors (like weather effects on crop production, etc.).
In addition, the neoclassical economics is fundamentally flawed in that it ignores the fact that human beings are ultimately reliant on the planet for survival – for food production, for living space, for clean water and air. One of the worst assumptions of such neoclassical economic theory is this:
So economists really need a whole new approach to the basic issues, it seems. One option I’d suggest is to go back and look at the work of Alexander Chayanov – who was shot by Stalin for opposing the farm collectivization strategy (which he was right about). Even better, studying ecological theory in simple ecosystems might give insights into human economic activity. For that, the best source is G. Evelyn Hutchinson.
Likewise, economists seem to need a similar program for understanding economic systems, including pyschology as well as those other factors.
The guy who’s been banging this particular drum for some time is Steve Keen. His Debunking Economics: The Naked Emperor Dethroned is required reading for anyone wanting a definitive take-down of economics as pseudo science, and economists like Paul Krugman as pseudo wise men. Turns out even the author of the IS-LM (Hicks)–a model that Krugman relentlessly promotes–later recanted, saying it was anti-Keynesian.
Also worth a look: Matthew Stewart’s Management Myth, which discloses that the inspirations for “scientific management”–e.g. Frederick Winslow Taylor–were frauds who essentially falsified the results of their little experiments so they would fit their pet theories.
“Science envy” afflicts many disciplines since Newton straightened out our understanding of gravity, and left the religious framework of pre-reformation Europe in tatters. Unfortunately, the nuance that current science (i.e.relativity) brings to even the predictions (and relativity is valid within two parts per billion in experimental settings) doesn’t allow the kind of careless arrogance that many MBAs practice (Stewart was a management consultant, and documents his history of encounters with such people too).
I got a couple of paragraphs into this and started shaking my head. Most of what Americans recognize as “economics” is actually dishonest intellectual justification for predacious behavior of the wealthy. Take for instance the Laffer Curve. It’s an economic theory that has ruled our government since Ronald Reagan, no matter how destructive, self-defeating, or wrong it is in practice. Look at the “economics” of international trade deals. It crucifies participant nations’ economies and populations with agreements that have nothing to do with trade (“The Holy Roman Empire was neither Holy nor Roman nor an Empire: Discuss!”). They’re all justifications for syphoning money from workers, consumers, the taxpaying public at large, to wealthy concerns. And the economists who espouse these get accolades and Nobel prizes, when contrary economists don’t even get tenure. Who really takes economists seriously? They’re like trade group spokespeople: Good for a quote, not to be trusted.
dont economists admit that they are just building impercise models? i think they explain this in universities. that its just “schematic,” i remember the analogy of a building a model train to understand real trains or something…
what is idiology is the way these models are then unquestioningly applied to real policies, and not changed when they are wrong
The economics Pilkington rightly attacks is best understood as a strategy posing as a theory. The proper question is: who or what are the natural players of this strategy? That is informative and useful and verifiable.
There are so many flaws in neoclassical economics it’s hard to know where to start but my favourite is with supply and demand since that’s so central to everything else and so pervasive in political debate.
The theory says that price results from – and in turn moderates – the interplay of supply and demand. In ‘strong’ versions (a.k.a. libertarian) the result is an optimum allocation of resources with which politicians shouldn’t meddle. In ‘weaker’ versions that’s not claimed so much but is kind of assumed anyway by default. The conclusion it points to is TINA – the rule of markets over all.
But supply and demand don’t determine price – *power* does, specifically the relative power of buyers and sellers. Supply and demand *can be* important determinants of that but large companies’ base their strategies largely on ways to make it *not* so. That can include building monopoly or oligopoly positions, lobbying for helpful legislation, exploiting information asymmetries etc.
People normally think I’m mad when I say it’s not really about supply and demand but when I explain it’s actually about power they get the point very fast because that’s actually their everyday experience.
How strange that economists by and large haven’t noticed. (/sarc)
I am not sure you understand supply and demand. All that the theory states is that supply and demand curves meet each other in order to clear the market. If the price is too high, there won’t be enough buyers to clear the market, and if the price is too low there won’t be enough suppliers to supply the market. It says nothing about the shape of the supply/demand curve. There are situations where the supplier has pricing control and where the supplier does not. It is all covered under supply and demand theory.
The author is spot on! If anyone is truly interested in the subject….read Joan Robinson’s ‘Economic Philosophy’ written in the early 60s…..she already commented on this matter….and it’s shocking how…as Ecclesiastes notes : ‘There’s nothing new under the sun’.
As George Soros says, economics is not like physics because the subject is reflexive. In other words, the objects of study, people, read what is written about them, and can change their behavior based on what they read. Billiard balls don’t read physics to change their behavior.
The study and promotion of economics reminds me of when a retired senior executive of an insurance company mentioned outside consulting firms his company hired.
He stated that management tended to choose consultants who “agreed with what they wanted to do”.
That could apply to the “economics profession” as they tell TPTB what they want to hear (globalization is good for everyone, military spending is good for the economy, free trade is good for everyone (except for unworthy low wage citizens who deserve to have their wages cut)
Economist are largely ignored by the “hoi polloi” as there is no queuing up to purchase tickets to hear famous economists as they do for sporting/entertainment events.
And one can see that when economists sometimes venture into real world modelling with real money on the line, they sometimes get it very, very wrong, as the short lived but titled “Long-Term Capital Management” hedge fund, with two economics ersatz Nobel Prize winners as principals, demonstrated.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management
Economics does fill a valued need of the elite in providing a class of people who will help TPTB justify what THEY want to do.
This will continue to fund the economic profession, at least of economists who will do well financially.
If you talk to Austrian Economists it’s clear that they see their system as a prescriptive system for rational action; which, since rationality (supposedly) leads to optimal efficiency and thus the fairest possible outcome, is also a prescriptive system of ethics.
To Austrian Economists, the fact that humans, individually or in groups or governments, won’t behave rationally, is neither here nor there.
Americans have become lost in a world of their own propaganda about capitalism.
Let’s take a look at the big picture to see if this is reflected in economics.
Basic capitalism was how it all started in the 18th and 19th Centuries, the poor lived in squalor and the rich lived in luxury, that’s what it’s like.
Only organised labour movements got those at the bottom a larger slice of the pie, basic capitalism gives nothing to the people who do the work apart from a bare subsistence existence.
Those at the bottom have always lived a bare subsistence existence and done all the work necessary to produce the surplus, until Marx came along and showed them how to use their labour power by working together and withdrawing it.
Mankind first started to produce a surplus with early agriculture.
It wasn’t long before the elites learnt how to read the skies, the sun and the stars, to predict the coming seasons to the amazed masses and collect tribute.
They soon made the most of the opportunity and extracted themselves from any hard work to concentrate on “spiritual matters”, i.e. any hocus-pocus they could come up with to elevate them from the masses, e.g. rituals, fertility rights, offering to the gods …. etc and to turn the initially small tributes, into extracting all the surplus created by the hard work of the rest. They then worked through more sophisticated religions where they were the high priests or gods representatives on earth.
The top and the bottom of the system were set and any intermediate layers of administrative and managerial staff were given as little as they could get away with. At the top they always lived in great luxury and did almost nothing, those at the bottom did all the work to generate the surplus and lived a bare subsistence existence.
Later they came up with money.
We pay you and you give it back to us when you buy things, you live a bare subsistence existence and we take the rest.
The surplus produced since the earliest agricultural communities is thus extracted by the elite.
Basic capitalism carries on this tradition and can be clearly seen in the early 19th Century.
The elite always find some way to extract all the surplus leaving those at the bottom with bare subsistence existence.
The UK aristocracy barely noticed the transition from feudalism to capitalism and their life of luxury and leisure continued as before. The new system for extracting surplus was just as good as the old one, we’ve got everything and they have nothing. You do the work and we take the rewards, just the way things should be.
The natural order was maintained until Marx gave the masses the idea of organised labour movements.
Adam Smith observed early basic capitalism in the 18th century:
“The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Adam Smith saw landlords, usurers (bankers) and Government taxes as equally parasitic, all raising the cost of doing business.
He sees the lazy people at the top living off “unearned” income from their land and capital.
He sees the trickle up of Capitalism:
1) Those with excess capital collect rent and interest.
2) Those with insufficient capital pay rent and interest.
Where did trickle down come from?
We assumed the system trickled down, lowered taxes on the wealthy and inequality soared.
One for 18th century economics.
He differentiates between “earned” and “unearned” income.
Most of the UK now dreams of giving up work and living off the “unearned” income from a BTL portfolio, extracting the “earned” income of generation rent.
The UK dream is to be like the idle rich, rentier, living off “unearned” income and doing nothing productive.
Another one for 18th century economics.
Adam Smith observed:
“But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”
When rates of profit are high, capitalism is cannibalising itself by:
1) Not engaging in long term investment for the future
2) Paying insufficient wages to maintain demand for its products and services
Another one for 18th century economics and today’s problems with growth and demand revealed.
How did economics go so wrong?
The grand corruption at the base of neoclassical economics is now blowing up in everyone’s faces.
In the 19th Century there were two opposing elites, the new industrialists and the old money rentiers.
There still are, they just don’t realise and now the manufacturers can off-shore.
The Classical economists identified the two sides of capitalism, its productive side where “earned” income is generated and its unproductive side where “unearned” income is generated.
Its unproductive side, where “unearned” income is generated, is little more than a welfare state for the old money, idle rich, rentiers.
The old money, idle rich (the landowners, landlords and the usurers) are parasites feeding on the productive side of capitalism.
What were the idle rich to do? (19th Century)
If the idle rich can come up with a new version that buries the earlier conclusions they should be home and dry.
This is what they do, it’s called neoclassical economics and it’s what we use today.
The distinction between “earned” and “unearned” income disappears and the once separate areas of “capital” and “land” are conflated.
The landlords and usurers are now just productive members of society and not parasites riding on the back of other people’s hard work.
A better all in one version I have just done.
Americans have become lost in a world of their own propaganda about capitalism.
Let’s take a look at the big picture to see if this is reflected in economics.
Basic capitalism was how it all started in the 18th and 19th Centuries, the poor lived in squalor and the rich lived in luxury, that’s what it’s like.
Only organised labour movements got those at the bottom a larger slice of the pie, basic capitalism gives nothing to the people who do the work apart from a bare subsistence existence.
Those at the bottom have always lived a bare subsistence existence and done all the work necessary to produce the surplus, until Marx came along and showed them how to use their labour power by working together and withdrawing it.
Mankind first started to produce a surplus with early agriculture.
It wasn’t long before the elites learnt how to read the skies, the sun and the stars, to predict the coming seasons to the amazed masses and collect tribute.
They soon made the most of the opportunity and removed themselves from any hard work to concentrate on “spiritual matters”, i.e. any hocus-pocus they could come up with to elevate them from the masses, e.g. rituals, fertility rights, offering to the gods …. etc and to turn the initially small tributes, into extracting all the surplus created by the hard work of the rest.
As they were taking the credit for the bounty of the earth and the harvests, the elites probably prayed there would be no drought or pestilence to mess up the system that maintained them in luxury and leisure. After an extended period of bad harvests, the old elites did tend to get swept away and so they had every reason to be concerned.
Over time this was worked up through more sophisticated religions where they were the high priests or gods representatives on earth.
The top and the bottom of the system were set and any intermediate layers of administrative and managerial staff were given as little as they could get away with. At the top they always lived in great luxury and did almost nothing, those at the bottom did all the work to generate the surplus and lived a bare subsistence existence.
Later they came up with money.
We pay you and you give it back to us when you buy things, you live a bare subsistence existence and we take the rest.
The surplus produced since the earliest agricultural communities was thus extracted by the elite.
Basic capitalism carries on this tradition and can be clearly seen in the early 19th Century.
The elite always find some way to extract all the surplus leaving those at the bottom with bare subsistence existence.
The UK aristocracy barely noticed the transition from feudalism to capitalism and their life of luxury and leisure continued as before. The new system for extracting surplus was just as good as the old one, we’ve got everything and they have nothing. You do the work and we take the rewards, just the way things should be.
The natural order was maintained until Marx gave the masses the idea of organised labour movements.
Problems were also coming from another direction, the Classical Economists, who noted their lives of luxury and leisure and the mechanisms for surplus extraction, rent and interest.
Adam Smith:
“The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Their great scams that had maintained the elite in luxury and leisure for 5,000 years looked as though they were drawing to a close
The Classical economists had identified the two sides of capitalism, its productive side where “earned” income is generated and its unproductive side where “unearned” income is generated.
Its unproductive, parasitic side, where “unearned” income is generated, is the surplus extraction part.
The game is nearly up what can they do?
If they can come up with a new version of economics that buries the earlier conclusions of the Classical Economists they should be home and dry.
This is what they do, it’s called neoclassical economics and it’s what we use today.
The distinction between “earned” and “unearned” income disappears and the once separate areas of “capital” and “land” are conflated. The landlords and usurers are now just productive members of society and not parasites riding on the back of other people’s hard work.
Today’s economics is not that modern and has been used before in the early 20th Century, both times it encouraged an absolute faith in markets that led people to stand back and leave the markets alone.
Both times it led to Wall Street Crashes, 1929 and 2008.
It seems to be more of an ideology today than it was the first time around.
“Stocks have reached what looks like a permanently high plateau.”Irving Fisher 1929.
In 2007, Ben Bernanke could see no problems ahead.
Their beliefs were based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.
Same problem, nearly eighty years apart, let’s see how Irving Fisher and Ben Bernanke handle it.
Irving Fisher looks into his mistakes and in the 1930s comes up with a theory of debt deflation. Hyman Minsky carries on with his work and comes up with the “Financial instability Hypothesis” in 1974. Steve Keen carries on with their work and spots 2008 coming in 2005.
Irving Fisher learnt from his mistakes and came up with a theory that later predicted the same sort of event next time it happened. Unfortunately, all this occurred out of the mainstream of economics and no one took any notice of Steve Keen’s warnings.
Ben Bernanke attributes 2008 to a “black swan” and learns nothing.
Neoclassical economics, in its second coming, has become an ideology.
First time they realized it wasn’t working and came up with a New Deal.
The second time they just blindly carried on until the electorate got fed up and voted for Trump.
Actually, even the first time, I think the common sense electorate had to kick out the elite who were stuck in their failed dogma.
Yes, economics today it is very much a tool of oppression, more polished than ever before, with a huge propaganda machine built just for its dissemination. Steve Keen rightly calls it the failure of the left, who got taken in by the story of the elites.
I find it astounding that from a population of 7 billion, there are probably just a few thousand people who still understand economics for real, grouped around a few blogs… One hundred years ago there were lots more people understanding it right and fighting for economic justice, now there are all barking up the wrong tree…
The pen is mightier than the sword…