Yves here. I have difficulty understanding how anyone can convince themselves that the economics discipline is about to turn over a new leaf. The criticisms Snower lists are hardly new. You’ll find them all and more in ECONNED, which is now over ten years old, as well as in Steve Keen’s earlier Debunking Economics. Keynes’ critique, that economies have no propensity to a stable equilibrium is even older and vastly better known, yet much to his frustration, his theories were treated as a mere special case of neoclassical economics.
Snower ignores that prospering as an academic economist depends on getting published in a handful of elite economic publications. Jamie Galbraith has explained that they are hostile to anything that dimly resembles a heterodox position; he’s accomplished mathematically, has submitted non-mainstream arguments to them, properly mathed up. He reports that once they understand where he is going, his submissions are always rejected…..with the spurious claim that his math is no good. There are plenty of corroborating examples.
The purpose of mainstream economics is to defend free enterprise against Communism by depicting market economies as generating full employment if left alone. That’s obviously false but the essential political role means that the notion that conventional economics is on its last legs is wildly overstated.
By Dennis J. Snower, President of the Global Solutions Initiative, which provides policy advice to the G20. He is Professor of Macroeconomics and Sustainability at the Hertie School of Governance, Berlin; Fellow at The New Institute, Hamburg; Senior Research Fellow of the Blavatnik School of Governance, Oxford University; Non-resident Fellow of The Brookings Institution and visiting Professor at University College, London. Published jointly by Evonomics and ThisViewofLife.com
This is probably the most exciting and fruitful time ever to become an aspiring economist. Why? Because economics is reaching its Copernican Moment – the moment when it is finally becoming clear that the current ways of thinking about economic behavior are inadequate and a new way of thinking enables us to make much better sense of our world. It is a moment fraught with danger, because those in power still adhere to the traditional conventional wisdom and heresy is suppressed.
Up to the 16th century, the conventional wisdom on astronomy conformed to Aristotle’s cosmology and Ptolemy’s astronomy. In Aristotle’s system, the earth is the center of the universe and the heavenly bodies are part of spherical shells of aether. These shells fit around one another in a clear order: Moon, Mercury, Venus, Sun, Mars, Jupiter, Saturn, and the fixed stars. All these spheres are put in motion by the Prime Mover. By the 16th century, Ptolemy’s astronomy was regarded as in accord with the conventional reading of the Bible, the ultimate source of all knowledge.
Ptolemy’s system encountered endless difficulties in accounting for the empirical evidence, which were addressed through the repeated application of geometric “fixes” (eccentrics, epicycles, and equants). The underlying methodological requirement was to retain the Aristotelian system as the foundation for our understanding of the universe and then to depict each “fix” as a divergence from this accepted foundation. Thus, to be taken seriously as an astronomer, it was necessary to master the Aristotelian and Ptolemaic systems and to develop superstructures on them. Copernicus did not follow this intellectual path, but he did not dare to publish his heliocentric theory until the year of his death, in 1543. In 1632 Galileo published a book supporting Copernicus’ heliocentric theory, was summoned before the Inquisition, and recanted. The Church had the hard power of the Inquisition and the soft power of scholastic theology on its side.
In the academic discipline of economics, we are currently experiencing a tame analogue to these first throes of the scientific revolution. The punishment for heresy is not execution, but intellectual oblivion.
Current Foundations of Economic Thought
The entire ecosystem of economics — the textbooks, the dominant journals, the places of higher learning, the prestigious conferences, the promising pathways to professional success, and the news media — is singing from the same song sheet, namely, the basic axioms of neoclassical and behavioral economics. The most important of these axioms are the following:
Microeconomics:
• Individuals are the only units of functional organization relevant for economic decisions. The economic activities of social and political groups are merely the sum of their members’ activities. Thus individuals are the only unit of selection, i.e. the success of an individual depends only on the characteristics of that individual. Methodologically, we have the claim that social phenomena must be explained by individual actions, which in turn must be explained by the decisions of individuals. This is the doctrine of methodological individualism.
• In neoclassical economics, consumption is the ultimate source of wellbeing. In other words, the “utility” of individuals depends, either directly or indirectly, on what they themselves consume. In behavioral economics, this axiom has been relaxed to allow for “social preferences,” whereby an individual’s utility may depend on the consumption of others.
• Individuals are “rational actors.” This means that each individual’s decisions can be explained in terms of maximizing utility subject to constraints (such as a budget constraint).
• This utility can be represented by a preference function which is complete (it covers all the individual’s objects of choice) and transitive (if A is preferred to B and B is preferred to C, then A must be preferred to C). The individual’s choices “reveal” her preferences, which implies that the preference function must be temporally stable at least for long enough for such preference revelation to take place. Behavioral economics relaxes this axiom to allow for preferences that depend on reference points (such as the status quo), loss aversion (more weight given to losses than gains) and differences between experienced utility (the source of wellbeing) and decision utility (the objective of decision making).
Macroeconomics:
• An economic market can be understood in terms of the demand for and the supply of goods in that market, which depend on the prices of these goods. In “perfect” markets (characterized by perfect information, perfect competition and no externalities), the price adjusts to equate demand and supply.
• Once this adjustment has taken place, the market is in “equilibrium,” which means that there is no tendency for any further change.
• Under “market imperfections” (imperfect information, imperfect competition, and externalities), markets may tend towards an equilibrium in which they do not clear. In such an equilibrium, for example, labor supply may permanently exceed labor demand.
• When all markets have reached their equilibrium, then the economy is in a state of “general equilibrium,” in which the entire economy experiences no further change.
• Macroeconomic activities can generally be understood as aggregates of market activities in the general equilibrium.
Knowledge:
• Individuals understand their environment imperfectly. Rational agents obey the axioms of probability. This means that they know the set of all possible events; they can assign a probability to each event; every event has a probability of at least zero; the probability of all events is 100%; and if the events are unrelated, then the probability that either of the events happens is equal to the sum of the probabilities that each event happens.
• Economic events can be understood through the application of econometrics (i.e. statistical theory, based on probability theory).
A major implication of these axioms is that under “perfect” market conditions, the general equilibrium is efficient, so that no one can be made better off without making someone else worse off. This is the basis for understanding Adam Smith’s Invisible Hand, whereby the selfish activities of uncoordinated market participants serves the public interest. It is also considered the basis for understanding why the capitalist system has been so successful in delivering high and growing living standards.
Unless you accept these basic axioms and the Invisible Hand implication, you will not be taken seriously as an economist. This is important, since economics is particularly influential among policy makers, economic commentators and the general public — far more influential than the other social sciences.
Fixes That Fail
Thus, economists tend to accept the neoclassical economic system (comprising these axioms with regard to perfect markets) as the foundation for their understanding of the economic universe. They then explain each discrepancy between the predictions of this system and their empirical observations in terms of a “fix,” to be understood as a divergence from the accepted foundation.
They recognize that the axioms above are often not in accord with the empirical evidence. In fact, behavioral economics began as a compendium of “anomalies” that the neoclassical system could not explain. Some of these anomalies have been addressed by behavioral theories such as prospect theory or social preference theory, but many have not. Different theories explain different anomalies; there is no overarching theory to explain them all.
And since behavioral economics is devoted primarily to individual fixes, it has retained many of the basic axioms above, such as methodological individualism, consumption as central for wellbeing, understanding economic events in terms of probability theory and the tendency toward equilibrium. However, these axioms are also open to question.
Regarding methodological individualism, who says that the individual is the only level of selection? After all, Homo Sapiens owe their evolutionary success largely to their ability to cooperate with one another, in larger number than other mammals.
Regarding consumption as central to wellbeing, who says that our material appetitive needs dwarf our social needs, such as the need to care and be cared for, or the need to belong to a community, or the need to shape your fate through your own efforts?
Regarding our ability to understand economic events in terms of probability theory, who says that we can imagine all conceivable future states of the world and that we can assign probabilities to each of them? After all, many of the most important events that young people look forward to in the future — whom they will marry, where they will live, what jobs they will get, how much they will earn, what their state of health will be, when they will retire, how long they will live — are simply unknown unknowns.
Not only has the neoclassical system encountered endless discrepancies between predictions and evidence and thus has accumulated endless fixes, but it also has had little success in addressing the great economic questions of our time. For example: If the free-market system is meant to satisfy our needs efficiently, why is it despoiling our environment? Why is it generating inequalities and other inequities that threaten the social cohesion of our societies? Why does it leave so many people economically insecure, vulnerable to unemployment and trapped in dead-end jobs? Why does it not correct for the excesses of consumerism, workaholism and digital addictions, frequently leading to anxiety, depression, burnout, substance abuse and crime? Why is it giving us so little guidance in promoting public compliance with social distancing rules during the Covid-19 pandemic, even though such compliance has economic causes and consequences? Why does it keep so many businesses focused on short-term profit and shareholder value, even though so many business leaders are genuinely concerned about the environment and the wellbeing of their customers and employees?
Responses to Failed Fixes
To these great questions, mainstream economists (those whose economic knowledge is taken seriously) give one of two standard answers: (1) These questions may be important, but the answers lie outside the domain of economics. For environmental problems, turn to the life sciences; for social problems, turn to sociology and anthropology; for psychological problems, turn to psychology; for crime, turn to law; and so on. (2) Economics can deal with these questions through its standard policy toolbox: taxes and subsidies, government regulations, quotas, remuneration schemes and other instruments that provide monetary incentives for some behaviors and forbid others.
In the course of my policy and business advisory activities — supporting the G20 Presidencies through my leadership of the Global Solutions Initiative, advising international organizations and national governments with regard to labor, welfare and macroeconomic policy, and working with business leaders to address global economic problems — I have recognized a profound change in the way practitioners view mainstream economics. Economists used to be the high priests of public policy and business strategy, playing a leading role in the formulation of pricing policies, incentive schemes, contract design, monetary and fiscal policies, social and health policies, and much more. Mainstream economics promulgated a simple narrative on the division of responsibilities — a narrative that appeared to suit everyone well in today’s capitalist economies: The purpose of business was to make profit; the purpose of consumers was to satisfy their selfish material desires; and the purpose of government was to devise rules that enabled the businesses in the free-market system to the satisfy the consumption desires efficiently (i.e. at minimum resource cost).
Now the practitioners’ patience with mainstream economics is wearing thin. Unlike the academic economists, the practitioners must actually address the great economic questions of our time. They cannot afford to be satisfied with the two above-mentioned standard answers. They cannot accept that these questions lie outside the domain of economics, even though they have many important economic causes (the world economy as driver of climate change, economic inequalities as drivers of populism and social fragmentation, and so on) and many important economic consequences (climate change driving migration, populism leading to protectionism, and so on). Nor can the practitioners be content with the economists’ standard policy toolbox, since these instruments are obviously not overcoming the growing problems of climate change, social conflict, “deaths of despair,” containment of the Covid-19 pandemic, and much more.
And finally, the practitioners are no longer enamored by the mainstream narrative on the division of responsibilities. Consumers in their millions are taking an interest in the social, political and environmental consequences of consumption and production activities, school children are out in the streets in protest about climate change, international organizations are beginning to measure economic performance beyond GDP (such as through the OECD’s Better Life Index and the UN’s Sustainable Development Goals), businesses are beginning to measure business performance beyond shareholder value (such as through Environmental, Social and Governance criteria along with the initiatives of the WEF International Business Council, the OECD Business for Inclusive Growth coalition, the Value Balancing Initiative, the British Academy’s Future of the Corporation programme), national governments are beginning to design budgets with regard to notions of wellbeing that extend beyond consumption of goods and services (such as New Zealand’ wellbeing budget). In short, the practitioners are not waiting for the mainstream economics profession to adjust to reality; instead, they are forging ahead on multiple fronts, extending the domain of economics to the existential challenges we face.
Intimations of Progress
Beyond any shadow of a doubt, there is a change in the air, as economics nears its Copernican Moment. We are gradually reaching the same sort of stunning realization that Copernicus must have reached before writing his revolutionary book “On the Revolutions of the Celestial Spheres”: What if we can’t get there from here? What if incremental fixes don’t permit a major new leap in our understanding? What if we need to encounter the world afresh?
Fortunately, we now have access to a powerful body of thought that can guide this new encounter. The evolution of our natural world can be understood in terms of variation, replication and selection. The evolution of ideas can be understood in such terms as well: new ideas keep cropping up; they are transmitted from person to person; and the ideas that get selected to survive are often to be ones that enable us to navigate our environment most effectively. Selection can act not only on individuals, but also on groups. “Selfishness beats altruism within groups. Altruistic groups beat selfish groups. Everything else is commentary.”(E.O. Wilson and D.S. Wilson (2007), “Rethinking the Theoretical Foundations of Sociobiology,” Quarterly Review of Biology, 82(4), 327-348) The level of functional organization thus depends on the relative strength of within- and between-group selection.
This is a different starting point from the one underlying mainstream economics. The discipline of economics is based on classical physics, i.e. the inanimate world. Evolution, by contrast, is appropriate to the animate world. Not a bad point of departure for economics. After all, humans are living creatures. If we choose this path, economics will be reaching its Darwinian – not Copernican – Moment.
This is why now is probably the most exciting and fruitful time ever to become an aspiring economist. The Dutch philosopher Erasmus famously said, “At the end, you will ask yourself: What have I made of my life? That wish you wish to answer then, do now.” Who would not wish to be alive and active at such a moment, when a great contribution is waiting to be made and there is no one around to execute you for it?
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My interactions with David Friedman, and such offerings, back in the day, with legacy and perches leave no doubt in my mind, let alone the funding aspect of a discipline that whats to project intellectual and academic rigor at the highest level is tantamount to wandering the desert until the moment some higher force is satisfied that the unwashed are deserved of ***his*** gifts.
Without exception … when the wealth set determine buy [tm] funding of intellectual or academic pursuits the rot is set in, history is chockerblock with examples, matters not the veracity of various royal physic or maths outcomes when all are slaved to the enrichment of a fee due to their command of social organization.
That said pulling the rug out in an act of desperation is not an option, dislocations would have multivariate implications for those most vulnerable and like the saying goes never let a good crisis go to a waste when consolidation is the name of the game regardless of the tokens that its priced in.
Is this not old hat? I haven’t read ECONNED yet, but I read James Gleick’s book “Complexity” a while back. It was written in the 1990s iirc, and it was about Brian Mathur, the Santa Fe Institute, and the economics work being done there in that era among other things. Specifically it talked a lot about path dependence and chaos in the economy, along with laws of increasing rather than diminishing returns.
It’s fine and proper to say that free market ideology was meant to fix all this, just like it’s perfectly correct to say that certain prayers are meant to cure COVID. They just don’t work as intended, as happens with lots of things.
Alas — looking at current developments in the universities of the U.S. and U.K. — one has to suspect that any new Copernican or Darwinian intellectual “green shoots” would be quickly nipped in the bud, their prospective authors’ energies diverted and dissipated into avoiding charges of racism and other -isms, of being insufficiently supportive of people with certain backgrounds, of ignoring past injustices, … and so on and so forth.
“This is why now is probably the most exciting and fruitful time ever to become an aspiring economist”. The jubilation in this sentence makes me want to yell out for all of those poor heterodox souls who Yves mentioned who have been screaming unheard into the wind for decades. It’s like he thinks they don’t exist. It’s not like the problems and solutions are still sitting undiscovered, just waiting for a Galileo to look through their telescope and see them.
They say science advances one funeral at the time. I wonder what the ratio is for economics.
re: “screaming unheard into the wind for decades”.
Alarms have long been sounded about the glaring travesty of the Ivory Tower economics. The global financial system is a black box enabling massive corruption, impossible for the citizen to discern, and dependent on wholesale environmental destruction. Our political establishment is owned wholesale by sinister special interests whose unofficial slogan is IBG-YBG—I’ll be gone You’ll be gone.— by the time the Sh** hits the fan as they imagine then sequestering in some idyllic location untouched by collapse.
What about “true cost economics”? A simple concept that cost to the environment must be factored into production. Of course it’s cheaper to treat the environment like a waste dump and produce copious amounts of non-essential “forever” plastics and forever war for toxic weaponry production.
The exaggerated requirements of animal sourced protein are dictated by one of the most wasteful, inhumane and catastrophic industries—factory farming producing the devastating fast food industry, whose integration into the diet is the cause of many degenerative diseases and concentrated confinement of animals are producing many of the viruses now epidemics and pandemics.
Instead of root causes, the response pandemic and ill health? Indoctrinate the use of heavy pharmaceuticals with concentration of continual TV advertisement for: Entresco, Enbrel, Otezla, Neurocrine, Dupexent, Keytruda, Latruda, Vraylar, Ozempic, Rebelsus, Opdivo+Yervoy, Jardience, Trintellex, Biktarvy, Dovato, Entyvio, Prevnar 13, ibrance, Trelegy, Prolia, Cosentyx, Neulasta, Trelegy, Skyrizi, Nurtec, Orecrevus, Xjeljan, Prolia, Tremfaya, Humera, Ubrelvy, Nucala, Fascenra, Kisquali, RinvoQ, Caplyta/
All showing happy people engaging in activities with catch phrases like “wake up to what is possible” “find new normal” “feel empowered” “be connected” with disclaimer side-effects noted: ruptured spleen, liver damage, aching bones, possible cancer, infection, tears in stomach and intestine, lymphoma, brain infection, tuberculosis, inflammation of bowels, inflammation between anus and genitals, suicidal thoughts, death, stroke,
Our economic thinking and theories are collapsing. It has been evident for decades as many have cried into the wind. We are a species who cannot understand survival threat and adapt.
I’ve not been following the academic world of economics for a long time, but it seems to me that the old cliche of science advancing funeral by funeral applies. Most of the big names seem to have quite successfully shifted their unsustainable stances (‘oh, but of course we always knew about externalities…’), without shifting their underlying assumptions. And they are probably still churning out lots of young Masters and PhD grads with the same assumptions. I remember that after the Celtic Tiger crash in Ireland, one of the few academic economists who had predicted it, (a specialist in, of all things, medieval urban economics,) dryly noted that he knew the economy was screwed when he heard some of his ex students, now bank economists, on the radio, assuring everyone that things were fine.
It should be pointed out of course that there is a strong Anglosphere angle to the argument. In the German speaking world they have their own problems with strength of the Austrian School and the Ordoliberals. My language skills don’t stretch to understanding it in detail, but I get the strong impression that Asian economics schools are far more practically oriented, with a focus on real development issues, not pointless mathematical models. Someone BTL commented here the other day that the Chinese ignore western economists. I actually think they don’t – they listen very closely to them, but precisely because they want to do the exact opposite of that they recommend. The entire focus of the South Korean economic miracle was based on doing the exact opposite US economists recommended, and of course during he Asian Economic Crisis in the 1990’s, those countries that emerged largely intact were the ones that listened to IMF/World Bank advice and did the exact opposite.
I was reading Rodrigo Aguilera’s excellent book “The Glass Half-Empty”, which is essentially debunking a lot of the happy-clappy New Optimist shtick that people like Steven Pinker have – you know, everything is getting relentlessly better this century, you simply don’t realise it because the news is too negative, and you have capitalism and liberalism to thank…
anyway, he does an analysis of China’s economic development insofar as it relates to the “Washington Consensus” – the ten points that the IMF and World Bank prescribe any developing country government to follow if it wishes to see economic growth.
As I recall, of the ten principles, China violated all but one of them in one way or another over the course of its development, often quite egregiously.
https://en.wikipedia.org/wiki/Washington_Consensus#:~:text=The%20Washington%20Consensus%20is%20a,States%20Department%20of%20the%20Treasury.
Of course, it’s no coincidence that many of the ten points in the washington consensus are also the ten points you would be most interested in if you wished to continue to exploit a poor nation…
Ha Joon Chang (a Korean economist based in Cambridge, UK) has written quite a lot on this too. He has pointed out that nearly every country that achieved high sustained growth from low income to upper middle or high income has achieved it by breaking the ‘rules’ as set by classical and neoclassical economics. Some by accident, some (as with China and South Korea), quite knowingly.
Sub-sets of economics, such as political economy, economic geographers, economic historians/anthropologists, developmental economists, etc., have long known this, but they never get the same respect or public profile as the ‘pure’ economists. Certainly, if you want to know how to grow an economy above ‘average’ growth rates, you do it by studying history and geography, not economics.
Yes, I’ve been meaning to read his stuff next to get a better idea of it.
You’re right + I think one aspect that is interesting to note here is… I think it was something Steve Keen may have said about how it’s very difficult to get published in a “respected economics journal” with any critique of mainstream neoclassical economics *unless you can propose an alternative model* which has comparable explanatory power.
The trouble is that the neoclassical econ discipline has physics envy (as one who studied physics, I would know, and I think Yves puts this very well in ECONNED also.) Physics prides itself on being able to write down fundamental equations and derive pretty much everything you’d want to know just from the mathematical consequences of those equations. This is workable because nature actually obeys mathematical laws to a high degree of fidelity once you’ve figured out what the laws are and which systems you can apply them to for study.
Economics is nothing like that. You can have a theory with a lot of predictive power that’s based on totally incorrect assumptions. Or you can say “bugger that for a game of soldiers” and try to look more at bulk quantities and accounting identities which you know must hold, like Keen and other MMT-adjacent economists do. But, doing that, you will struggle to write down a model that has the same ability to make incorrect predictions as the neoclassical model, and so the theory will seem less complete [because, of course, our understanding is less complete, and it may never be complete!]
>with any critique of mainstream neoclassical economics *unless you can propose an alternative mode
That’s been the trick of every power structure ever. “Well what would you do?” is always the question and if you are young, it’s really impossible to see that the correct answer is “Not that”.
The funny thing is, neoclassic econ thinks it is heavily into math, but the beauty of math is doing proofs, IMHO.
And why I loved proofs is either you wind up with three pages of eloquent derivations – or you get to write two lines showing a real-world counter example. And you’re done.
As I’ve said before, nobody has to offer an alternative when you are wrong.
Oh I quite agree, it’s perfectly valid just to dismantle a paradigm as harmful as neoclassical econ without needing to “solve” the economic problem [although of course many of its critics have insight that neoclassical doesn’t]
Re: “it’s very difficult to get published in a “respected economics journal””
It is just another variation of “The Book Deal”, or even, “The Nobel Peace Prize”. ……..
…Tasty little nibbles handed out to the obedient ……show ponies
In the struggle to create an economic model that will foretell the future, economist have forgotten that the model is really the whole world we live in because that is what is being destroyed. Following any model that destroys what makes life livable is a fool’s errand.
I’ve wondered about that, ever since I read ECONned. Yves said that was one of the many things Milton Friedman said, and I thought it was so stupid no sensible person would take it seriously. Since many rich, famous, and acclaimed people claim to accept it, I must be wrong but I still feel that way. The “free markets” I was taught in Econ 101 do not actually predict what happens in the world I live in, where the sky is blue. In fact they don’t exist in the world I live in. “Rational expectation” is so bizarre I can understand how an economist could be awarded a Nobel Prize for developing the theory, but I cannot understand how they could actually claim involuntary unemployment is impossible because it is “proven” by “rational expectations” that people are only unemployed because they want more leisure time. This is not predictive power.
Procopious,
I really should have said “apparent predictive power”. As in: it’s a theory that you can ask a lot of pertinent questions of. Whether the answers are correct or not, I don’t know.
Yes, Chang is very good, and one reason why he’s good is that his family is from Korea, and he has an excellent insight into how the Korean economic miracle was achieved, notably by copying successful models such as Japan.
There is a generational aspect to this, but it isn’t as simple as waiting for funerals. When I studied economics in the 60s the discipline was focused on practical economic management, Keynes was the hero, and we were invited to chuckle at the delusions of marker economics. The change that came over economics in the next decade was not based on intellectual developments but on the exercise of power to change thought and ideas in a way that Nietzsche would have thought too blatant and crude. So the problem we have is not that the models don’t work (we’ve always known that) but that the models are sustained by overwhelming power, and it’s that which must change.
Which is why it’s wrong, also, to beat up Aristotle once again. He and others were practically focused. They made observations and tried to deduce what was going on to explain what they saw. They were wrong not because they were stupid but because entire branches of science had not yet been developed. Imagine yourself, two thousand years ago trying to explain to a highly educated person why the sun goes round the earth and why the starts don’t fall down if they aren’t attached to something. Economics is not in that position.
I was quite fortunate in that when I studied economics in the 1980’s the professor at the time quite openly admitted that macro models didn’t work. Some of the micro lecturers also openly joked at how none of the mathematical models used to describe models had any relationship with the real world. One commented that the prestigious journal ‘Econometrics’ was the only non-Marxist economics journal permitted in Romanian economics courses ‘because nothing in it was of any meaning and so couldn’t do any harm to the Party’. I remember an anthropologist lecturer (I also did archaeology) openly mocking the economics students in his class (including me) for their complete failure to understand the basics of how human societies operated.
Sometimes the students were the problem, not the teachers (this was the 80’s, after all, everyone wanted to get a job as a financial trader). I remember one lecturer mentioned the name of Raymond Crotty, one of the tiny number of heterodox economists in Irish academia at the time. The entire lecture hall laughed and jeered. I think I was the only one who’d actually read his books.
In Ireland at the time there was an open awareness that classical models were useless for a developing economy like Ireland, especially one with chronic unemployment, as the models stated that this should be impossible. In the 1970’s there was a theory floating around that Ireland had been stuck in a sort of permanent Keynsian depression. The recommended solution was a 1978 Budget busting rush of cash which was supposed to cure the problem, but instead led to near bankruptcy.
In the meanwhile, government advisors in the background got on with the job of actually building up a real economy. I don’t think they employed any economists.
Speaking of laughing at a heterodox economist, Jamie Galbraith recounts how he, of all people, was openly laughed at by an audience of economists when he made standard Keynesian arguments at an address at the White House in 2000 (I think).
Re studying economics in the 1980s, I too studied economics then (McGill University, in Montreal) and got a Masters’ degree. I noted to one of my more open-minded profs that I learned more economics by walking around the streets of Montreal than from my courses. He agreed, noting that economics was at a low point similar to the late 1800s and that it took 40 years for the subject to recover then. For me at the start of my economics career this was a bit discouraging, although in the end it didn’t matter as I was able to get a good job at a progressive union. Nonetheless the emptiness of economics did not serve the Canadian labour movement well when neo-liberalism arrived because our counterarguments were unsatisfying, especially with respect to fiscal deficits. Unfortunately MMT arrived too late for us.
Michael Hudson introduced MMT into the Canadian government. I think the ideas still skulk around the Parliament Buildings and appear occasionally in the Bank of Canada vaults, but all unacknowledged.
“Nonetheless the emptiness of economics did not serve the Canadian labour movement well when neo-liberalism arrived because our counterarguments were unsatisfying, especially with respect to fiscal deficits….”
I’ll bet your arguments were about the social and political aspects that make up an economy and the opposing side had mathematical models that had zero to do with the way people actually live.
You got into economics during its peak days of “physics envy”.
Your Romanian stories funny, but there’s a reason why Ceasescu wasn’t worried about mathematics. His daughter had gotten engaged to a mathematics professor. Caesescu didn’t like him.
So how to break up the couple?
He closed every mathematics department in the country.
(So Alvin Toffler told me once.)
That is an interesting story, it sounds a very Ceasescu thing to do!
Just on the point on Chang and Korea – something I’ve only recently realised, is that one reason for the huge success of South Korea is that they did a lot more than just copy Japan – they specifically looked at areas where the Japanese went wrong and adjusted their model. As an example, they identified that the horrible Japanese land market, which made it very difficult for companies to buy large land banks (this is why the Japanese are so keen on land reclamation from the sea, and also why Japanese cities sprawl so much) as a drag on the economy and a potential problem with costs. So they gave local governments very strong powers for compulsory purchase and zoning. This has allowed South Korean industries to cluster and grow in a way that even the Japanese and Chinese envy. Wandering through Korean industrial zones is a real education – they are clean, orderly, efficient, and absolutely vast, even in small towns. Entirely different from anything I’ve seen in Japan, China, or Vietnam.
In fact, the base model (at least by the Chinese, probably not the Koreans) is, weirdly enough, in Ireland – the Shannon Free Trade Zone.
I’m currently reading Joe Studwell’s How Asia Works: Success & Failure in the World’s Most Dynamic Region which is well worth the effort for anyone interested in how some Asian countries did so well.
He argues ‘NE Asia’ (his shorthand for Japan, S Korea & Taiwan) succeeded so well because they started with radical land reform. Other Asian ‘Tigers’ which didn’t do so well failed at this step.
In the early 1980s I spent time in Botswana setting up a project and a senior member of the establishment explained to me the logic behind the country’s development planning.
Interestingly, despite the great difference in culture, climate and just about everything else, it was almost identical to the ‘NE Asia’ described by Studwell. It’s seen Botswana go from one of the poorest countries in the world to one of the richest in Africa.
Thanks, that book sounds very interesting. I’d certainly agree that land reform for many countries is an essential first step. In many ways, Japan is still hamstrung by its poor land use controls.
Botswana is I think one of the quiet successes of Africa. Ethiopia too followed a NE Asian model for development for the past 20 years with very considerable success, although sadly it looks to be on the verge of collapse.
My education in economics and economic history began when I was a few millimeters above ground zero on the subjects and stumbled onto this blog over a decade ago. Based on what I’ve learned here, as well as from other sources I was often led to from here, I see neoclassical economics not as a paradigm of an academic discipline, but as an info op of, by and for the very wealthy. It’s propaganda.
It is malign propaganda at that. Yves summarizes its purpose in the first sentence of her last intro paragraph.
yah–me too–
My education in economics and economic history began when I was a few millimeters above ground zero on the subjects and stumbled onto this blog over a decade ago. Based on what I’ve learned here, as well as from other sources I was often led to from here, I see neoclassical economics not as a paradigm of an academic discipline, but as an info op of, by and for the very wealthy. It’s propaganda.
Yah again–and that makes two of us.
I find all that crap stupefying to the way I think and would not pay attention to it at all if I didn’t think it the prime driver of something I REALLY think is Important—the Climate Crises.
imo–the prime driver of the Climate Crises is Over Consumption promoted through the ‘Free Enterprise’ part of the current reign of modern Economics:
• In neoclassical economics, consumption is the ultimate source of wellbeing. In other words, the “utility” of individuals depends, either directly or indirectly, on what they themselves consume. In behavioral economics, this axiom has been relaxed to allow for “social preferences,” whereby an individual’s utility may depend on the consumption of others.
The above makes me wretch every time it is proffered –and makes me think of Ilex Vomitoria–pretty and innocuous until drunk–
https://www.wildflower.org/plants/result.php?id_plant=ilvo
Chiming in as #3.
We were in Australia in 2006 looking to move back in 2007/8. My trips to Oz as a teen since 1994 had me interested in macroeconomics due purely to the seemingly random gyrations of the Aussie dollar, but the multi hundreds of thousands of dollars purchase of a house focused me.
I wanted to understand the US housing market prior to purchase. That quest led me here and thank goodness for that! We avoided the GFC and ended up staying in Oz for another 10 years before jumping back into the fire in 2016 (don’t get me started).
Calling Economics the dismal science still gives it far too much credit. I think “propaganda” is far more fitting.
The discussions above drawing parallels to a King’s court have really brought something into sharp focus for me; the sycophants in these courts who jeered those who brought different perspectives that history proved correct didn’t necessarily realize their own role in it all.
Likewise, the econo students mindlessly jeering thoughts outside their own taught status quo fall in that same trap. When these stories are told in literature, the reader has the benefit of the lens of history, but the poor schlep in the story has to suffer despite being correct. So often I feel as though I’m stuck somewhere between the sycophants and the eventual movie audience watching this farce in disbelief; like I’ve been sealed within the 4th wall itself. Forced to watch it all play out with partial information that “somethings wrong with the world today” and a seeking suspicion of what it is… Ever longing to be in on the joke of it all with that audience generations hence.
I had thought that the Ilex v. itself does not induce the vomiting. Rather that the Cherokees mixed in other ingredients to induce the “spring cleaning” vomiting. So I went to the linked-to article and found this sentence within the article itself. . . .
. . . “The vomiting was self-induced or because of other ingredients added; it doesnt actually cause vomiting.”
So my memory was correct. The Ilex v. itself does not pose a vomiting problem.
I got my first introduction to what I now know is ‘real’ economics when a commentator to an op ed in the NYT said simply “Everything I know about economics I learned from Bill Mitchell.” I had never heard of this guy so I looked him up and, WOW: He writes clearly, has a firm grasp of the empirical data, and his interpretation thereof for monetary sovereign nations is spot on. Unlike the ideological mainstream macroeconomics, Mitchell’s MMT framework supplied useful applied economic advice. I had just finished reading ECCONNED, so I was ‘primed’ to appreciate Mitchell’s MMT framework. Therefore, I have to disagree with Yves Smith that it’s not likely MMT will replace the macro currently being taught at university. For starters, MMT is being taught at some universities. MMT economists are getting far higher visibility around the world. MMT economists are among the most popular speakers, especially to the investment houses, on the circuit. In my view the momentum is obvious. How long are universities going to teach a macro that gives lousy advice? They do their students a disservice. The writing, as they say, ‘is on the wall’ for all to see.
“How long are universities going to teach a macro that gives lousy advice?”
The point of neoliberal economic thought is not to be an accurate summation of economics or to teach students. The point of most economic schools in the US is to defend neoliberal orthodoxy. Whether neoliberal orthodoxy works or not isn’t a relevant interest of these economic institutions: Defending said orthodoxy for the benefit of large financial players is the purpose of these economics educational institutions.
Adam Smith and others were quite concerned about rent seeking. Not to mention this in today’s economic environment speaks volumes about the current state of economics.
Smith, Ricardo, Mills etc are spinning like ventilators in their graves now.
I found this New York Times article about China’s push to move 50 million mostly rural folks from poverty interesting.
https://www.nytimes.com/2020/12/31/world/asia/china-poverty-xi-jinping.html
Following up on earlier comments, would they have even tried if they listened to western economists?
Well, Chinese also tried a Great Leap Forward, on which they didn’t listen to western economist.
That of course doesn’t mean that Western economists are right, just to remind that “enemy of my enemy is my friend” is a dumb doctrine. Every item should be judged on its own merit, and its own context, not just by comparison to what it’s not.
IIRC, Mao tried to out do the Soviet Union, which to be honest had been very successful in industrializing, but it had taken them decades and the chairman wanted to do the same in years mostly by cutting all the supposedly extraneous bits; those bits (like careful planning) were actually necessary and the lives of the ordinary people were not considered that important anyways. Restated, from what I understand, the USSR was mainly trying to improve the economy while it was a vanity project for the narcissistic Mao, who didn’t really care about the lives of his people, albeit one that was also supposed to improve the Chinese economy.
I had read this article, with comments by an IMF expert saying that this may not be “economically practical” and “sustainable” over the long term, and wondered how these words apply to the use by the USA of so much of its budget on “defense”. Perhaps thinking of the poor might give different priorities to what Congress approves, and we shall soon see what the present uses of federal funds leads to as ten million more people are tossed out of their rented accommodation.
For me, one of the main problems with economics is it wants to be both descriptive and prescriptive. The short name for that is “physics envy”, but using that tends to focus on the “everything can be modelled with some maths”. IMO it’s quite a bit more than that – it’s really both being able to describe the current state (and how you got there) and the future state.
Except, even physics can’t do it, except for some special cases. But at least they know that, because their history is things breaking up the previous assumptions a lot.
You can see it even in MMT, which works exceedingly well as a descriptive theory, but IMO starts stuttering when it goes into prescriptive mode, for reasons that are actually old as mankind – projecting your own biases on the theory aka wishful thinking, which in most predictive social sciences can be simplified to action A => (my expected) reaction B, hence C. For example, with Mitchell it can be seen in his inability to understand the EU (and for example, disassociate it from the EURozone).
Of course, moving economy to descriptive mode means not plush careers in consulting or academia (or both), because politicians want prescriptive, not descriptive. So it ain’t gonna happen.
“ if the events are unrelated, then the probability that either of the events happens is equal to the sum of the probabilities that each event happens.”
Nope. Doing this will sometimes give probabilities greater than 1. This is approximately true for small numbers of independent and very unlikely events. If A and B are independent and both have a chance of 1 percent, the chance that one or both happen is approximately 2 percent, but more precisely it is 1 – .99 squared.
If you flip three coins the chance that you will get at least one head is not 1.5. It is 7/8.
I am nitpicking, but imagine if I were a neoclassical economist reading this.
I’m assuming the author means the assumption of sigma additivity. Which hold only for mutually exclusive events. Which is not the same as “unrelated” by far. As you say, if I flip two coins, the results are unrelated, but not mutually exclusive. You’d argue that the law of total probabilities is a sum of probabilities too, but they are conditional probabilities, which is even further from “events are unrelated”.
Notes like author’s are the reason why mathematicians have so low an opinion of economists (and, indeed, most people who ‘use’ maths, as very often they don’t actually understand the tools they are using, just use them).
““ if the events are unrelated, then the probability that either of the events happens is equal to the sum of the probabilities that each event happens.”
No way. The probability [that either or both of the events happen] is precisely one minus the joint probability (the product of the probabilities) of each event NOT happening.
I too studied in the fading light of Keynesianism. My professors were all children of the Depression and probably had a certain intimacy with a spartan dinner table. They were less interested in Pareto optimality than they were in the “G” of the GNP multiplier. Here is a little tid-bit from A. Cockburn from his column Beat the Devil published in the Village Voice in the late ’70’s. I have shared this with the NC fellow travelers in the past, but it’s too funny to bury permanently…
A perfectly preserved Keynesian has been unearthed by archaeologists investigating the sudden onset of the age of monetarism in the 1960’s. The Keynesian was unearthed by excavators from the quadrangle of King’s College, Cambridge, where he had apparently been engaged in digging a hole. The body is in an excellent stage of preservation, clad in corduroy trousers and a tweed coat. The stomach contains freshly chewed cucumber sandwiches and cinnamon toast.
Archeologist speculate that diagrams found on the Keynesian, referring to LM and IS, will shed new light on early Keynesian thought. A copy of the New Statesman, also found on the corpse, dates the sudden death of the Keynesian to the time of the British devaluation of the sterling in 1967. It is believed that the Keynesian, fearing the onset of glacial monetarism, may have fled Whitehall to his old grazing pastures in Kings. But other experts, noting the placid expression on the face of the Keynesian, believe that the catastrophe took him entirely unawares.
A portion of the Keynesian’s thigh was flown at once to a banquet held by the Chicago School. “Tasty and surprisingly fresh,” was a common verdict, though some found the meat “too fatty.”
Those who know me (or of me) know I’m no friend of my “home” discipline of economics but I feel obliged to say “don’t throw the baby out with the bathwater.” A fair chunk of “utility maximisation” has been proven in the separate competing field of mathematical psychology. BUT math psych people understand what REAL people do and have attempted to model it.
The result is both complex (mathematically) and remarkably simple conceptually – humans are NOT consistent and once you add the error distribution then all sorts of “anomalies” can be explained – but NOT in a way economists would like since things like transitivity get regularly violated. Occams take would say the “basic model with simple empirically observable tweaks” is likely the correct explanation. Fundamentally that’s why McFadden won the “nobel” but the problem comes back to New paradigm.
The new paradigm SHOULD BE that we are probabilistic not deterministic. It solves 10 problems in 1 but economics won’t allow it. Meanwhile math psych people are laughing (not all the way to the bank as there’s no prize for them) but they are correct. Correctly model the error term and lots of these problems go away.
I wonder just what about orthodox economics led to it’s success? I’m of the opinion that it has been just the most recent in a long line of myths that allow our elites to justify their place in society. If true then, what phenomenon will allow orthonomics to be replaced? If MMT is to be the heir, will it be because a dying middle class sees it as a way to make society work again or instead, that a faction of elites see it as a more effective means of looting?
” what phenomenon will allow orthonomics to be replaced?”
when the run of the mill human on the street regards the rich man with the lip curling disgust now reserved for pedophiles.
shun them, and if that doesn’t work, eat them.
they can be composted, too..in the same manner that i currently compost deer carcasses.
I am of the opinion that, if MMT were viewed a “go to” strong policy tool, it would be immediately hijacked by those in the front row seats (politicians, financial elite, business elite) with full support by the media elite..
Two pieces of evidence may be the current Covid-19 rescue acts in the USA, where $1200/$600 payments are allocated for the hoi polloi AND a lot of large payments for the financial elite to preserve their wealth.
In my view, these two legislative acts appear MMT like in their funding but “hijacked/corrupted” MMT in their implementation.
But I’m not an economist.
I know MMT has been long discussed here fondly but I’ve not looked into it specifically. It’s more recent machinations in the popular press have had me wondering about it’s long held belief here that MMT’s a generally good thing. But your posit of it being co-oped by the powers that be rings true to these jaded ears.
It depends on what you mean by MMT. I recommend the MMT Podcast if you’re into this sort of thing – shameless plug, I collaborated with them on a couple of interviews which aimed to explain MMT to laypeople like myself.
If the fundamental insight you take from it is just that “the main practical limit on government spending is inflation, as the government can create money at will, and there is not necessarily any need to worry about high deficit to GDP ratios” then this sort of thing can be abused. But arguably, it already is being abused. Deficit scolds never seem to worry about ever-increasing military budgets; nor would they resist bailouts for the financial sector in a crisis.
Similarly, one can use MMT to justify something like a tax cut. Providing there isn’t inflation, you can argue for this as a form of economic stimulus just as much as you can argue for spending increases, because MMT tells us there’s no necessity for the government to spend only what it takes in in taxes (or notionally “borrows”).
However, I like to think of the broader points made by the consequences of MMT, which I do think inevitably take you towards different territory, philosophically and politically.
Fundamentally you have the neo-chartalist idea. That is to say, money is not something that the “private sector” creates as a means of allowing for barter and exchange. Instead, money is something that is created by the state – which, let’s not forget, in a representative democracy, is supposed to be “us”.
The old model views money as something that is “created” in the private sector by those job creators and capitalists… and then cruelly “taxed away from them” by the state. The MMT model sees money as being spent into the economy by the government and removed again through taxation. I think this is more empowering of the collective and of the state, because it comes back to why we have money in the first place.
A state issues a currency, and levies taxes in that currency, to allow the state to provision itself. It is necessary for us all to collect and transact in pounds or dollars (etc.) because we must pay taxes using this currency. Similarly, the power to issue this currency allows the state to provision itself (build roads, do education, maintain standing armies, etc.)
Once you have this as your framing, the state is less something that leeches off and impedes private businesses who really “create” the money, and more like the thing that we collectively empower to issue currency, set prices and decide what is and isn’t valuable. It emphasises the collective power that we have as a society, rather than the hyper-individualistic neoliberal wealth accumulation paradigms that benefit the few and leave the less fortunate out in the cold. Concepts like the Job Guarantee, and the notion that unemployment is a policy choice, follow from this fundamental more naturally than they do otherwise.
Unfortunately no economic theory will automatically prevent people from voting for corrupt or irresponsible politicians: but perhaps a better understanding of the role of the state, and more public and democratic engagement with the political economy in which we all live, might move us closer to better things.
Incidentally I should add that an obvious extra point to make here is that our current definition of “inflation” as, say, a consumer price index with a single basket of goods that can be expressed as a single % is daft and obscures what is really going on. Economic policies that concentrate wealth at the top (like the ones we have now) don’t *not* result in “inflation”. They simply inflate the price of different assets: the kind that the wealthy consume a lot of. Jeff Bezos is not buying a billion hamburgers… but the price of equities, real estate etc *will* inflate when policies like QE, which generally support the wealthiest by propping up asset prices, are pursued. Indeed, if you took MMT to mean that you can run a trillion dollar deficit every year and give every cent to the 1%, you would probably not see as much “inflation” if we’re talking about the price of bread, but…
You can’t hijack MMT because its not a moral or political position. It is an explanation as to how the modern economy works.
The government uses MMT. They just mostly use it for the military. As I said, its a method of understanding the economy, not a political program. What you do with the hammer doesn’t stop the hammer from being a hammer.
An apt description of neo-classical macro economics is “cargo cult science” – an attempt to duplicate the success of physics without really understanding how science works. I can picture it now: the economists waving pieces of bamboo in an attempt to signal the planes from heaven to land and bring forth economic bounty – if they can just get those free-trade planes to land and bring forth the bounty of free-markets – all guided by the invisible hand – then we will finally have full-employment and maximum utility – whatever the hell that unmeasurable-undefinable utility really is…
Particularly appreciated Snower’s view regarding the increasing influence of “the practitioners”; i.e., policy makers. While I expect the incoming Biden administration will likely ignore MMT and adopt austerity and balanced federal budget policies while continuing to subsidize financial markets and favored constituencies, and adopt a hawkish geopolitical agenda in part as a diversionary measure, those policies will again both fail to improve the lives of the vast majority of Americans and lead to a protracted period of economic malaise. The intermediate term social and political reactions of the American people to those policies are far less clear. One might consider the possibility that the protests which began with Occupy and the election of populist politicians have just been shots across the bow.
WRT Snower’s comment regarding the extinguishment of emergent views of heterodox economists in professional journals, textbooks, conferences and academia by the establishment’s gatekeepers, I would distinguish between professional oblivion and a vibrant intellectual life. This blog serves as an example of the latter, as do the books, articles and interviews by the many heterodox economists you have featured here. Yes, I know they’re not “insiders” in terms of crafting policy. But that doesn’t mean they’re without influence in effecting policy over a meaningful time frame. Thank you.
Talking about Copernicus, one should remember that his friend bishop was a sponsor and an endorser for the book publishing. Still today, a statue of Copernicus stands with a back to the museum (call it a shrine in his glory) and facing the bishops house on his left and Warsaw university on his right. I found it quite symbolic.
While at that time an average citizen was a man of 30 miles of his home area (his guild shop or a field of corn, his parish church, and a town market place to sell or buy his good), the Roman Church sponsored all these incredible new world discovery expeditions. You may ask how, if the Earth is flat and you need a globe for a navigation. But when that 30-miles-man was asking his local priest, if the Earth is really flat, the priest would answer him, “As for you, my son, it is. And amen with that!”
And I am not sure if there is any influential “bishop” to sponsor and endorse any book of revolution on economic spheres of new Copernicus now or yet.
I’m not unconditionally optimistic. But I’m so old I’ve seen all the changes and then some. Change is the constant. How nice. The thing that bothers me is that success carries such a lag time that nobody realizes it when it’s over. I used to watch my dogs play dog tag. They’d go after each other like it was almost a dance and for about 2 or 3 minutes they were in perfect sync and then, for no reason I could ever discern, they’d both just stop and go on to something completely different. Dogs are clearly not burdened with a concept of success. We large 2-legged dolts, however, seem to have a vested interest in it. Long after it has actually disappeared. And I did sort of like Dennis Snower’s summary of the state of the art of being human and I kind of agree with him that we are changing. With or without lip service to vestiges of the old economics, my sense of the world is that we are most definitely changing.
The problem with the concept of “we are changing as humans” is that some/many/most translate this into “it’s different this time” or “permanently high plateau” and generally use it as an excuse to discard the lessons of history.
I like Twain’s take, myself – “History doesn’t repeat, but it rhymes”. I internally extend this to mean that yes, while we have smart phones now but we are still, in agragate, dumb. The American populations’ response to COVID puts this lesson into sharp relief, if one were to ask me (with the irony of the designed “incompetence” of America’s institutions ment to further enrich the elite rather contributing greatly to the malaise not lost on me – the guillotine will again be a surprise for the some/many/most).
The Founders probably would be extremely baffled by the lack of debates or legislation in Congress. For two centuries there was weekly debates with the majority of the legislators actually at the meetings. Today, it is unusual for the full chambers to meet, debate, and vote. Most of the time is spent dialing for dollars at a nearby building and trying to not have any legislation that would have one’s vote recorded. This is one of the reasons for the collapse of the government. Congress is doing less and less of its job of supervising the federal government, planning for the future, and creating the means needed to govern. Criminal investigations, debates over policy, decisions on problems like climate change. This is a why both the Presidency and the judicial system is gaining more power; they are using the power that the legislative branch has given up and often somebody has to make a decision.
I can see a similar pattern throughout the country at all levels of government. Portions of the government refusing to do its job with other portions taking over.
Economics has always been a problem.
Everything had been going well for 5,000 years and then the classical economists turned up.
Those at the top had been living in luxury and leisure, while other people did all the work. The last thing they needed was “The Enlightenment” as people would work out what was really going on.
They did work out what was going on and this had to be hidden again.
The Classical Economists had a quick look around and noticed the aristocracy were maintained in luxury and leisure by the hard work of everyone else.
They haven’t done anything economically productive for centuries, they couldn’t miss it.
The Classical economist, 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.”
There was no benefits system in those days, and if those at the bottom didn’t work they died.
They had to earn money to live.
Economics was always far too dangerous to be allowed to reveal the truth about the economy.
How can we protect those powerful vested interests at the top of society?
The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.
They took the focus off the cost of living that had been so important to the Classical Economists as this is where rentier activity in the economy shows up.
The landowners, landlords and usurers were now just productive members of society again.
Angus Deaton rediscovers the wheel lost by the early neoclassical economists.
“Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might” Angus Deaton, Nobel prize winner.
Things had already got well out of hand before he worked it out.
The UK knew how to prepare for free trade in the 19th century because they used classical economics.
The West didn’t know how to prepare for free trade in the 20th century because they used neoclassical economics.
How did the UK prepare to compete in a free trade world in the 19th century?
They had an empire to get in cheap raw materials; there were no regulations and no taxes on employees.
It was all about the cost of living, and they needed to get that down so they could pay internationally competitive wages.
UK labour would cost the same as labour anywhere else in the world.
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
Ricardo supported the Repeal of the Corn Laws to get the price of bread down.
They housed workers in slums to get housing costs down.
Employers could then pay internationally competitive wages and were ready to compete in a free trade world.
That’s the idea.
The interests of the rentiers and capitalists are opposed with free trade.
The Repeal of the Corn Laws caused conflict between the old, landowning class and the new capitalist class.
This almost tore the Tory Party apart in the 19th century.
See where neoclassical economists go wrong?
Everyone pays their own way.
Employees get their money from wages.
The employer pays the way for all their employees in wages.
Off-shore from the West, ASAP.
This is missing.
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
You can pay wages elsewhere that people couldn’t live on in the West.
You need to off-shore to maximise profit.
Being one of the economists in the NC world, I guess I have an obligation to chip in here. The popular criticism of economics is justified but also very tricky: because so much econ is evident rubbish there is a temptation to argue that the whole field is just a rationalization for exploitation, elite control, etc. People will make sweeping statements about economics without having spent much time reading it (often without going beyond Econ 101, which has misrepresented economic thinking for decades). Like any other field, economics covers a broad terrain and encompasses a myriad of contradictions. That doesn’t invalidate the criticisms, but it implies a bit of caution.
Snower is certainly right that, despite all the apparently heterodox developments of recent years, economics is still institutionally tied to a worldview that must be accepted if you are to have access to journals, departments, etc. It is also true that people in the policy and business worlds put less stock in academic economics than they used to.
About the first: it is worse than Snower describes. Above all, I would point to the National Bureau of Economic Research (NBER) in the US, which is a sort of nomenclatura. As far as I know, there hasn’t been a proper study of its rules, operations and influence, but I think they are substantial. And of course I’ve personally experienced the other exclusions, so I won’t argue the point.
About the second: at times orthodox economics has played an ideological role (when capitalism has come under significant attack), but that is not its main appeal to the worlds of money and power. Rather, decision-makers at the tops of these pyramids face characteristic problems, and they place value on fields of study oriented to solving them. That’s been the calling card of economics for business and government for centuries now, and while its performance has been spotty, its framework and language have had enough appeal in these circles to sustain its position. The important thing to remember, of course, is that the “problem” from the perspective of high-level investors and managers is quite different from what you or I think it is. Economics does a lousy job of addressing our characteristic problems because that has never been what it was developed to do. (Even economists who want to reduce inequality, heal the environment, etc. are mostly focused on how high-level policy decisions can be redesigned; they give less attention to changing the reasons why such decisions are made the way they are, which is ultimately about what you and I need to do.)
I think Snower is right about the deep challenge behavioral economics, properly understood, poses to orthodoxy. That’s probably where my agreement with him ends.
There has definitely been an empirical turn in economics in recent years—the current stars are not model-spinners (only) but econometricians touting new methods and data sources. Alas, the statistical framework that dominates economics is rather awful and biased toward allowing implausible theories to claim empirical victory, which they do in spades. For more on that, check out Andrew Gelman’s blog.
There are two related underlying assumptions that define economic orthodoxy and would have to be discarded to make real progress. (1) The assumption that economic agents and goods don’t interact with each other outside the market is profoundly counterfactual and insidious. By interaction, I mean nonlinear effects that they have on each other. Accepting the reality of an interactive world means abandoning those conveniently convex production and choice sets that give us unique equilibria and make hill-climbing rather than hill-finding the chief concern. (2) The rational actor model is precisely where Vlade’s observation about the conflation of positive and normative is located. On the one hand, people are said to choose in order to maximize their “utility”. On the other, the goal of society should be to maximize some version of its aggregate utility. In the simplest case (the benchmark model) they coincide. In more complicated cases, with externalities, behavioral “anomalies”, “sticky prices”, etc. we need policy tweaks to get them back on the same track. In my view this framework is unacceptably reductive and the reason economists nearly always take on these topics singly, in isolation from one another. We won’t have a new paradigm until economists accept that their job is to understand the world whether or not the problems they uncover have corresponding fixes.
Long-winded, but unavoidably.
Thank you for weighing in. However, I continue to disagree with your depiction of modern “mainstream” macroeconomics as not being primarily ideologically driven.
Economists did not get a seat at the policy table, nor did their pay gap out relative to other social scientists until the USSR industrialized. The fact that a command and control economy was able to perform as well and potentially better than a free enterprise system focused the minds of Western leaders. Look at what happened to Lorie Tarhis. His economics textbook, which was on its way to becoming accepted, gave a faithful rendition of Keynes (Tarhis has been part of a reading group that debated Keynes as he was publishing his key works). It was quickly recognized that the implication of his work and of Keynes was a lot of government intervention. Tarhis’ book was demonized by McCarthyites and fell quickly out of favor. Paul Samuelson’s textbook, which bastardized Keynes, became the predominant text for decades, cementing the dominance of neoclassical economics and diminishing the impact of Keynes in the policy realm.
Similarly, I question your contention that businesses value economists except as useful in lobbying efforts (the lone exception is arguably finance, where analysts’ forecasts are a useful selling tool….despite it being widely acknowledged that macroeconomic forecasts are unreliable for anything longer than six months). When I got my MBA (1979-1981), the various engineering disciplines were far and away the most heavily represented undergraduate major. Wall Street for decades had hired liberal arts graduates for investment banking and trading jobs; the head of syndicate at Salomon, for instance, had been an English major at Yale. Major companies and private equity firms hire major consulting firms for advice, and they don’t hire them for their economics chops. The most common degree is an MBA, which is a glorified trade school. I don’t know about current requirements, but all MBA programs required in my day was having taken an introductory economics course and an accounting course so they wouldn’t have to teach basic concepts. Even then they’d waive that for candidates they found interesting, like soldiers who had had unusual experiences (we had a former nuclear sub commander in my section, as well as a labor organizer).
Example of the last part is for the undergraduate business degree, Econ 101 and Accounting 101 along with calculus are required to be admitted into the business school. Econ 101 (or 150) and accounting 101 are widely considered the hardest classes at school because they are used to “weed out” students who aren’t qualified in the school’s eyes for a business major. Combined with being the econ major weed out class, 150 pulls an average grade of about a C while teaching relatively simple material. This forces a lot of people with otherwise amazing instincts and skills into fields with less strict prerequisite requirements, while telling people with MBA and consulting/banking aspirations, their only hope is going through the business school or getting a math-econ degree. I think its become much more streamlined for those jobs because i haven’t met someone who is a non pre-finance track student who plans to go into one of those positions. Furthermore, the programs all take in so much money and consultation from BofA JPM and in our case Pepsico, that the curriculum is lined up for people to go right into those companies. I can’t speak for people who transfer into those fields from elsewhere, but from the school-job perspective, I’d bet there’s less liberal arts majors in those jobs now a days.
Second part of this is that MBAs and MSBAs are increasingly unappealing to students because alternatives such as econ, finance, and marketing are more specific and easier to compete with, so the graduate programs are pushed extremely hard by the schools. The cafeteria tables always have a pamphlet on them advertising these programs and they give out special backpacks and shirts to MBA and MSBA students, almost like they are athletes.
We partly agree on the ideological function of economics. I think it’s important when it’s needed, but the difference is that I don’t think it has been needed all that often recently, especially since the collapse of the USSR. (I would date the collapse of western Marxism at around the early 1970s.)
I’m familiar with the Tarshis story. It’s interesting that Samuelson too was widely blackballed for his (bastardized) Keynesianism, although he survived and eventually won out. Behind this lies an interesting question, unresolved IMO: why are the rich so enamored of austerity and hard money policies? Yes, they hate inflation etc., but austerity can also have negative effects on asset prices. I mean, look at the 30s and the role that period plays in Piketty’s “U”. You’d think that folks with big portfolios would want to avoid a repetition of that.
I agree too that economists typically exaggerate the extent to which corporations and government rely on them. For both better and worse, economists are actually not very influential. But I think the categories, language and problematics adopted by economics are highly responsive to the worldview/perspective of decision-makers at the apex of wealth and power. These are not the same thing! An economist can say “imagine you are running a business and X happens” but that doesn’t mean the resulting analysis will be all that useful for actual businesses. I’ve spent a bit of time in the world of cost-benefit analysis, which claims to model rational thinking by government regulators. It definitely adopts a certain version of their idealized decision process, but the actual impact on policy has been rather minimal, no?
Two more quick points.
When thinking about the mindset of mainstream economics it’s helpful to think about who is attracted to the field and why. There is a small but powerful contingent of highly ideological free-market economists to be sure, but most are centrist to liberal. They are moderately idealistic and think their work and teaching in economics will make the world a better place. We need explanations for the core assumptions and values of economics that don’t contradict the motivations of the people who rally around and perpetuate them.
For a sense of where economics is at currently, scan the program of the national economic (ASSA) meetings that begin tomorrow.
Re:”why are the rich so enamored of austerity and hard money policies? Yes, they hate inflation etc., but austerity can also have negative effects on asset prices.”
Perhaps the rich and their advisors truly do believe that climate change is real and is proceeding quickly?
Austerity slows the economy for the less well off and slows the production of CO2.
This buys more time for a climate change solution (or for the well-off to do local hardening of their own life support systems).
“This is the basis for understanding Adam Smith’s Invisible Hand, whereby the selfish activities of uncoordinated market participants serves the public interest.”
What did Adam Smith actually say?
“The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
• An economic market can be understood in terms of the demand for and the supply of goods in that market, which depend on the prices of these goods. In “perfect” markets (characterized by perfect information, perfect competition and no externalities), the price adjusts to equate demand and supply.
• Once this adjustment has taken place, the market is in “equilibrium,” which means that there is no tendency for any further change.
Control theory says otherwise::
In “perfect” markets (characterized by perfect information, perfect competition and no externalities), the price adjusts to equate demand and supply.
Implying there is feedback between the demand and supply entities “price adjusts”..
When feedback is present the feedback can dampen changes in the system, or increase the amplitude of the changes, depending on the delay between the supply and demand actions.
Feedback, by itself, can destabilize a system, depending on the phase (latency) of the feedback.
Ptolemy’s…
Aristotelian…
Aristotelian and Ptolemaic systems…
Copernicus..
Galileo…
While these were all great tinkerers, their understanding of systems was non-existent compared with what we now know for the 20th Century., with control loops, practical used of feedback, and the effects of non-linearity (distortion) and noise added to information being delivered.
And the internet is a hugely “noisy” system, because its almost impossible for an observer not intimately familiar or (face to face) with the information produced to be able to verify the information received.
Why? Because for Evey topic there are trained professionals, who are masters of their art, introducing noise (aka distortion) into the communications systems, and corrupting the messages.
The only way known to build a reliable communications is to have at least three independent sources of the information, and discard and information not confirmed by two other information independent streams inaccuracies.
Getting the multiple information streams requires three completely independent “observers” or sources, which may not be possible.
This says all about the profession.
https://www.huffpost.com/entry/priceless-how-the-federal_n_278805
Max Planck put it this way:
“Science advances one funeral at a time.”
“A scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die.”
There’s no way for the discipline to move forwards when its focus and foundation is rooted in money. Every econ class i’ve taken has made the end goal profit maximizing with no acknowledgement that profits disappear when resources run scarce or dry. Until theory becomes based around resources and energy, the things that truly underlie society, I don’t see the field accomplishing the meaningful paradigm shifts the article and many others are calling for. Our issues will be in terms of resource scarcity (water, oil, soil, food) rather than money and job scarcity, so where’s the focus on this? It’s almost worth starting an entirely new field as opposed to molding economics into something else.
MMT does a good job of acknowledging the role of resources and i think looking at resources entirely removed of monetary expenditures on a macro level can go a long way. For example, not thinking about how much it will cost to redistribute farming and living as places become uninhabitable, but how to change it period. Neoclassical models put undue restraint on getting one’s money back and rent-seeking from every project, hindering any sort of progress in this way.
“no acknowledgement that profits disappear when resources run scarce or dry.”
I’m still trying to figure out what Capitalism is even going to look like in 2100, assuming it doesn’t largely implode before then. The planet will be out of all sorts of things from Rare Earths to Helium, and that’s even without the environmental pressures of global warming, such as water depletion and agriculture being more difficult to continue as it has in the last century.
There’s no plan. The Capitalists are just going to take more and more of the share of the pie while everything goes to shit. At least the Soviets pretended to have plans. The global economic system has literally no plan for the future, beyond, at most, the next five years. Probably not even that far, considering how abysmally non-China have done with Covid.
The next few decades of food and water scarcity are going to wrack the international economic system like a brick hitting a glass window.
The irony is the capitalists lifestyles of affluence and escapism won’t be able to exist, so they will be left with the rest of us and undoubtedly at the mercy of people who hate them.
I’m torn between a cyberpunk blade runner/minority report like future where either the gov or a company takes control of society through monopolizing dangerous and advanced tech, or a collapse followed with radical localism where if society can hold itself together takes the form of a bunch of smaller autonomous countries within the larger ones, especially in the US.
There was a link a few months ago about collapse being difficult to spot until its too late. I think the supply side shocks from covid are a mere audition for resource induced ones over the next century, which is scary as hell.
My view is that Humanity will fall back to Barbarism, after a massive die-off.
What we have now is not sustainable in any way, for resources to food and population. For the starry eyed, who believe we can move to the moon or mars, I’d assert the these is not enough thrust producing fuel available to transport a civilization to either body.
If a few billionaires think there is enough thrust-producing fuel to get a few billionaires plus their butler-bots to the moon or mars, the few billionaires will be satisfied.
Perhaps our billionaires are all Ethical SubGeniuses. Perhaps they expect the moral equivalent of special rescue for themselves on the Space Ships of the Sex Goddesses from Planet X.
“Now the practitioners’ patience with mainstream economics is wearing thin. Unlike the academic economists, the practitioners must actually address the great economic questions of our time. They cannot afford to be satisfied with the two above-mentioned standard answers.”
I would say they can. Economists aren’t in their positions to do much more than maximize profit for whoever pays them. By the time someone realized they needed to solve the “great economic questions of our time,” they would also realize their teaching and models tied both of their hands and the problems are too embedded to be solved without a complete reset that would render them unemployed and with a lifetime spent working on a lie. So the game continues.
Everyone is loving talking about these huge shifts and changes needed in society and the only results we are seeing are in the form of apps.
Interesting – among other things, Dennis Snower is:
Blavatnik appears to be the same person in the Institutional Investor article “How Harvard Lost Russia”:
The Institutional Investor article is cited in the New York Times article about Larry Summers “Did an Exposé Help Sink Harvard’s President?”:
The Marketplace of Ideas:
Donor $$$ ===> Neo-Classical economists/propagandists for the Donors ===>Donor $$$ ===> Lobbyists to write legislation ===> Donor $$$ ==> Politicians to pass legislation written by Lobbyists citing Neo-Classical AgitProp ===>Even More $$$ === > Donors.
There is no ecological niche for real economists in a “democracy”. Its like marketing bells to cats.