Why the truth eludes mainstream economists
- Published: 10 June 2011
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Economists have betrayed both society and themselves. They have found cosy positions in the community at a huge cost, the sacrifice of independence and of commitment to relevance. The constricted methodology of economists makes it impossible for them to develop accurate theories, writes Bill Waters.
11 June 2011
Modern economics traces back to the 1870s. It originated as a theoretical reply, and a political antidote, to Karl Marx’s critique of capitalism. Critics from within the economics profession launched a massive world-wide attack on the discipline during the protest-laden 1970s, charging that “the economists are the sycophants of inequality, alienation, destruction of the environment, imperialism, racism, and the subjugation of women”! (Proceedings of the American Economics Association, 1970).
But the attack was not decisive. Quite the opposite!
“Globalisation” (free trade), “deregulation” (of corporations), and “privatisation” (of public assets) were the catch-words of the 1980s and beyond. By 2008, their implementation had ensured a global financial crisis (GFC). The underlying causes were eerily reminiscent of those of the 1930s Depression. Economists were again entrapped by their own ideology.
The global financial system had once again been portrayed by economists as a near-perfect, self-correcting free market. Corporate profits had exploded and - in almost all advanced capitalist countries - statistics revealed widening inequality of incomes and wealth (as in the 1920s). The upshot was restricted mass consumer spending power, thus over-production, and then recession cum depression. The most dramatic contrast between the 1930s crisis and GFC was the post-2008 plunder of public funds by failed banks and corporations.
Now, to contain the ensuing (world-wide) worst-ever levels of government debt, those who are the victims - the low and middle-income majority of taxpayers - are being scapegoated with government spending (especially welfare) cuts and tax rises. Thus the masses must pay the bills twice under failed global capitalism.
This makes another downturn inevitable (just a matter of when), because inequality of wealth and income must widen further: hence, reduced mass consumer spending (and over-production).
In the wake of the GFC, new attacks might have been expected to rise to a crescendo. But so far, alas, there have been only ripples.
In 2011, the more objectionable defects of mainstream economics, as taught to students, are:
1. Its methodology makes economists unconscious partisans of the status quo.
2. It trains students for narrow specialisation and social irresponsibility.
3. It postulates social harmony – aside from a few “frictions” and difficulties, there are no irreconcilable conflicts of interest between social groups.
4. It totally lacks historical perspective – capitalism is accepted as eternal; other systems are discussed only to underline the superiority of capitalism.
5. It assumes the State to be an aloof, impartial arbitrator; whilst the inter-relation between economics and politics, and the role of lobby groups in economic policy-making, are paid scant attention.
6. It manifests a naive faith in the existence, efficiency, and beneficence of the “competitive” price-market system.
Orthodox economists are, for the most part, as unaware of their partisanship for the status quo as they are of the smell of their own breaths. It is their constricted methodology that is at fault.
As “positivists” they simply take society as “given”, and seek to optimise the overall production and employment levels given existing socio-politico-economic constraints (such as sexism, racism, inequality of incomes). They are essentially administrators of a (hopefully) ongoing system whose foundations are never themselves a subject for analysis.
They proclaim economics to be a ‘’value free” science (i.e. positivism). They refuse to be drawn into the sphere of political and moral judgements, and are vulnerable to the charge that economics and politics are inextricably interwoven – that we cannot begin to comprehend economic policy-making until we first understand the world of political parties and vested interest groups.
Orthodox economists – though they deny this – are themselves making (albeit unconscious) value judgements. They are apologists for the status quo (with all its distortions and inequities) and their function is to try to make capitalism a viable and entrenched economic and social system, by keeping unemployment and inflation within tolerable bounds. Their task is certainly not to question and change society.
Social scientists or irresponsible technocrats?
University economics departments conceive their function as one of uncritically “servicing” the status quo by producing specialist-professional economists for industry and the State; people who would (hopefully) ensure the smooth functioning of the ongoing system in a period of rapid scientific and technological change.
University courses are thus calculated to produce economic technocrats or “mathematical technicians”: technically-competent professionals willing to sell their “skills” to big business, and limit their horizons for the mutual profit of employer and employee. Such products must implicitly accept the values and assumptions of the status quo.
Textbooks inform us that the economist’s role is limited to technical advice on the least-cost methods and implications of achieving objectives defined by higher authorities (State or private employers). Thus, since the onus of responsibility for decisions taken does not rest with economists, they presumably should spend no sleepless nights over the pollution, built-in obsolescence, unsafe products and social injustices that their “skills” may be helping to perpetuate.
The discipline’s most famous textbook, based on international sales and longevity, is American Professor Paul Samuelson’s Economics. It idealised capitalism, for a half century after 1948, presenting a wildly utopian and naive model of a near-perfect regime of “workable competition”.
Samuelson conceded that the “ideal” competitive market mechanism was flawed in the real world by the existence of certain imperfections and rigidities (e.g. monopolies, cartels and collusion, pollution, economic fluctuations) but these were held to be comparatively minor problems and it was the task of the State (as neutral umpire in society) to mitigate these distortions via appropriate public policies (anti-trust laws, monetary/fiscal policy, taxation etc.).
“Value-free”, “workably competitive” models - so cherished by Samuelson’s clones in the other textbooks - are a monstrous irrelevance when set against the realities of our economy and polity. Governments and economists pander to the powerful groups which ultimately dictate economic policy!
“The ideas of the ruling class are in every epoch the ruling ideas” said Marx. It is easy to understand why government economic policy, and the opinions of economists, are both formulated in the interests of the dominant large corporations – because the health of the economy is believed (by both) to depend almost exclusively on the health of these giants.
A two-pronged assault by the economic “establishment” can quickly bring a government to its knees. The mining lobby’s pivotal role in the toppling of former Australian Prime Minister Kevin Rudd is a classic instance.
Large corporations threaten to cut production, abandon projects, and retrench workers: the “strike of capital”; or to shift their funds and jobs offshore: the “flight of capital” – all reinforced by an unlimited media advertising blitz, positing jobs/economic growth losses, plus the threat to company share values and the retirement incomes of our much beloved “mums and dads investors”, plus the substantial potential share losses to investors in super funds.
Current Prime Minister Julia Gillard played softball with the Mining Mafia; Rudd had earlier played hardball and was slam-dunked in a shattering demonstration of uncloaked corporate economic power.
Lost in thickets of algebra
Joan Robinson (in Australia in the late 1970s) lamented that orthodox academic economists had “crept off to hide in thickets of algebra”; when it came to an actual issue, they had nothing concrete to say. They “took refuge in building up more and more elaborate mathematical models, and got more and more annoyed at anyone asking them what it was that they were supposed to be manipulating”. In the literature and classroom, there has not been the same concern for urgent social problems as for “mathematical aesthetics”.
J.K. Galbraith complained in the 1980s that too many students came to economics for the opportunity it provided to exercise arcane mathematical skills. This remains the case.
Esteemed economist Kenneth Boulding warned that mathematics is a wonderful servant but a bad master: we become so enamoured of mathematical models that we think the world is actually like them, a sort of “no-person” world, a study of the movement of prices and commodities in the absence of people.
Unfortunately, Galbraith says, the “prestige system” of modern academic economics (and this applies right up to the present day) means that low prestige is accorded to those who concern themselves with practical policy questions and with related disciplines, for this brings them into the realm of moral and political judgements. Inevitably, then, promotion in this academic world of make-believe depends on supine acquiescence. Unfortunately also, there is a “downward thrust” of mathematical trivia, and questionable theories, into undergraduate courses.
Sadly, since the “mathematical school” wants precision and wants to quantify everything, “mathematically inconvenient” hard-to-quantify factors are often left out of the calculus: hence the over-emphasis on economic growth (of output) and the relative neglect (for decades) of the impact on pollution, our environment, and other species.
Macro-economics is the study of government policy directed to the optimum levels of output, employment, and prices. It cannot be considered “pure theory” or “value free” theory. Its preoccupation is how to make capitalism a viable economic and social system, by confining unemployment and inflation within reasonable bounds. In a word, its raison d’etre is to perpetuate the social and economic relations of capitalism. It is not a critical science because it constitutes itself on the given economic and legal foundations of capitalism, and fails to make the foundations themselves a subject for analysis.
The other major branch of economics, micro-economics, studies the theory of the firm, and the interaction of supply and demand for the firm’s (and industry’s) product (i.e. the price-market mechanism).
The fundamental flaws are, firstly, that the prevailing distribution of income and wealth is usually taken as “given” without telling us what it is, or how the rich acquired their wealth.
Secondly, the structure of consumer tastes and preferences is also assumed “given”, though, as Galbraith argued, the manipulation of those very tastes by advertising and marketing (along with peer group pressure and “social conditioning”) is essential to stimulate consumer spending and boost economic growth - without which capitalism has a bleak future. If Galbraith is anywhere near correct, then the bulk of traditional micro-economics is near nonsense.
The laborious, pathetic, and futile attempt to emulate the natural sciences in matters of methodology is the Achilles’ heel of mainstream economists. They cannot escape their demons and destiny. Their policy prescriptions and predictions are fatally compromised.
Genuflecting to the economic elite, and to its priorities, has diverted generations of orthodox economists from seeing that the Emperor was indeed naked; it made the GFC inevitable (it was always only a matter of when), it rendered economists incapable of predicting the crisis, and made truth impossible for them to grasp.
Bill Waters holds a Master’s degree in Economics and an Honours degree in Government, both from the University of Sydney. He taught Economics and Government at the University of Sydney, and Politics at the University of New South Wales.