Ten years ago the judgement and competence of the economics profession was politely questioned by the Queen of England and thereafter fiercely attacked by civil society and ‘heterodox’ economists. Through all this, the profession has stood aloof - from both the heated debate, and indeed from much of the crisis itself.
No longer. For most of these ten years, the profession has treated its critics with some disdain. Now they’re fighting back. Establishment economists – those that enjoy university tenure, hold professorships in the best universities, win big research grants, are published in prestigious journals, have jobs in the City, Bank of England or in the financial press – have become more vocal in defence of the profession. It was the latest provocation that drew them out. In an article in Prospect magazine, the economist Howard Reed took sharp aim at the “theoretical core of modern economic theory—the so-called “neoclassical” paradigm.”
“When the great crash hit a decade ago” he wrote, “the public realised that the economics profession was clueless.”
There is a need for a new economics, he wrote and called on the profession to rip up that defined by many as economic orthodoxy, and to start again. The backbone of the orthodoxy, the neoclassical paradigm, Reed wrote:
“starts with the presumption that the individual firm or person is the best unit of analysis for making sense of a complex world. This atomism ought to be questioned—climatologists, after all, don’t make sense of the weather by thinking about individual molecules in the air.
Neoclassicism assumes, furthermore, that firms are out to get as much as they can of profit, and people are out to get as much as they can of “utility,” or well-being. This doesn’t sound like how real people, or many real companies, generally behave.
Finally, it assumes that everyone will act rationally, which implies not only a certain consistency, but also that they took full account of all available and relevant information. In a world of obsessions and wilful blindness, this seems like a simplification that needs to be questioned, but—again—that is not a challenge that economists have dedicated much time to, at least until very recently.”
Reed’s critique provoked an immediate, in some cases angry, and very public reaction from mainstream economists. This negative reaction led Prospect’s editor, Tom Clark, to add his own critique:
“The profession gets too confident about its grip on the world, and then — from what I see on social media — starts taking umbrage when awkward questions are pressed. For me, that is the clearest failing of all.” (Financial Times, 24 April 2018)
Diane Coyle, OBE, a former advisor to the UK Treasury, previously vice-chairman of the BBC Trust, a member of the UK Competition Commission and a part-time professor at the University of Manchester – responded to Reed in the columns of Prospect. She began with a defence of the excellent microeconomic work undertaken by her colleagues and outlined the beneficial impact of:
“research on the likely effects on UK obesity rates of the sugar tax on soft drinks by Rachel Griffith and two of her colleagues at the Institute for Fiscal Studies. Cameron Hepburn, an economist at Oxford, (who has worked) on policies to encourage environmentally-beneficial innovation. A study by other Oxford economists and engineers on how to design contracts to enable the growth of a peer-to-peer market for matching small-scale energy generation with demand. A working paper by Boston University, Harvard, and MIT economists, documenting a shift in the character of AI patents in the US from the automation of existing activities to general purpose deep learning.”
While there is surely much to admire in this work, none of it rises to the challenge of explaining the systemic natureof the economy: an economy that has evolved into a system of globalised markets in finance, property and labour – beyond the reach of regulatory democracy. A system that is clearly fragile, that collapsed just ten years ago, that continues to cause living standards to fall in the UK and elsewhere, and that many fear may collapse again. This globalised system, these markets, did not make themselves. They are not the products of the ‘invisible hand’. They are the outcome of established economic theory and policies, taught in all our universities, and adopted wholesale by governments and international institutions like the IMF and World Bank.
But while the theory is faithfully taught, and policies implemented, the economics profession collectively still fails to understand the operation of the system – or so it seems to both outsiders and insiders. The economics profession, it would seem, has reached the stage the geology profession reached fifty years ago – before the discovery of tectonic plates. Like today’s microeconomists, geologists were fiddling about on the surface of the earth, chipping away at rocks and shells, with very little real understanding of the underlying causes of the great destructive forces – earthquakes, volcanoes, tsunamis – that periodically erupted and destroyed whole ecosystems and societies. In an article published on the BBC and titled: “Plate tectonics: When we discovered how the Earth really works” – a scientist explained how clueless they had been just over fifty years ago:
"Until that time we’d been looking down microscopes at thin sections of rock, looking at faults and outcrops on land. And every now and then we’d be lucky enough to find some component of plate tectonics, but we didn’t know it was plate tectonics because we didn’t have the oceans. Without the oceans, you have nothing" he told the BBC's Science In Action programme.
Thanks to developments in technology, today geologists’ understanding of plate tectonics can
“tell us why the Himalayas are so tall; why Mexico experiences damaging earthquakes; why Australia developed a diverse group of marsupials; and why Antarctica went into a deep freeze.”
Given the catastrophic nature of both the 2007-9 crisis, and the many, and increasingly frequent crises that preceded it- society demands to know why economists have not “discovered how the economy really works”. We believe, perhaps vainly, that with a better understanding of the ‘tectonic plates’ that underpin the economy – we may, as a society, be able to prepare for a collapse. We might be able to protect ourselves, our families and firms from economic failure, job losses, collapses in living standards, housing insecurity and the impact of these failures on social life: divorce, depression and in some cases, suicide. Not to mention the disastrous political impact of economic failure.
We cannot be relieved of this deep anxiety by admirable research into the impact of the sugar tax on soft drinks and obesity.
It is my view that the greatest weakness of economics is the habit of drawing, or encouraging politicians to draw, macroeconomic conclusions from microeconomic reasoning (“the government budget, like a household budget, must balance”). This weakness is endemic within the profession. It is caused by the deliberate neglect of macroeconomics, including shameful neglect of Keynes’s monetary theory and policies; and by the dominance of microeconomics. Such skewed dominance is not accidental. After all, and this is something that economists must finally and honestly acknowledge: economic theorising is driven by class interests. As the liberal John Hobson (1858-1940) once wrote:
“The selection and rejection of ideas, hypotheses and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy, as we might well suspect, from its close bearing upon business and politics, we find the most incontestable example.”
The public instinctively knows this to be the case – that economics and the design of the economic system is driven by the class interests of the few, the ‘elite’. Which is why the profession is now held in low regard, and why so many have turned to populists and populism - for protection from the fragility of an unequal, polarising and unstable economy – whose underlying forces economists still do not seem to understand; are not inclined to explore, and are unwilling to explain.