Uneconomics: a challenge to the power of the economics profession
This piece opens OurKingdom's new debate, "Uneconomics".
When economists Lucas Papademos and Mario Monti were parachuted in as Prime Ministers of Greece and Italy respectively in November of last year, this heralded a new era in the power of the economics profession. With questions still being asked about the failings of economics and economists in the build-up to the financial crisis, this technocratic rebuke to democracy was further evidence that this crisis is entrenching existing elite power, rather than weakening it. Not that you would hear any of this being discussed in an economics classroom.
Harvard graduates play major roles in the financial institutions and in shaping public policy around the world. If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.
Elsewhere, the documentary, Inside Job, contained startling reports of how senior economics professors had been paid large consultancy fees to report that economies such as Iceland’s were fundamentally sound. From the 1990s onwards, a number of senior American economists repeatedly ‘discovered’ that financial derivatives were reducing risks within the financial system.
We now know that the financial crisis has produced a depression in many Western economies, which will destroy lives and many cherished public institutions. According to the figures of the UK government, living standards in 2015 will be lower than 2002. One of the ingredients of this crisis was that the financial system (including its regulators) was a mineshaft crammed with canaries, scarcely any of whom had any inclination or ability to sing. Those that did, such as Nassim Taleb or Nouriel Roubini, have since acquired the status of gurus for this single reason.
And yet, five years on from the origins of the crisis, the power (if not the authority) of economics in public life is, if anything, greater than it was before. Credit-rating agencies make governments shudder with their risk models. The UK government’s austerity programme was backed up by zany claims from conservative economists (especially in the think tank Policy Exchange) that rapid cuts in public spending would result in economic growth. When these predictions turned out to be false, few even bothered to register their surprise.
As Woolfgang Streeck recently argued, there has always been an implicit tension between the demands of economic experts and those of democracy, but the crisis has elevated this to a new level. We are used to elected politicians (such as Ruth Kelly and Vince Cable in Britain) being trained economists or to economic advisors shaping undemocratic regimes (such as Milton Friedman in Chile in the 1970s or Jeffrey Sachs in Russia in the 1990s). But, until 2011, we had never witnessed the phenomenon of economist as unelected Prime Minister.
It is time to acknowledge an uncomfortable truth about the public status of economics as an expert discipline: it has grown to be far more powerful as a tool of political rhetoric, blame avoidance and elite strategy than for the empirical representation of economic life. This is damaging to politics, for it enables value judgements and political agendas to be endlessly presented in ‘factual’ terms. But it is equally damaging to economics, which is losing the authority to describe reality in a credible, disinterested, Enlightenment fashion.
The status of economists in public life has taken many twists and turns, since Adam Smith’s Wealth of Nations was published in 1776. The classical political economists, such as David Ricardo and John Stuart Mill, were engaged public intellectuals, whose analysis covered institutions, politics and morals. It was only after the ‘marginal revolution’ of the 1870s that economics reappeared in its neo-classical manifestation, the form with which we associate the term ‘economics’ today. In drastically delimiting the scope of economics to the study of rational decision-making by individuals, the marginalists withdrew from describing capitalism or society, creating space for rival social sciences to emerge for this purpose.
The methodology of neo-classical economics famously presupposes that human beings are rational maximisers of their own utility. This idea has worked wonderfully for the economics profession as a basis for model creation, but dreadfully badly for the world that economics purports to describe. It has generated images of economic life, which are excessively simple and quantifiable. The political and cultural function of economics (which, with the notable exception of Deirdre McCloskey, economists have scarcely ever reflected upon) has become one of stripping out ambiguity and complexity. Their usefulness to politicians lies in the rigidity and global reach of their methods, but not necessarily in the truthfulness of their findings.
Two caveats should be made in defence of economists at this point. Firstly, many neo-classical economists go to great lengths to acknowledge the unrealism of their methodological assumptions. As Gary Becker, the esteemed Chicago School economist, likes to put it, neo-classical economics is simply one particular “approach” to human behaviour. This apparent humility then enables Becker and his acolytes to extend this ‘approach’ into all walks of life without any further justification for doing so, as popularised in the best-selling Freakonomics.
Secondly, economists are typically far more alert to the frailty of economic knowledge than those they are advising. Academic economists will stress the presence of ‘uncertainty’ underlying all situations, highlight the limitations of their data and qualify their presuppositions. The problem is that adrenalin-fuelled bankers, over-worked politicians and regulators have little interest in such nerdish conditionality. They want numerical answers with which to defend their actions.
The bizarre truth, then, is that economics has attained its current pre-eminence in public life through saying as little as possible about the institutions, character and practices of contemporary capitalism. Combining acute humility regarding the realism of its premises, with the appearance of certainty regarding its conclusions, it has created a dangerous form of rationalism that is deeply entangled with economic life, while being entirely unable to reflect on that fact.
The discipline has performed a modicum of self-criticism over recent years through admitting findings from two rival fields, namely psychology and biology. Behavioural economics, neuro-economics, happiness economics (as debated here on OurKingdom), ecological finance and complexity theory are now being looked to, in search of a more realistic vision of economic life. George Soros’s Institute for New Economic Thinking, which was founded in 2009 in response to the financial crisis, is dominated by these modified versions of neo-classical economics. Andrew Haldane of the Bank of England has seized on many of these schools of thought, to criticise the status quo. While efforts by economists to re-engage with economic reality must be welcomed, there is still a total dearth of institutions, power or culture in the portraits that these sub-fields paint.
Yet this is far from true across the social sciences more broadly. Following the marginal revolution, sociologists took up the task of describing the institutions and regulation of industrial capitalism, which economics had abandoned. Anthropologists asked fundamental questions of economic life, regarding the nature of exchange, of money and of production. Political economy survived in various Marxist, evolutionary, Keynesian and neo-institutionalist traditions, which now go under the umbrella term ‘heterodox economics’.
Leading figures from these disciplines have attained great public influence in the past. Keynes’s role at the 1944 Bretton Woods conference is the leading example, but evolutionary economists (such as Richard Nelson in the US), sociologists (such as Anthony Giddens in Britain) and Marxists (such as Michel Aglietta in France) have all performed roles as senior economic advisors to governments. But neo-classical economic thinking has become the vernacular of contemporary government, and much of what these thinkers address would nowadays be described by policy-makers as ‘externalities’, the neo-classical term for that which occurs outside of the market price system.
As a contribution towards reversing some of these trends, OurKingdom and openEconomy are hosting a debate entitled ‘Uneconomics’. Commissioning and inviting contributions from sociologists, anthropologists and heterodox economists, the debate will seek to further public understanding of economic life and the present crisis in two ways.
Firstly, we will seek contributions from social scientists doing detailed empirical work inside the dominant institutions of contemporary capitalism. For example, the ‘social studies of finance’ has greatly illuminated institutions such as derivatives, stock markets, trading screens and Wall Street culture, thanks to ethnographic work of scholars such as Donald MacKenzie and Caitlin Zaloom. The skills to watch and to listen – in the hands of journalists such as Michael Lewis and the anthropologist-turned-journalist Gillian Tett - have proven far more important in furthering our understanding of the current crisis than orthodox economics.
Sociologists, anthropologists and ‘cultural economists’ also have important things to say about institutions such as debt, accounting, regulation and credit-rating. The anthropological insight, that how we represent things affects how we act, has become more widely accepted since the beginning of the crisis; think how the practice of ‘mark-to-market’ accounting has been held up as one of the culprits for the banking crisis. But public debate is typically denied the insights of anthropologists and sociologists.
Undoubtedly this is partly the fault of scholars themselves, who either refuse to or fail to present their evidence in ways that meet the demands of a numbers-hungry, attention-deficient media. But if we accept that simplistic, mechanical portrayals of economic life contributed to our current crisis, then we must also create more space for nuanced and ambiguous depictions of reality. Strangely, this has been accepted in management theory for decades, but public policy-making still clings to a machine-like view of the world.
Secondly, we will seek contributions which reflect critically on the relationship between social sciences and the state. Sociologists such as Marion Fourcade and Peter Wagner have written extensively on the co-evolution of social sciences and public policy, while Phillip Mirowski has provided brilliant studies of the history and delusions of economics. Science studies scholars, such as Michel Callon and Fabian Muniesa, now analyse economics purely as a facilitator of economic activity, rather than as its representation. Manchester University’s CRESC centre has published numerous papers on the present crisis as an ‘elite debacle’, in which particular experts failed in their public duties.
But how might things be done differently? How could the stranglehold of the neo-classical worldview over public policy be weakened (if it should be at all)? What are the historical precedents of more nuanced, culturally-attuned forms of social science being used as a basis on which to form public policy and advise politicians? And how can public understanding of capitalism be furthered, in ways that don’t simply replace one blanket explanation (the rational maximiser) with another (the brain)? Could the marginal revolution be reversed, and classical political economy be put back together again?
These questions are not new. But their urgency is heightened by the present crisis. Of all the social sciences, economics has proven itself to be the most politically useful – some might say politically malleable – but its lack of realism has become a critical issue with serious economic and political consequences. ‘Uneconomics’ is needed to explore alternative forms of expertise and advice, and an alternative basis for public economic debate.
The second article in the debate, by Judith Marquand, will be published early next week.
What do you think? Leave a comment below.
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