Where now for economics?

Almantas Samalavicius: How does the climate that dominates departments of economics almost worldwide affect the situation of economics inside and outside the academy?

Joshua Farley: The academic discipline of economics has an enormous influence on society. John Maynard Keynes once remarked that ‘practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’ Keynes himself was responsible for rethinking economic theories that were incapable of explaining the great depression or unemployment. Paul Samuelson, who stated ‘I don’t care who writes a nation’s laws, or crafts its advanced treaties, if I can write its economics textbooks’,1 developed the so-called neoclassical-Keynesian synthesis in his 1948 textbook. Far more neoclassical than Keynesian, Samuelson’s approach helped restore faith in unfettered markets, and has formed the core of undergraduate economics ever since. Ironically, though Milton Friedman is credited with the statement ‘we’re all Keynesians now’, he also played a major role in returning the economics discipline to its very un-Keynesian neoclassical roots. An inordinate number of ‘practical men’ now seem to be slaves to Friedman’s ideology. Like the 1920s, academia, government, business and society in general are permeated with the notion that unregulated markets unerringly guide our system to an optimal, equilibrium outcome, despite overwhelming empirical evidence to the contrary.

Perhaps the main reason that the economic discipline ignores alternatives and fails to question stale theories is because it does not expose itself to outside views or disciplines: economics is among the least interdisciplinary and most hierarchical academic fields, as documented in a fine article by Fourcade et al.2 In a 2006 survey, over 57% of economists disagreed or strongly disagreed with the statement ‘In general, interdisciplinary knowledge is better than knowledge obtained by a single discipline’ – well over twice as many as in most other social sciences. Economists are the least likely of any social scientists to cite journals outside their field, and within the field, citations are predominantly to a handful of journals closely aligned with the leading schools of economics. Promotion and tenure in universities are closely tied to publication in top journals, and in economics departments, this requires toeing the ideological line. Those who fail to do so lose their jobs, further ensuring homogeneity.

Fortunately, I am not part of a mainstream economics department, but rather of UVM’s transdisciplinary department of Community Development and Applied Economics. My open-minded colleagues are far more interested in improving society than in ideological purity. UVM’s economics programme appears distinctly different, actively discouraging alternatives to the conventional approach. Economics students have repeatedly tried to get their department to cross-list courses in ecological and applied economics, publishing calls for more pluralistic approaches in the student paper and setting up student committees to push for the same. At the insistence of economics students, I have repeatedly submitted proposals for cross-listing my courses, to no avail. Students have told me that one professor (no doubt tongue in cheek) offered extra credit to his students if they would beat up my teaching assistants, who are notorious for asking difficult questions and challenging core mainstream assumptions. One of the few heterodox lecturers in the economics department, very popular with the students, was recently purged. He used the Freedom of Information Act to access the emails discussing his firing, and it is quite obvious that his crime was to challenge the economic orthodoxy, as he has chronicled in his blog.3 Economics departments appear to be advocates of competition everywhere except in ideas.

However, blame for the persistence of the narrow, mathematical vision of a perfect, self-regulating market must be shared. Universities have an implicit hierarchy, in which science, technology, engineering and mathematics (STEM) are at the top, followed by social sciences and then the humanities. Within the natural sciences, math is viewed as the language of nature. Charles Darwin would have a hard time getting funded today. Mathematics and quantification have become the gold standard. The closer other disciplines can approach this standard, the greater their prestige. Mainstream economics is explicitly based on the math of mechanical physics. Stanley Jevons, who played a critical role in the development of neoclassical economics, viewed economics as ‘the mechanics of utility and self-interest’.4 Many early economists were deists, who believed that a supreme being set the universe in motion according to immutable laws – expressed in mathematics – which scientists could discover. Newton discovered God’s laws for physical matter, and it was the task of economists to discover them for society.5 Perhaps this still explains the religious conviction with which economics stick to its theories.

Unfortunately, mathematics may be particularly inappropriate for economics and other social sciences. Nicholas Georgescu-Roegen, a mathematician and mathematical economist before his pioneering work in ecological economics, argued that economies are characterized by qualitative change and the continuous emergence of novelty, which is inherently unpredictable. The economy doesn’t produce more horse carts than it did in the 19^th century, but instead produces automobiles and jet airplanes.6 Nassim Taleb similarly argues that most important events in human history – economic and otherwise – are black swans that cannot be predicted from previous experience.7 Furthermore, quality is an ordinal concept, with no distinct boundary between good and bad. Life itself is ordinal, not arithmetic: H. erectus evolved slowly into H. sapiens, with no distinct generation in which one species became the next. In contrast, in mathematics, everything is predictable, in the sense that it all logically follows from basic axioms, and any two mathematical quantities are distinctly different.

Nonetheless, mathematization helped economics emerge as the queen of the social sciences. Despite its seemingly glaring failures to explain how the economy works or to predict booms and busts, economics is by far the most prestigious social science by many measures. It is the only social science with a ‘Nobel’ prize, and with advisory councils for presidents and other national leaders. Economists hold leading positions in international organizations, corporations and NGOs. Economics professors earn far more than other social scientists on average, on a par with engineers, and economics students have better job prospects than students in most other disciplines. Economic theories appear more likely to be taken serious by society and policymakers, and to have more of an impact on real life decisions, than other social sciences. Economists perceive themselves as the most scientific of the social scientists.8 All of this reinforces the discipline’s conservative tendencies. Why change economic theory when economists are so well rewarded for the current one?

Professor Joshua Farley. Source: University of Vermont

AS: Every discipline that cares about its ‘health’ needs to revise its own history, especially when some of the presumptions become dogmatized and start to resemble those of a religious cult. Some presumptions of the currently dominant form of economics have been exposed and attacked intellectually, yet changes in the dominating ‘ideascape’ are few or insignificant. How can the mainstream ruling theories be challenged so that serious rethinking follows? Do you believe that such a rethink will take place in the coming decades, at the same time as awareness of large-scale ecological problems, such as global warming, grows?

JF: Abundant research confirms what is known as the backfire effect: presenting ideologues with facts that contradict their worldviews simply reinforces their existing opinions.9 I am afraid that this is the case with mainstream economics, and I have grown increasingly sceptical of the potential for change within the discipline.

A look at previous attacks on mainstream economics helps illustrate this. Irving Fisher was an early star of neoclassical economics. Unfortunately, just as the great depression hit, he was publicly proclaiming that the stock market had reached a permanently high plateau – remarkably similar to Ben Bernanke’s claims shortly before the great recession. Fisher learned from his mistakes, and during the depression developed brilliant new macroeconomic theories, including proposals for a banking system in which banks would no longer be allowed to lend money into existence. Many ecological economists, including myself, support his plan for 100% fractional reserve banking. However, while mainstream economists continue to value his theories that were disproven by the great depression, they reject his later ideas. Georgescu-Roegen has a similar history. Based on his early work in mathematical economics, he was praised by Paul Samuelson10 as ‘an economist’s economist’, and widely cited within the profession. When he realized that worsening ecological problems revealed fundamental flaws with mainstream economics, he wrote The Entropy Law and the Economic Process,11 which offered a radically different economic paradigm and laid the foundations for ecological economics. Again, mainstream economists simply ignored all evidence contradicting their theories.

More recently, the field of behavioural economics has applied psychology, clever experiments and empirical evidence to build a more accurate depiction of human behaviour that undermines core axioms underlying mainstream models. Both Daniel Kahneman and Richard Thaler have won the ‘Nobel’ prize for economics for their work, which can be harshly critical of mainstream theory. Mainstream economics, however, has managed to channel this critique in ‘acceptable’ directions. The dominant focus in behavioural economics is on how people are predictably irrational, which tacitly accepts the mainstream definition of rationality. Most behavioural economics (though certainly not all) also focuses on individual behaviour, which is compatible with the mainstream view that society is simply the collection of individual actions, with no emergent properties. Finally, if behaviour is predictable, it can still be modelled mathematically, and thus does not challenge the mainstream obsession with mathematical models. As a result, behavioural economics is widely accepted by the mainstream, but has had relatively little impact.

It’s important to note that the social sciences are very different from the natural sciences, first because social scientists generally want to change the systems they study, and second because our theories can affect reality. This is particularly true in economics, where there is greater agreement on core theories within the discipline, and greater acceptance of those ideas by key players in government and business. For example, if the top economists all announced that their theories predicted a major stock market crash within the month, everyone would pull out of the stock market, causing a crash. More sinister is the evidence that simply studying economics makes people behave like the rational self-interested actor of mainstream theory.12 Self-negating prophecies are also possible. Following the great recession, society created numerous regulations of the financial sector to prevent subsequent crises. These were so successful for so long that economists came to believe the financial system was inherently stable, and regulations were no longer needed, triggering deregulation and the next crash. Perhaps the best ecological economists can hope for is to become anti-Cassandras: to make true predictions about what will happen if we continue with business as usual, but which people believe and therefore act to prevent. For example, if we convince society that the finite global ecosystem can no longer sustain an ever-growing population with ever greater per capita consumption, and society acts on this prediction, we could achieve a steady-state economy in which our dire prophecies never come to pass. People in the future might see us as frauds and fools, but it would be well worth it.

I believe the likeliest paths for change will not convert mainstream economists, but rather sweep them aside, as chemistry swept aside alchemy. One possibility is an optimal catastrophe: a financial crisis or ecological problem serious enough that people recognize our current system cannot solve the problem, but not so serious that it is too late to change. As Milton Friedman once said ‘Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around … Our basic function [is] to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.’13 Another possibility is that we pragmatically struggle to prevent catastrophes before they occur, and recognize that alternative economic institutions are required. For example, fossil fuels fit the market paradigm: since two people can’t burn the same barrel of oil, competition over use is inevitable, and we can use private property rights to ration access. In contrast, different geographic locations do not compete for solar energy, and we all benefit when others replace fossil fuels with solar. Furthermore, technologies improve when the knowledge on which they are based is freely shared, but private intellectual property rights restrict such sharing, slowing economic progress. An energy transition could trigger an economic transition. Regardless of the path, I believe most mainstream economists will be displaced, not converted.

AS: And, finally, can any revision of the current economic thinking that dominates in the universities contribute to serious rethinking of the institution itself?

JF: There are two ways that new economic thinking could lead to a rethinking of universities. First, any economic paradigm capable of addressing our current ecological and social challenges must recognize that natural and social systems are deeply entwined, co-evolving systems. It is impossible to understand how the economy functions without understanding ecology, politics, sociology and basic physics – in short, a new economics must be transdisciplinary. Universities, however, mostly train people in narrow disciplines. A better approach to economics and to university education in general would be to train scholars to understand and solve specific problems, such as climate change and growing inequality, by learning appropriate tools and theories from various disciplines.

Second, modern academic economics is really what the Greeks called chrematistics, the study of numbers and how to make money from money. Oikos, the root word of both economics and ecology, means household. Economics literally means the management of the household. Economics must abandon the goal of quantitative growth, and recognize that the most serious challenges we face are prisoner’s dilemmas that can only be solved through cooperation, not market competition. Universities used to be models of the cooperative economy, in which we served on committees, reviewed each other’s work, and dedicated ourselves to classes because it was the right thing to do, and because others did the same for us. Influenced by mainstream economics and finance, universities have grown increasingly obsessed with chrematistics, money and competition: slashing the number of tenured faculty in favour of poorly paid adjuncts; valuing the number of publications, students and grant dollars over effective teaching and meaningful research; choosing presidents for their money-raising prowess rather than their inspiring visions; channelling ever more resources to administrators, who justify their existence by demanding ever more reporting from faculty; gaming the rating systems, for example by encouraging excessive applications to push up the rejection rate; treating students as customers paying for a service; and promoting education only as a means to the end of employment and greater economic production. A new, non-suicidal economic paradigm must promote qualitative improvements over quantitative growth, pursue quality of life over production and consumption, and recognize that some problems are better solved through cooperation than competition. These same approaches would certainly improve our universities as well.