March 23, 2018 / 1:43 PM / a month ago

Breakingviews - Review: Pluralist economics is a work in progress

By Edward Hadas

A professor gives a lecture to students at the College of Administration and Economy in Baghdad University March 16, 2009. REUTERS/Thaier al-Sudani

LONDON (Reuters Breakingviews) - Some economics students want to change the profession. They deserve to succeed, but the rebels lack one really important element: compelling alternatives.

After more than a decade of development the iconoclasts have gained confidence, as their book “The Econocracy: The Perils of Leaving Economics to the Experts” testifies. A joint project of former University of Manchester students Joe Earle, Cahal Moran and Zach Ward-Perkins, the volume makes two important arguments, along with promoting some fuzzy thinking on liberal values and democracy.

The first point is that contemporary economics undergraduates receive more of an indoctrination than an adequate education. The curriculum is narrow, the learning is rote and mathematical models receive far more attention than actual data. The authors’ careful statistics about course material and exam questions support their harsh conclusion. There is a “lack of more fundamental debate about how to think about the economy”. Their data is British, but the pattern is nearly universal.

Second, the economic models which the students memorise are mostly close to useless. “The Econocracy” provides a clear summary or this long-standing – and fundamental – complaints. The mathematical formulations of economic theory rely on three basic assumptions – radical individualism, a universal utilitarian calculus, and a natural tendency towards economic equilibrium. Each of these assumptions is false. In fact, people always work together, their motivations are always complicated, and the economy is always embedded in a complex society with many goals and compromises.

Still, even the rebellious authors seem reluctant to follow the philosophical logic to its grim conclusion – arguments based on such shoddy premises prove nothing and provide little insight. The level of mathematical sophistication makes no difference.

Of course, economists do actually provide insights. They rely on statistical techniques; they monitor recent trends and they develop specialist knowledge on complex topics such as healthcare and economic development. They sometimes even ruminate on social questions. However, economists themselves often fail to recognise that their insights come despite, not because of, complicated models based on faulty principles.

Those models fell very short during the 2008 financial crash. Indeed, the gap between the theory being taught and the financial reality that dominated the news helped to propel the reform movement. Economists promise tweaks to their macroeconomic models, but the authors suspect the problem is deeper. It is unrealistic to treat government monetary actions as basically undesirable “interventions” into otherwise optimal markets. Government policies, both fiscal and monetary, have to be accepted as natural and fallible parts of a complex and deeply flawed system.

What is to be done to improve economics and economic education? “The Econocracy” has a simple answer: pluralism. Students should learn about many theoretical approaches. That would basically be a return to the less intellectually homogenous approach of a half-century ago. To help get back to the future, a group of young economists, including Ward-Perkins, have edited an anthology, “Rethinking Economics: An Introduction to Pluralist Economics”. The book’s 135 pages contain nine essays, each written by one or two senior practitioners of a particular school.

The brief essays are clear and carefully edited, so presumably present something like the state of the art for the various approaches. If so, there is a lot of work to do.

Engelbert Stockhammer, a Professor at Kingston University, leads off the book with post-Keynesian economics. His technique mirrors the simplistic rigour of pure neoclassical theory – but with inverted conclusions. For example, cutting wages in a recession moves from optimal to terrible while sector-wide wage settlements go from bad market imperfections to good means of social distribution.

Next up are Ben Fine and Alfredo Saad Filho, both of the University of London’s SOAS. They approach Marxist economics as if it is still the middle of the 19th century; there has been no massive increase in workers’ living standards, and there is no welfare state. Xavier Mera and Guido Hulsmann of the Ludwig von Mises Institute follow with Austrian economics, which seems to exist in another historical freeze-frame – the time when communism seemed workable.

There are brighter spots. Geoffrey M. Hodgson of the University of Hertfordshire makes institutional economics sound worthwhile, especially when he mentions “moral motivation” – a concept lacking from many of these alternative visions. Also, Susan Himmelweit makes a compelling case for feminist economics. Unfortunately, the Open University emeritus professor struggles to explain how including the unpaid labour of women should change economic analysis and policy.

Three of the remaining chapters, on behavioural, complexity, and ecological economics, seem more concerned with infighting or complaining about the conventional approach than with offering coherent visions. And Molly Scott Cato, a member of the European Parliament representing the Green party, writes about co-operative economics with great enthusiasm but little rigour or insight.

If the alternative thinkers seem a little stunted, the academic stranglehold described in “Econocracy” bears much of the responsibility. Many of the best potential new thinkers are co-opted into conventional approaches, leave the field or struggle to find time for research. The loss is significant. Economics really could do with more and better rethinking.

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