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The Poverty of Economics

“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

– Joan Robinson

Dublin, Ireland.

Economics is often referred to as the ‘dismal science’, and it’s certainly a name that’s well earned. To understand why, we could look to its relative failure to foresee the global financial crisis, but to go with a more contemporary example just look at the recent events in Greece. Time and time again we have been subjected to the same tired and fallacious arguments of the Troika, who tell us that the answer to Greece’s problems – massive debt and recession – is more debt and more austerity, which culminates in….? Yes, you guessed it, more debt and even deeper recession.

So is the latest bailout agreement, which adds another €86 billion to an already unsustainable national debt of €316 billion, not Einstein’s definition of madness par excellence? Because instead of resolving the crisis, all this will do is ensure that sooner rather than later Greece will need to return to the negotiating table, and then madness will begin all over again.

Now I’m well aware that the Troika’s motives have been more political than economic, but ‘sound’ economic reasoning is the cover they use for their arguments, in much the same way that the US government uses for theirs whenever they’re defending cuts to Social Security or tax breaks for millionaires.

It’s therefore important to equip people with the artillery with which to fire back at these self-serving arguments, whether they hear it from our politicians in the parliament, their handmaidens in the media, or even just amongst friends in a conversation. What follows is a critique of neoclassical or mainstream economics (herein just economics); the type that any student of economics would find in their textbook, and who upon graduation go on to find jobs as the likes of bankers, financiers, housing economists and of course the advisors to our political masters.

Mainstream Economics: Re-Writing its own History

It’s a widely held view today (but by no means uncontested) that economics is a value free science of choice, detached from any kind of moral concerns. But this is not how it started out. On the contrary, it began life within the humanities as a subsection of moral philosophy – no less, after which time it shifted to the social sciences as it attempted to apply the scientific method, and today through its use of complex (and often entirely inapplicable) mathematical/statistical modelling, it has pretensions of joining the hard sciences.

But this contemporary lack of moral/ethical concern would outrage many of those who are considered its early proponents, such as the enlightenment philosopher Adam Smith. Smith, the man considered to be economics’ founding father, is the hero of Conservatives as the supposed champion of the free market, largely through his notion of the ‘Invisible Hand’. The ‘Invisible Hand’ is a metaphor for the supposed unintended social benefits, which arise in a market economy from individuals acting self-interestedly.

But this is a highly selective interpretation of Smith, one that is quite at odds with the general thrust of his work, which stated the importance of things like banking regulations and progressive taxation. Hardly the usual stuff that conservatives advocate for!

Smith condemned the elites of his day – the ‘masters of mankind’ – for their ‘vile maxim’, namely ‘All for ourselves and nothing for other people’. Hardly a ringing endorsement of the kind of greed (or self-interest), that many claim to discern from his work. What’s more, he stated quite clearly that ‘to restrain our selfish, and indulge our benevolent affections constitutes the perfection of human nature’. Does this sound like a man who supposedly prioritised selfishness above all else?

Yet Smith’s ‘Invisible Hand’ is the bedrock of mainstream economics. It’s the rationale for the kind of neoliberal policies that have been aggressively pursued since the time of Reagan and Thatcher. It’s also underpins these so called ‘reforms’ that the Troika are demanding in Greece, like the privatisations of their ports and airports.

Doubts remain about how much emphasis Smith actually gave to the supposed ‘Invisible Hand’, but there’s one thing we can be certain about. That which passes for capitalism today would horrify him. We need only take a look at the present state of global inequality. After all this is the man who said ‘No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable.’

Homo Economicus – No relation of Homo Sapiens!

Building upon this selective interpretation of Smith and others, the discipline constructed the figure of homo economicus, or economic man. This is a figure who always acts to selfishly maximise his well-being (or what economists call utility), through the use of a sense of robot like rationality. It also forms the basis of so called market rationality, or what became known as the Efficient Market Hypothesis.

For if self-interested individuals operate in a rational way, then surely markets, which are just collections of individuals interacting with one another, must also act in a rational way, right? Wrong! The theory of homo economicus makes a number of rather large (and unjustified) claims, such as the supposed innate selfishness of human nature. But economics is out on its own on this one, and finds no support for such a conclusion from the likes of evolutionary biology, neuroscience, ecology, anthropology, and so on and so forth.

The evidence for our selflessness and co-operative nature is everywhere. From people crowdfunding to help Greece in its plight, all the way to Tunisian’s forming a human shield around tourists to protect them from a terrorist gunman. Even in my home country of Ireland, we give some of the highest levels, per capita, of charitable donations to foreign countries. It stands to reason that if we were as selfish as mainstream economics says we are, then our species probably would not have made it this far.

So what about the evidence for our supposed ‘rationality’? Well the Noble prize winning psychologist Daniel Kahneman, who specialises in the psychology of judgement and decision making, put a number of economics’ assumptions to the test. His numerous empirical studies found that individual behaviour does not match up to that described by any run of the mill economics text book.

On the contrary, he showed that people tend to have significant short term and optimistic biases when making financial and non-financial decisions. Thus they take on risky projects instead of counting the potential costs – in stark contrast to the behaviour that mainstream economics predicts. This should not be entirely surprising, considering that we humans are an emotional and an imaginative species that are influenced by our culture and society – just as we influence it. We’re constantly subjected to advertising and marketing that incessantly implores us to buy goods/services that we probably don’t want and most likely don’t need.

It’s not hard to see, that far from economics’ line about rational individuals making rational decisions in efficient markets, the truth is more often one of non-rational individuals, being implored to make irrational decisions in markets that are usually inefficient. Because when the supposed ‘Invisible Hand’ of the market is left to do the heavy lifting, invariably it’s the government who’s left to pick up the slack.

Cloning the Selfish Gene, know what I mean?

There is very little evidence that ordinary people act according to economics’ model of human behaviour, however there is significant amount of evidence that those who study economics, and practice it, do. A number of studies have shown, that economics teaches both students and professors to be more selfish. And this shouldn’t be all that surprising, because the idea of rational self-interest found in most textbooks becomes a self-fulfilling prophecy, as students begin to exhibit the very behaviour described therein.

Unfortunately mainstream economics has shown itself to be remarkably resistant to any kind of self-reflection and reassessment; whether arising from its relative failure to foresee the financial crisis, the failure of its policy of austerity as a path to growth, or the growing empirical evidence which explodes the theory of homo economicus.

The insularity of the discipline is a big problem, because it further entrenches its bunker mentality. With 81% of all citations coming from within its own field, as opposed to 52% sociology, 53% anthropology and 59% political science, what we find is contemporary economists are mostly talking to and amongst themselves, to the exclusion of most other fields of study.

This is a serious problem, because a discipline which cannot engage with the ideas of other fields, nor in a critical re-examination of its own core tenets, especially when reality and the weight of evidence seems to invalidate them, can in no way claim to be following the scientific method.

Thankfully students of economics have shown themselves to be much more concerned with its obvious failings and shortcomings. From New York and London to Rome and Tel Aviv, a movement has taken hold that’s determined to change the way economics is taught in Universities. The International Student Initiative for Pluralism in Economics has called for a ‘pluralism of theories and methods’ to be taught. They also want greater engagement with the other disciplines such as history, sociology and philosophy. And they’re absolutely right.

We need to be teaching our students how to think, not what to think. The only answer is to present our students with a range of competing economic frameworks; Marxian economics, Keynesian economics, Behavioural economics, Economic History, etc., and then allow them to come to their own conclusions based on the weight of evidence and their explanatory power. For as the saying goes, ‘let a hundred flowers bloom, let a hundred schools of thought contend’.

More articles by:

Cillian Doyle is an economist with the People Before Profit Alliance of Ireland.

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