Mainstream economics is in denial: the world has changed
Despite the crash, the high priests of economics refuse to look at the big picture – and continue to prop up world elites
- The Guardian, Monday 28 October 2013 20.00 GMT
Rebellions aren’t meant to kick off in lecture theatres – but I saw one last Thursday night. It was small and well-read and it minded its Ps & Qs, and I think I shall remember it for some time.
We’d gathered at Downing College, Cambridge, to discuss the economic crisis, although the quotidian misery of that topic seemed a world away from the honeyed quads and endowment plush of this place.
Equally incongruous were the speakers. The Cambridge economist Victoria Bateman looked as if saturated fat wouldn’t melt in her mouth, yet demolished her colleagues. They’d been stupidly cocky before the crash – remember the 2003 boast from Nobel prizewinner Robert Lucas that the «central problem of depression-prevention has been solved»? – and had learned no lessons since. Yet they remained the seers of choice for prime ministers and presidents. She ended: «If you want to hang anyone for the crisis, hang me – and my fellow economists.»
What followed was angry agreement. On the night before the latest growth figures, no one in this 100-strong hall used the word «recovery» unless it was to be sarcastic. Instead, audience members – middle-aged, smartly dressed and doubtless sizably mortgaged – took it in turn to attack bankers, politicians and, yes, economists. They’d created the mess everyone else was paying for, yet they’d suffered no retribution.
In one of the world’s elite institutions, the elites were taking a pasting – from accountants, entrepreneurs and academics. They knew what they were on about, too. Given his turn on the mic, one biologist said: «I’ll believe economists have reformed when the men behind Black and Scholes [the theory that helps traders value financial derivatives] have been stripped of their Nobel prizes.»
One of the central facts of post-crash Britain is that the elites still hold power, but no longer command the credibility to wield it. You see that when Russell Brand talks on Newsnight about the corrupt lilliputian world of Westminster, and the various YouTube clips total more than 3m views. And I certainly saw it in Cambridge.
Like all the other plebs in Britain – whether on minimum wage, or a five-figure salary – the people in that lecture theatre had been told for decades to trust the politicians, policymakers and employers to provide the jobs, the houses and pensions, and the prospects for their kids. In the wake of the biggest economic rupture since the 1930s, they’re evidently no longer so willing to extend that trust.
But at the same time, the elites – whether in Whitehall or the City – remain in charge. Looking at mainstream economists gives us as good an idea as any as to how reform has been warded off.
As Bateman points out, by rights these PhD-armed boosters of The Great Moderation should have been widely discredited after the crash. After all, the most significant thing to emerge from academic economics in the past five years has not been any piece of research, but the superb documentary Inside Job, in which film-maker Charles Ferguson showed how some of the best minds at American universities had been paid by Big Finance to produce research helping Big Finance.
Yet look around at most of the major economics degree courses and neoclassical economics – that theory that treats humans as walking calculators, all-knowing and always out for themselves, and markets as inevitably returning to stability – remains in charge. Why? In a word: denial. The high priests of economics refuse to recognise the world has changed.
In his new book, Never Let a Serious Crisis Go to Waste, the US economist Philip Mirowski recounts how a colleague at his university was asked by students in spring 2009 to talk about the crisis. The world was apparently collapsing around them, and what better forum to discuss this in than a macroeconomics class. The response? «The students were curtly informed that it wasn’t on the syllabus, and there was nothing about it in the assigned textbook, and the instructor therefore did not wish to diverge from the set lesson plan. And he didn’t.»
Something similar is going on at Manchester University, where as my colleague Phillip Inman reported last week, economics undergraduates are petitioning their tutors for a syllabus that acknowledges there are other ways to view the world than as a series of algebraic problem sets. I was puzzled by this: did that mean Smith, Marx and Malthus weren’t taught? Yes, I was told, by final-year undergraduate Cahal Moran: in development studies. What about Joseph Schumpeter and his theory of creative destruction? Oh, he gets a mention – but literally only a mention.
This isn’t all the tutors’ fault: when you have to lecture to 400 students at once, it’s hard to find time and space to go off-piste. But the result is that economics students come out of exam halls and go off to government departments or the City with exactly the same toolkit that just five years ago produced a massive crash.
Economics ought to be a magpie discipline, taking in philosophy, history and politics. But heterodox approaches have long since been banished from most faculties, claims Tony Lawson. In the 1970s, when he started teaching at Cambridge, the economics faculty still boasted legends such as Nicky Kaldor and Joan Robinson. «There were big debates, and students would study politics, the history of economic thought.» And now? «Nothing. No debates, no politics or history of economic thought and the courses are nearly all maths.»
How do elites remain in charge? If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we’re all paying for.
Economics students need to be taught more than neoclassical theory
University syllabuses for economics are stuck on an outdated model. There are other schools of thought worth learning about
- theguardian.com, Monday 28 October 2013 08.00 GMT
Would the ordinary person regard how economics students are educated as a significant political issue? Probably not, but the way economics students are educated has much wider implications for society than is commonly imagined.
Every year thousands of economics graduates take jobs in the City, thinktanks and at the heart of government itself. Economics is highly technical and often mathematical, and this elevates economists to a position of expertise from which they mediate economic analysis to the British public. They are the guardians of our economy, charged with its upkeep, and they play an important role in shaping political narratives around economics. Yet British universities are producing economics graduates who are not fit for this purpose.
The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole. Economics education is dominated by neoclassical economics, which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences. Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an «equilibrium». The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.
Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2.7 million and plummeting wages, economics syllabuses remain unchanged.
The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge, UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too. At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic «science».
We are taught to memorise and regurgitate neoclassical economic theories and models. Our tutorials consist of copying problem sets off the board and critical discussion is non-existent. We studied our modules and found out that only 11 out of 48 even mentioned the words «critical», «evaluate» or «compare» in their course guides. Eighteen out of 50 of our modules have 50% or more of their marks awarded by multiple-choice exam and in nine of these it is more than 90%. This, combined with the fact that economics students don’t have the option to do a dissertation, means that many accept economics as truth, rather than as contested theory.
When we raise these issues with our economics professors, many of them argue that mainstream economics is dominant because it is academically superior. At our first event, our old head of economics suggested that many of these schools of thought were disproven in the same way the «tobacco smoke enema» was not an accepted medical technique anymore.
Manchester used to have one of the most diverse economics departments in the country. This was reflected in a broader undergraduate syllabus, with modules such as comparative economic theory available to students. A major driver of nationwide economics department «ethnic cleansing», as one Manchester professor puts it, is the Research Excellence Framework (how the government allocates research funding to universities). Every four years a panel of leading academics grade economics journals from 4 stars to 0 depending on their academic quality. The problem is that there are no recognisably non-mainstream economists on this panel and the grading is done behind closed doors with only institutional results published. Because of this the highest graded journals are all neoclassical and universities must hire academics who subscribe to this school of thought.
Despite this dominance, the few who did predict the financial crisis were economists from non-mainstream backgrounds. This clearly shows that alternatives have much to contribute to the discipline of economics. Neoclassical economics is the mainstream and it is vital for economics students to understand it, and there are reasons it has proved so alluring to so many great minds. While in recent decades it has often been used to advocate free markets, it can be used to argue for a socialist economy, and indeed was in the 1930s. So it doesn’t necessarily restrict us to a single political viewpoint. However, it does not comprise the whole of economics – and nor should it. This is not about ideology, it is about improving economics education.
We propose that neoclassical theory be taught alongside and in conjunction with a broad variety of other schools of thought consistently throughout the undergraduate degree. In this way the discipline is opened up to critical discussion and evaluation. How well do different schools explain economic phenomena? Which assumptions should we build our models upon? Should we believe that markets are inherently self-stabilising or does another school of thought explain reality better? When economists are taught to think like this, all of society will benefit and more economists will see the next crisis coming. Critical pluralism opens up possibilities and the imagination.
The current state of affairs is not good enough. Our classmates tell us that they are embarrassed when their family and friends ask them to explain the causes of the current crisis and they can’t. One of our professors was told that he should follow the dominant research agenda or move to the business school or politics department. Another was told that if he stayed he would be «left to wither on the vine». This situation is reflected in economics departments across the country – it is national problem. Economics academia can and should be better than this, and that’s why we are calling for change.