Why Economists are like 5 year-olds
ROGER BOYD
rogerboyd.substack.com
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As a recovering mainstream economics practitioner, I can attest to the author's denunciations of "Neoclassical" dogma as pure hokum at once consecrating and shielding capitalism from a materialist critique.—Editor
The inhabitants of the mainstream economics La La Land.
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The study of political economy provided detailed insights into the workings of capitalism in the nineteenth century through historical material analysis. Such insights directly challenged the capitalist ruling class’s ability to legitimize their power and wealth through ideological dominance; what Gramsci referred to as cultural hegemony. In the United States, the most purely bourgeois dominated of all nations, the university sector was controlled by private capital rather than the state and that capital moved to defang the ideological challenge. This was done through intellectual specialization (political economy being replaced with the specialisms of economics, politics and sociology) and control over academic grants (even now half of the academic grants in the US come from the elite-funded foundations), academic progress (university boards loaded with the representatives of the rich can override faculty promotion decisions), the funding of schools (many “mainstream” schools of economy have and are funded by the rich), academic chairs and non-academic career opportunities for graduates (currently seen with the threats to the job opportunities for students openly supporting Palestinian rights). Economics became focused on marginal analysis and assumed a god-like market that stood above politics, sociology was defanged through functionalism and positivism, and politics became little more than the technical study of institutions and econometrics-like studies of voting intentions. These changes took longer in Europe, and are still less complete given the less purely bourgeois dominance of those societies. The social sciences were disconnected from materiality, both the material reality of the social relations of production and the materiality of the physical world. They were also rendered generally ahistorical, as universalist theories were proposed that ignored questions of both historical and geographic specificity. Mainstream economics stands out as possibly the most extreme case of a return to medieval metaphysics, with significant parts of Western social science catching up with the post-WW2 moves to post-modernism and non-material critical theory. The teaching of modern mainstream economics follows much of the same process as that of the priesthood, a process by which the venerated “knowledge” and beliefs are imbued through many years of study (BA, MA and PhD taking nearly a decade) within an ideologically controlled environment (the economics faculty) that is cut off from other schools of thought. This is then followed by the long slog to gain a secure (tenured) faculty position that may add another decade, during which any “non-mainstream economic academic thought” will quickly derail the possibility of an escape from precarity into tenured safety. Even when tenure is gained, further career progress will be derailed by any public displays of heresy. All mainstream academic economics journals are controlled by a true-believing economics priesthood, with accepted papers having to follow both the belief system and intellectual practices of the economics church. Fundamentally, the creation of new economics professors and private sector economists is a journey of unlearning rather than learning which greatly benefits the compliant, the “clever” who are happy to play within a disconnected from reality theoretical space, and the clever careerist. All rendered safe for the capitalist class and trained to provide technical skills, legitimization of wealth disparities and to see no capitalist class power, hear no capitalist class power and to never speak of capitalist class power. And all displaying the thought processes of clever five year olds, full of intricacy and complexity but utterly devoid from the workings of the real world. Perfect servants for the rich and powerful; serving power while rendering it invisible. |
Introduction
Five year-old children inhabit a magical world where cardboard boxes can become castles, Father Christmas lives in Lapland, ghoulish creatures can be hiding under their bed, and they can converse with secret friends that no one else can see. In essence, they live in a complex mixture of the real and the imagined. This is a completely natural and healthy part of childhood development1, but not of course of adulthood. Unfortunately, society has become dependent for advice and direction from a group of adults that seem to have never quite escaped from the imaginary world of childhood. We call them Neo-classical economists.
The economics profession has constructed a huge mathematical edifice on top of a set of patently false, and some would say crazy, beliefs. These beliefs are simply assertions, and have not been tested utilizing the scientific method of proof. Without them the economics profession would have to accept that their complex models were little more than intellectual curiosities. To protect this imaginary world of beliefs they have set themselves apart from the other academic professions, even the hard sciences, as otherwise they would have to explain why their beliefs are contradicted by the findings of academics from other fields. As a society we need to free ourselves from the cult of economics and the erroneous policies that it supports. In the following I will cover just three of the many assumptions which bear little or no linkage to reality. These assumptions do serve some in society very well though, the rich and powerful, as they provide a smoke screen of beliefs which hide the reality of how modern societies work. That is why the rich and powerful have extensively supported “mainstream” Neo-classical economists and worked hard to keep historical materialism out of the academy and societal discourses in general.
Society consists of rational sociopathic know-alls with equal market power
This is the classic invisible hand and efficient market hypothesis in operation, where a set of purely rational independent individuals and companies exchange goods and services, based upon their own self-interest. Each has access to all relevant information, and the requisite skills and time to process this information effectively. In addition, there are no large differences in market power between them.
Extensive work in neurobiology, cognitive psychology and socio-psychology has shown that individual and group decision-making is not purely rational and is in fact highly mediated by emotional and other non-rational factors. In cases where the emotional centres of the brain have been impaired a concomitant impairment of the individuals’ decision-making abilities occurs2,3. As Haidt puts it "It is only because our emotional brain works so well that our reasoning can work at all"4. In addition, people build a mental map of the world based upon their personal experiences and teaching from a diverse set of groups, such as parents, schools, friends, the church, and the media. Such mental maps may not correspond to actual reality, and parts of them may be irrational, thus severely biasing an individual’s decision-making. Individuals and groups may also cling to such incorrect and irrational beliefs even in the face of conflicting facts5,6. The public relations, marketing and media industries would not be viable without such non-rational and belief-driven human decision making to manipulate. Humans also have the ability to deceive themselves, believing their own lies to be the truth, as Harwell and Scott put it, "you'd think we'd know the truth about ourselves. But often the truth is the last thing we want to know"7. Haidt even proposes that in many cases decisions are made subconsciously, and then the conscious mind "confabulates" a logical story for why the decision was made4. Another little talked about factor affecting decision making is the phenomenal numbers of people in the richer nations who are on prescription mood altering drugs, with 13% of people in the U.S. on anti-depressants (25% of women aged 50-64), and another 13% on opioids8.
An individual will also not have the ability to gather all the relevant information for a given decision, and then have the time to process that information before making a decision. Given the number of such decisions people make every day each will be based upon limited information and "rules of thumb" to reach a decision in the time available. How did you make the decision to buy that cup of coffee this morning? The information required may also require specific technical training, as with many healthcare decisions, and thus the individual may not be qualified to process the information available. Relevant information can also be explicitly hidden, as with sealed legal settlements on corporate liability cases and the non-publishing of failed clinical trials by pharmaceutical companies.
There are also many cases of individuals not acting in their own self-interest and instead displaying a significant degree of altruistic behaviour. The many cases of people sacrificing themselves in attempts to save their pets attest to this9,10,11, as do the economically secure individuals who volunteer for the armed forces during wartime. Dickerson details many cases of such altruistic behaviour12. As Oakley et. al. propose, such altruistic behaviour can even become pathological, as with the case of suicide bombers13.
The area of behavioural economics has accepted some of these shortcomings, such as bounded rationality, but these have been treated by the general economics community as anomalies which do not invalidate the core beliefs in the efficacy of the free market in generating the best outcomes for society. This smacks of cognitive dissonance, where inconvenient facts that threaten strongly held beliefs are rejected or reinterpreted to remove the threat.
All market participants do not have the same market power, the example of an individual worker and a large corporation being one of the most obvious examples. The large corporation will have extensive resources and probable access to the required specialists to research issues and decide on the best course of action, neither of which will be available to the individual. They will also have much greater financial resources than the individual. Full employment, labour legislation and trades unions can offset some of this inequality, but in an era of off-shoring, deregulation and both legal and illegal restrictions upon unions the power is very much with the corporation. This is evidenced in the richer countries by the overwhelming share of economic growth being taken as profits while worker's incomes stagnate or decline14. This is in stark contrast to the post-WW2 decades in the richer countries where the balance of power between workers and corporations was much less unequal than it is today and the benefits of economic growth were more equally shared. In the past few decades the benefits of growth have gone predominantly to the corporation’s executive management and their owners. The same inequitable relationships are also felt by small companies that supply much larger ones, with the extreme cases being where the buyer is a near-monopoly purchaser (a "monopsony") as is the case with some of the suppliers to Wal-Mart15.
Free trade and deregulation are the best way for a country to develop
At the beginning of the 1700's Indian textile imports were overwhelming the English textile industry as they were both cheaper and of better quality. As Marks notes, "Indian cotton goods enjoyed a worldwide market, with Africans, Europeans, and American slaves all purchasing and wearing Indian textiles"16. Through the late 1600’s and early 1700’s Britain erected trade barriers to keep the Indian textiles out of their home markets. Mercantilist colonial legislation also kept competitors away from the British colonies in the Americas, thus creating a large and protected market for British textiles. As Alavi states, “It was the wall of protection that made possible the survival and growth of the British cotton textile industry in the face of Indian competition and facilitated large capital investments in the industry. Without it, the English industry would have found it impossible to get a foothold in the home market, let alone abroad”17. Later on, cheap cotton produced by slave-labour in North America, together with the mechanization of cotton processing with the cotton gin, also provided a much cheaper source of raw materials for the British textile industry. Even in the late 1700’s and early 1800’s British textile manufacturers could not compete with Indian imports, and duties on Indian textiles were further increased. As noted in Das, even at the start of the 1800’s, Indian textiles “could be sold in the British market at a price between 50% and 60% lower than those fabricated in England. It consequently became necessary to protect the latter by duties of 70% to 80% on their value”18. As the British gained the upper hand in India in the first half of the 1800's, it also acted to make the Indian textiles uncompetitive in their home market through taxes as well as controls over exports19.
Without this protection the British textile industry would have been severely harmed, and at the least much smaller than it actually was. Only through the banning of imports and the mercantilist advantages of the colonial trade system, did the British textile industry gain the scale that it had prior to industrialization. Its industrialization was then additionally supported by the colonial controls over Indian textile exports, and the increased taxation of Indian textiles within their home market. The end result was that the highly competitive and advanced Indian textile industry was devastated, leading to the deindustrialization of large parts of India, whilst the British textile industry became predominant. Until the 1830's the cotton textile industry accounted for nearly all of the economic growth in Britain. Only when Britain became overwhelmingly competitive in industrial production did it institute free trade for itself.
Britain's competitors knew better than to accept free trade with the overwhelmingly competitive British industry, and thus be consigned to the status of underdeveloped countries. They understood that they needed to build their own industries behind protective walls so that they would not be destroyed before they were strong enough. Economic development is path dependent in that what is in place at a given point in time will have a major impact upon development from that point forward. Industries benefit from a myriad of positive feedback loops through such things as incremental technological improvements, spin-offs from one industry to another, and synergistic relationships between producers and their suppliers. In addition, as industry became more technical in nature it required government support in the fields of education, research, and government purchases. Ricardo's highly simplistic theory of free trade driven by comparative advantage20 only works in the static sense with no differentials in positive feedbacks between economic sectors and the inability of capital to move from one country to another among many other simplifying assumptions.
Ricardo's actual example is telling, and quite possibly self-serving. He notes that even if Portugal had a competitive advantage in producing both wine and cloth (i.e. textiles) over Britain, it would be better for Portugal to focus where its competitive advantage is strongest, wine, and for Britain to focus where Portugal's competitive advantage is weakest, cloth. Both countries would then benefit from a "win win" situation as the economic output is increased for both countries, with Portugal producing wine and Britain producing cloth20. As we now know the textile industry was the one that formed the basis of Britain's industrialization. Thus in this case Britain would greatly benefit from the ongoing technological breakthroughs in textiles, much of which would spin-off to other economic sectors, while Portugal would be stuck producing wine. The ownership of an industrial sector provides a dynamic competitive advantage over countries that do not possess one. Another problem of course is that British capitalists could set up shop in Portugal to take advantage of its competitiveness in both wine and cloth, while closing down their factories and wineries in Britain. In this way absolute advantage would reign, rather than comparative advantage, and Britain would be locked into deindustrialization, relative poverty and powerlessness (as Kennedy notes, economic power is the basis of military and political power21). There are a number of other simplifying assumptions that Ricardo used which vary greatly from the real world, a phenomenon rampant throughout economic theory. Without the simplifying assumptions economic theories tend not to work.
Unfortunately for Britain's colonies they were forced into the role of de-industrialized commodity suppliers. Alexander Hamilton very much understood the dangers of such "unequal exchange" and industry in the Unites States developed behind high tariff walls, and with explicit government intervention22,23. Economic theorist Friedrich List also understood what free trade with an overwhelmingly superior economic power would result in, and instead proposed protection for "infant industries" and active state industrial policy24. European countries such as France and Germany also followed protectionist and interventionist policies to successfully develop their industrial base25. This approach was successfully utilized in the twentieth century by all of the Asian countries that successfully industrialized, such as Japan, Korea, Taiwan, and China, as documented by Chang26. The enforcing of free trade and deregulation upon the less-developed countries by the richer ones is therefore a cynical and hypocritical stance which can only serve to keep those countries less developed and more open to exploitation by the richer nations and their corporations.
Another issue that causes serious problems for free trade theory is that there are now numerous corporations that are much larger than the majority of nations in economic wealth, and the deregulation of finance allows them to easily move capital across borders. This gives them the power to force further deregulation and other beneficial policy changes in a "race to the bottom" as one country competes with another for their promised investments. The high level of corporate concentration in the food industry, which covers a high percentage of many developing countries exports, exacerbates this problem27. In addition much trade is in fact not "free", as it is composed of the intra-company transfers of global corporations. In 2009 48% of U.S. goods imports and 33% of U.S. goods exports were intra-company transfers, as was the case for 22% of service imports and 26% of service exports in 200828.
Natural resources are infinite, or infinitely substitutable
The argument of economists is basically that human ingenuity is boundless, and thus our technology will always "find a way". If we run out of a certain raw material we will find a substitute, and future growth will become "de-materialized" as it becomes more service oriented. Catton29 has described such thinking as being much the same as the "Cargo Cults" of Melanesian islanders who considered that the material wealth of the non-natives (i.e. Westerners) had been created through spiritual means and thus they could receive such "cargo" through certain spiritual rituals.
As long as the economy was not large in relation to the earth such fantastical beliefs were not overly dangerous, but after two centuries of fossil fuel driven exponential growth the human economy has grown to the point where it is both overtaxing the earth's renewable resources and drawing down on the earth's non-renewable energy and mineral reserves30,31. It has been calculated that humanity is utilizing about 1.5 times the earth's sustainable output, and with moderate ongoing growth we will be at two earth's by 203032.
Some economists, many coming from a hard sciences background, have challenged the orthodox view of sustainable exponential growth, with the fields of Ecological Economics33,34 and Biophysical Economics35 accepting that the economy does exist within a finite earth ecosystem. Unfortunately they have not had a significant impact on the mainstream orthodox economic establishment. When integrating the "externalities" which standard economics does not measure it becomes obvious that when measured holistically, what appears to be positive economic growth is more than offset by the costs to humanity's nurturing natural environment. Even this excludes the social costs which are also not measured by orthodox economics.
Conclusion
References
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ABOUT THE AUTHOR / SOURCERoger Boyd is an Academic Researcher in Geopolitics and Climate Change. Fellow, Balsillie School of International Affairs.
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