Rethinking economics

I was at the London conference of Rethinking Economics over the weekend. Rethinking Economics is an international network of economics students calling for changes in the curriculum of university departments and in the economics discipline in general (http://www.rethinkeconomics.org/). It was formed in 2012 in disgust at the failures of mainstream economics after the Great Recession and against the unwillingness of university economics departments to allow alternative courses or even pluralist critiques of the prevailing neoclassical mainstream. It is financed by George Soros’ Institute for New Economic Thinking among others.

The London conference drew a range of academics and other speakers, first, to explain why mainstream economics is unchanged, despite its failure to forecast, explain or even accept the failure of modern market economies in the light of the Great Recession. Second, the conference had speakers to discuss different strands of alternative or heterodox economics.

The conference themes of ‘alternative economics’ was dominated by the Keynesian view. In my view, Keynesian economics is mainstream, even it is not dominant. By that I mean that Keynesians accept the existing mode of production, capitalism, as eternal and the only one possible. They differ from the neoclassical school in recognising that there are booms and slumps due to a lack of effective demand that has to be dealt with. For example, Paul Krugman, the leading Keynesian, reckons the problem of a ‘lack of effective demand’ recurring in capitalism is just a ‘technical malfunction’ that can be corrected with judicious use of monetary and fiscal policy. For Keynesians, it is frustrating that mainstream economics does not recognise that this problem exists and can be fixed. Paul Krugman complained recently that “anti-Keynesian views, indeed real business cycle theory asserting that inadequate demand can never be a problem, retains a firm grip on much of the profession.”

There are Keynesians who go further than arguing that there is just a ‘technical malfunction’ in the capitalist economy. They reckon that capitalism is ‘inherently unstable’, or at least its financial or monetary sector is; and that there is no perfect market or steady equilibrium growth for capitalism. The ‘market economy’ is imperfect, unstable and the future is uncertain. Indeed, that was the message of many of the speakers at Rethinking Economics.

Indeed, some post-Keynesians, as the more radical heterodox wing of Keynesians are called, reckon the main message that Keynes brings to the understanding of economies is uncertainty. In a monetary economy, in a complex modern economy, with so many variables and human beings often acting ‘irrationally’, everything is uncertain and above all unpredictable.

Professors Victoria Chick (http://en.wikipedia.org/wiki/Victoria_Chick) and Sheila Dow (http://ineteconomics.org/people/sheila-dow) presented a session on the methodology of economics in which they argued that mainstream neoclassical economics was based on a ‘mode of thought’ called logical positivism that argued that facts were pure, that theories were socially or psychologically unbiased and that the nature of the scientific method was clear. Dow and Chick reckoned that this was rubbish: facts, theories and method are value laden. Mainstream economists have been ‘socialised’ into a mode of thought that markets are perfect and that self-interest and rational choices are the way humans act. These economists have closed minds to anything else.

I’m sure this is right but what worried me was that Chick and Dow seemed to argue that we could not really do any economic research as they do in the natural sciences because facts and theories cannot be considered objectively in a world of human irrationality and biased ‘modes of thought’. Indeed, we can’t know what is fact or fake, science or not science, because it is all relative. When a questioner asked the professors does that mean “anything goes”, they replied: oh no! But it seemed to me that their level of relativism implied just that.

Now maybe I am naïve, but I reckon that applying the scientific method to issues and problems is not useless. You draw up a set of realistic assumptions about the economy, you develop a theory from it and then you test it with the evidence and facts available. This evidence confirms or refutes the theory. You even make predictions or forecasts based on your theory and results – indeed you should. Others can argue against your theory, evidence and conclusions. Others must try to replicate your work to see if it holds. This is the scientific method and it still seems the way to work, even in a world of uncertainty, imperfection and human or social bias. Otherwise you can do nothing.

In economics, I reckon the right assumptions, theory and empirical study can help us to predict or forecast booms and slumps, or at least explain why they reoccur regularly. It seemed that Chick and Dow thought this was impossible or unwise, even for heterodox economics. But it is one thing to say that neoclassical economics is too certain, dogmatic and has a closed mind; it is another to say that everything is so uncertain, unpredictable and complex that we can do nothing, predict nothing, forecast nothing. In contrast, elsewhere in the conference, Julian Wells of Kingston University (https://kingston.academia.edu/JulianWells) showed that good work can be done by using the scientific method of the natural sciences in economics (economics can learn from the physical sciences).

Uncertainty, unrealistic assumptions and scant evidence are just as much problems in natural sciences as in economics, but that does not stop physics, chemistry etc from making huge advances in human knowledge. I quote from Bill Bryson’s popular book (A short history of nearly everything): “astronomers have sometimes been compelled to base conclusions on scanty evidence, and there is a mountain of theory built on a molehill of evidence … the upshot is that computations are necessarily based on a series of nested assumptions, any of which could be a source of contention.” But still scientists plough on. Meteorologists face a complexity of ‘weather’ but scientific work has increased the success of forecasting weather dramatically: three-day forecasts are pretty good now.

Anyway, the conference rolled on with one speaker after another basically telling the 300 strong attendees that uncertainty and complexity made making any predictions or forecasts about the economy impossible. Paul Ormerod (http://en.wikipedia.org/wiki/Paul_Ormerod), author of Butterfly Economics, told us that human behaviour ‘defies economic theory’; human society is not predictable or controllable; business cycles are natural and normal and cannot be avoided, and that it is better for government not to intervene. “Business cycles are an inherent feature of market economics”, but governments should not attempt to control unemployment, and recessions are “not really a concern”. Economies are so complex, all we can do is just try and improve long term growth through recognising complex problems, not short-term problems of inadequate effective demand. Not very Keynesian really.

Marxian economics got a small mention. Michael Burke (see my recent post, https://thenextrecession.wordpress.com/2014/06/22/investing-in-finance-but-not-in-people/) explained the basics of the Marxian approach to an audience of about 10% of all the attendees, probably a fair reflection of the support for the Marxist alternative relative to the Keynesian in among the rebellious Rethinking Economics.

The dominant view of the conference speakers (if not the audience) was summed up by the speech of Will Hutton (http://en.wikipedia.org/wiki/Will_Hutton). Hutton is a well-known pundit on the economic state of Britain and former editor of a liberal British newspaper. He has written a number of books attacking the neoliberal policies of various UK governments but from a Keynesian view. He started by saying how shocked he has been on the impact of the Great Recession and the growth of inequality in Britain. It’s been way worse than he ever imagined. The problem was that unregulated markets have failed. However, for Hutton, ‘socialised production’ or ‘socialism’ as an alternative would be “a mistake”. It would mean ‘monopoly control’ of the economy and that would deter innovation and technological progress. We need a ‘pluralist’ economy. Hutton said we had to recognise that capitalism is the best system and over the last century it had delivered huge increases in wealth per capita through the exploitation of technology and science.

This sounded much like the famous lecture by Keynes back in 1930 (The economic possibilities of our grandchildren) which aimed to convince his Cambridge students, also engaged at the time in Rethinking Economics in the depth of Great Depression. Keynes was concerned that students would migrate to Marxian economics (which he thought was rubbish) and to communism (which he thought was Stalinist dictatorship). He told his audience that within 100 years, all the world would be rich, people would be working only 15 hour weeks and would have to worry about what to with their leisure time (see my post,
https://thenextrecession.wordpress.com/2013/05/04/keynes-being-gay-and-caring-for-the-future-of-our-grandchildren/).
Just like Hutton, Keynes ignored the inequality of wealth and income under capitalism (the issue recently raised by Thomas Piketty and others – see my various posts). Keynes ignored globalisation, wars (a big one was still to come) and poverty for the majority of the world under capitalism. Keynes just talked about the advanced capitalist economies. And he never considered that depressions would be repeated even if governments adopted his ‘technical solutions’ to the recurrent lack of effective demand and monetary crises under capitalism.

Hutton and the dominant Keynesians at this conference left out these things from the nature of capitalism. For them it was simply a problem of uncertainty and imperfection. What capitalism needs is better management and regulation to end myopia (short-sighted investment), better control of credit and stock market speculation and a fairer labour market to boost wages.

If only capitalists could recognise what would be good for them or their system. Chick and Dow suggested that reform would be impossible until we can change the closed mind-set of mainstream economics. As if the issue was a psychological one. Mainstream economics is closed to alternatives because there a material interest involved. The ruling ideology of a society is that of the ruling class, in this case, the capitalist class.

Chick and Dow seem to think that it’s just a question changing the mind-set of those economists that support the market – for their own good because austerity and neoliberal policies are actually bad for capitalism itself. Keynes too thought that the problem was one of ‘old ideas’ hanging around in the heads of economists and governments. But ideas come from social experience and material class interests. It will take more than just ‘rethinking economics’ to change that.