Economic crises: look to science or the rain gods?

Recently, mainstream economists have been debating yet again why ‘economics’ was unable to see the global financial crash coming and/or provide effective policies to end what I have described as the Long Depression that has endured since the end of the Great Recession in 2009.

Mainstream economists John Quiggin and Henry Farrell summed up the debate in a paper: “some blame non-academic economists. Others blame prominent academics. Others still say that economic advice doesn’t really matter, because politicians will pay attention only to the advice that they wanted to hear anyway.”

But Quiggin and Farrell reckon the real reason that mainstream economics failed to be of any use was the lack of agreement among economists on what to do.  Economists could not agree on whether austerity was good or bad for the economy; or on whether economists had any influence over politicians.  And the reason for this lack of agreement was not due to differences on theory but to “sociology”.  By this they mean that mainstream economists are not pure objective ‘economists’ but are “deeply bound up with the political systems that they live within”

As I also pointed out in my book, The Long Depression, Quiggin and Farrell explain that, “prominent academic economists, far more than other social scientists, are likely to go back and forth between universities and roles in the Treasury Department, Federal Reserve, International Monetary Fund and World Bank. This means that economics has far more political clout than other social sciences, but it also has reshaped the profession, turning external policy influence into an important form of internal disciplinary prestige.” 

In other words, economists with jobs in government and the central bank go with the flow (from the forces of capital): “So the world of economic politics and the world of economic thought are deeply intertwined. Channels of influence rarely flow only in one direction, as some economists have discovered to their dismay.”

This conclusion seemed to surprise as well as upset Quiggin and Farrell.  Yet, if they had read Marx, they would have expected nothing else.  As Marx pointed out 150 years ago, in a footnote to the chapter on Commodities and Money in Capital, while making the distinction between classical economics and vulgar economics: “Once for all I may here state, that by classical political economy, I understand that economy which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds (p. 174 – 175).

Even earlier, Frederick Engels had anticipated the trend of economics in his Outlines Of A Critique Of Political Economy in 1843:The nearer to our time the economists whom we have to judge, the more severe must our judgment become. For while Smith and Malthus found only scattered fragments, the modern economists had the whole system complete before them: the consequences had all been drawn; the contradictions came clearly enough to light, yet they did not come to examine the premises and still accepted the responsibility for the whole system. The nearer the economists come to the present time, the further they depart from honesty”.

And in Theories of Surplus Value, Marx described “the vulgar economists—by no means to be confused with the economic investigators we have been criticising—translate the concepts, motives, etc., of the representatives of the capitalist mode of production who are held in thrall to this system of production and in whose consciousness only its superficial appearance is reflected.  They translate them into a doctrinaire language, but they do so from the standpoint of the ruling section, i.e., the capitalists, and their treatment is therefore not naïve and objective, but apologetic.”

In other words, all the obstruse theory presented by modern mainstream economics is presented as purely neutral, unbiased and logical, but in reality it is not “naïve and objective” but merely an apologia for the capitalist mode of production.  “It was henceforth,” Marx wrote, “no longer a question whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. Pure, selfless research gave way to battles between hired scribblers, and genuine scientific research was replaced by the bad conscience and the evil intent of apologetic”. Capital, vol. 1, p. 97

Recently, two mainstream economists (Identification in Macroeconomics Emi Nakamura and Jon Steinsson ´ ∗ Columbia University September 30, 2017) started their paper: “Any scientific enterprise needs to be grounded in solid empirical knowledge about the phenomenon in question. Milton Friedman put this well in his Nobel lecture in 1976: “In order to recommend a course of action to achieve an objective, we must first know whether that course of action will in fact promote the objective. Positive scientific knowledge that enables us to predict the consequences of a possible course of action is clearly a prerequisite for the normative judgment whether that course of action is desirable.” 

Sounds good, but unfortunately, “Many of the main empirical questions in macroeconomics are the same as they were 80 years ago when macroeconomics came into being as a separate sub-discipline of economics in the wake of the Great Depression. These are questions such as: What are the sources of business cycle fluctuations? How does monetary policy affect the economy? How does fiscal policy affect the economy? Why do some countries grow faster than others? Those new to our field or viewing it from afar may be tempted to ask: How can it be that after all this time we don’t know the answers to these questions?”  Indeed!

However, the authors remain optimistic.  For them, the problem is not that economists are locked into an apologia for the capitalist system, but that it is difficult to ‘identify’ the right variables in any causal analysis.  In other words, economics is a positivist science like physics but it is just  behind in its understanding of ‘the economy’ compared to physics because of the extra difficulty in empirical work.

Economics could progress in the same way that ‘natural science’ has.  Macroeconomics and meteorology are similar in certain ways. First, both fields deal with highly complex general equilibrium systems. Second, both field have trouble making long-term predictions. For this reason, considering the evolution of meteorology is helpful for understanding the potential upside of our research in macroeconomics. In the olden days, before the advent of modern science, people spent a lot of time praying to the rain gods and doing other crazy things meant to improve the weather. But as our scientific understanding of the weather has improved, people have spent a lot less time praying to the rain gods and a lot more time watching the weather channel. “

Unfortunately for the authors, such progress towards the truth will not take place in economics. To think so is just naïve.  To quote Milton Friedman as the epitomy of unbiased, objective positivist scientific analysis demonstrates that naivety.  Friedman was the peer example of an ideologist for capital, including his job as an advisor for General Pinochet after his coup against the democratically elected government of Chile in the 1970s (see my book, The Great Recession for more on Friedman).

Yes, economics is a science, in my view.  More accurately, as Marx says, it is political economy, the study of the social relations of the capitalist mode of production.  Yes, we need to test economic theories against the facts by identifying the causal variables.  Indeed, we should make predictions to test our theories.

But do not expect the body of mainstream economics to do so in any systematic way.  It has been hopelessly distorted by the need to preserve and defend the capitalist system.  As the authors say: “Policy discussions about macroeconomics today are, unfortunately, highly influenced by ideology. Politicians, policy makers and even some academics have held strong views about how macroeconomic policy works that are not based on evidence but rather on faith.”

They remain confident, however, that: “The only reason why this sorry state of affairs persists is that our evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism. Despite this, we are hopeful regarding the future of our field. We see that solid empirical knowledge about how the economy works at the macroeconomic level is being uncovered at an increasingly rapid rate. Over time, as we amass a better understanding of how the economy works, there will be less and less scope for belief in “rain gods” in macroeconomics and more and more reliance on solid scientific facts.”

Unfortunately, as the global financial crash and the Great Recession showed, mainstream economics has not progressed as much as meteorologists in predicting storms and hurricanes.  Economists still look to the raingods because it’s a matter of faith not reason.

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15 Responses to “Economic crises: look to science or the rain gods?”

  1. Henry Says:

    There are some Marxists who believe Marx wrote capital not from an objective and naive point of view but from the point of view of the working class.

    The scientific method obviously goes way way beyond empirical facts,

    Steve Keen sees a graph or a metric that shows private debt is x amount and says this indicates a crisis is on the way. Fine and fair enough but then some go onto claim that this proves private debt is the cause of crises.

    That assumption is wrong, wrong and wrong again!

    Beware facts!

    • Jack Says:

      There are some Marxists who believe Marx wrote capital not from an objective and naive point of view but from the point of view of the working class.

      That’s group A. Then there is group B: some Marxists who believe otherwise. One side must be right and the other wrong. Why do you need us to believe A but not B?

      Beware facts!

      Sure. What should guide us, then? No. Don’t tell me. Let me guess: You propose “alternative facts”.

      • Henry Says:

        “Why do you need us to believe A but not B?”

        Erm I do believe B personally. But if it is a point of contention then just pretending it doesn’t exist is an option but hardly ideal.

        “What should guide us, then?”

        Erm, did you even read the small bit re Steve Keen? All the clues you need are in there. It does require that you think a bit though. So good luck. But as a starter, facts are one thing and interpreting what those facts mean and how they relate to other facts is another.

        Here is an example, It is an uncontested fact that Black males make up a disproportionate number of the prison population. Ok nice fact, are there alternative facts? Hell no. That isn’t the point, the point is what are we to make of these facts?

        For the political right these facts point to the innate aggression and propensity for criminality among black people. Now that is one position, personally I go for the alternative!

        So Jack, my conclusion, bad guess on your part, better luck next time!

  2. Apostolis Xekoukoulotakis Says:

    What about the people that recite Marx instead of incorporating advances in Science that happened the last 150 years.

    The duality of the vulgarity of Mainstream Economics is the conservatism of Marxist Economics.

    Marx used Ricardo and Smith. What do current Marxists use?

    Now, let us look at Anwar Shaikh’s book “Capitalism”. He references the work of John Miller :

    `
    Complex Adaptive Systems An Introduction to Computational Models of Social Life

    press.princeton.edu/titles/8429.html
    `
    The book was written in 2007.

    Unfortunately, the economics and social dynamics of current Research , as the article points, creates this duality, the vulgarity and the conservatism.

    Shaikh is really the exception to the rule and where the revolutionary Scientific community should go.

    • Julian Wells Says:

      More recently (and with all respect to Sheikh, more significantly) there is the work of Cottrell et al. (A. F. Cottrell, P. Cockshott, G. J. Michaelson, I. P. Wright, and V. Yakovenko. Classical Econophysics. Routledge, Abingdon, 2009.) which develops the work of the Marxist pioneers of econophysics of Farjoun and Machover (E. Farjoun and M. Machover. Laws of chaos: a probabilistic approach to political economy. Verso, London, 1983.) and adds insights from information and computer science.

    • Virgens VK Says:

      Indeed, the second half of the 20th Century was a Dark Age for Marxism.

      But Marx’s scientific research itself is beyond suspicion. Das Kapital is — and will be, forever — the single most important scientific work about capital (and, therefore, capitalism). You can quote Das Kapital nowadays with the same certainty was you can still quote Darwin’s The Origin of Species. If you’re taking them out of context is another discussion.

  3. Magpie Says:

    The link provided points to a paper by Emi Nakamura and Jon Steinsson, not to the Quiggin and Farrell paper you mention. 🙂

  4. Julian Wells Says:

    The worrying thing is not these people’s faulty economics, but their dodgy science: “Macroeconomics and meteorology are similar in certain ways. First, both fields deal with highly complex general equilibrium systems.” In what way is the weather a general equilibrium system?

  5. FergusD Says:

    But “natural science” isn’t just the accumulation of “facts”, that in itself is pretty pointless. It is about the development of theories to explain those facts (observations). All the natural sciences have theories, some of which are well known, atomic theory, evolutionary theory etc, some of which are more hidden. So economics needs theories, but “mainstream” economists seem to pretend that they don’t have theories, that the explanation simply emerges from the facts. They seem unaware of how their own ideas emerge.

  6. Bruno Miller Theodosio Says:

    Prof. Roberts, I agree with you. In my undergad course I wrote a monograph to discuss the marxist crisis theory tracing the dialectics between appearance and essence of the crise. The abstract is down here. Now I’m focusing to discuss the brazilian crisis in the light of the profitability, much of this inspired for your work.

    Essence and appearance of the crisis in Marx: law of the tendency of the profit rate to fall and measureless

    The present work exposes the crisis theory of Karl Marx from a dialectical point of view. We outline a theory of the capitalist crisis by showing the relationship between how the crisis appears on the surface of capitalist society (apparent form) and its essence. We proceed by exposing the capital relation in different degrees of abstraction to show how the impediment of the expansive logic of value engenders the crisis. We oppose Marx’s method with some Marxist readings that elaborate a crisis theory from the sphere of circulation imposing an empirical-positivist tone on Marxism. Differently, the method of materialistic dialectics mirrors the logic of capital and derives the explanation of the crisis from the production under competition. Next, we elaborate a crisis theory from the exposition of capital and its barriers to valorization: distance between production and consumption, non-fluidity in the capital cycle, absence of reserve monetary fund, intersectoral disproportion, underconsumption and the autonomization of finances. These losses of the self-reference of the capitalist process itself are the “measureless “, apparent forms of the crisis. The essence of the crisis lies in the Law of the Tendency of the Profit Rate to Fall (LTPRF), the cause of the crisis from a dialectical point of view because it results from the tendencies of capital under competition. Thus, the capitalist crisis is a crisis of overaccumulation caused by LTPRF, but it is shown to agents as measureless in different ways in the appearance of the capitalist mode of production.

  7. Virgens VK Says:

    “Macroeconomics and meteorology are similar in certain ways. First, both fields deal with highly complex general equilibrium systems. Second, both field have trouble making long-term predictions. For this reason, considering the evolution of meteorology is helpful for understanding the potential upside of our research in macroeconomics. In the olden days, before the advent of modern science, people spent a lot of time praying to the rain gods and doing other crazy things meant to improve the weather. But as our scientific understanding of the weather has improved, people have spent a lot less time praying to the rain gods and a lot more time watching the weather channel.”

    Except for the fact that this is a dreadful comparison.

    Meteorology is a very new science and it’s comprehensible it is still suffering from growing pains. More importantly, it’s making remarkable, easily observable, advances — weather forecast has become much more precise with the advance of these last decades — this is so true that there’s actually a far-right-wing movement (climate change denial) to brake its progress. It is more than justifiable to give Meteorology a pass. It is progressing because capitalism needs Meteorology to actually work, since the precise forecast of natural catastrophes and daily weather is good for capital reproduction.

    Economics (non-Marxist, i.e. vulgar economics) is the opposite: it was born a science (classical economics), progressed very fast in the UK of the 18th and 19th Centuries, and, as a counter-revolutionary movement to neutralize Marxism, degenerated quickly into a pseudo-science (begun with Jevons in the UK, then the Austrian School, then the schools most already know) — a condition it still enjoys nowadays. Today’s economist is literally the capitalist version of the medieval priest (although we also have the sociologists, post-modern/Neokantian filosophers, revisionist historians — the historicists –, political scientists et al to give capitalist propaganda a more sophisticated, Greco-Romanised look).

  8. Eleutério F S Prado Says:

    I would like to make a crucial point in your post:

    “In general, several commentators were concerned to find in the Capital texts a particular passage, which would show what the “main cause” would be, in Marx’s view, which would drive capitalist production into a crisis. Using just this notion of “cause”, classic authors such as Tugan-Baranovki, Karl Kautsky, Rosa Luxemburg, Rudolf Hilferding, Henrik Grossman, Paul Sweezy, Ernest Mandel, among others, discussed for much of the 20th century the work Capital, trying to find in which text or canonical passage could reside the true conception of Marx on the crises of capitalism.”

    This dispute – one can see – is not new in the history of Marxism, but it is completely wrong.

    To read the paper that try to prove this point, see: https://eleuterioprado.wordpress.com/papers/the-capitalistic-crisis-problem-in-marxs-capital/

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