A Response to Commentary on the Post-Crash Economics Society

We are glad that the coverage of our society seems to have renewed debate about the state of economics, economists and economics education. In particular, we appreciate the thoughtful response our lecturer Peter Backus has given to our society’s general aims and arguments, which we published a short while ago on this blog. However, naturally, we have some things to say in response. This post will be loosely based around the same structure as Backus’ post, but we hope it will also cover some of the general points people have raised about our society (NB: blogger Cameron Murray has also written a response to Backus).

To start, it bears repeating that as a society we do not have political aims. We are not lobbying to get rid of central banks, overthrow capitalism, save the planet or what have you. We are not merely pushing to have “Marx and Keynes”, or any other thinker in economics, taught simply because we happen to like them. What we are instead looking for is to establish a reality based (inductively taught), pluralistic economics, particularly at undergraduate level. We want economists to acknowledge where there are competing theories which explain certain phenomena, and to draw attention to the pros and cons of the relevant theories. This is critical pluralism, not an “anything goes” smorgasbord of dead economists.

What is economics?

The first argument against us is that our demands suggest that as students, we are not really suited to studying ‘economics’ but to other, related subjects such as PPE, history or what have you. However, this is really more of a reflection of the problems with economics than a critique of our society. One of the central problems with economics as currently taught is that it is presumed to be a separate, quantitative, even value-free field of social science, and that political or historical questions lie outside its domain. But this merely defines economics by what economists currently do, rather than by its purported object of study. ‘Field x is rigorous and quantitative’ hardly seems like an adequate definition for any academic discipline – the others justify themselves by the problems they are supposed to study and solve. It seems that exactly what economists are supposed to study and why is unclear and contested even among economists, and there are many possible definitions: social reproduction (the classical definition); the study of production, distribution and exchange; the allocation of scarce resources; the study of enterprise and the market system, and so forth.

This lack of clarity about what economics should be ‘good for’ means a lot of crucial areas of study – like financial crises – are viewed as outside economists’ domain by economists, but as inside economists’ domain by other disciplines and by the general public. An increasing focus on mathematical formalism has turned economists away from the areas where the discipline overlaps with other social sciences: policy; economic history; sociological issues like culture or hegemony. Economics has increasingly focused on micro issues: partly because – we’ve been told – these seem to yield more fruit in terms of results, but also partly because, for a long time, the macroeconomic problem was deemed to have been “solved“. But clearly this is not the case, and we need a return to ‘big picture’ systemic thinking if economics is to rise to the challenges presented by the 2008 financial crisis. At the moment, it’s almost as if nobody has the knowledge for this because everyone else thinks it is a matter for a different discipline or sub-discipline.

It’s actually a relatively recent phenomenon that ‘economics’ has been separated from its ethical and political foundations: it was considered a branch of moral philosophy by the classical economists, while even early neoclassicists such as Alfred Marshall were careful to preserve this. He argued that economics was the “servant” of ethics, and also criticised obsession with mathematics. Keynes was certainly under no illusions that the economist could be, well, only an economist, arguing instead that the economist should be a “mathematician, historian, statesman, philosopher…as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.” We agree. How are we supposed to understand recessions and crises without studying their history? How do we fully understand theories without understanding the historical situations they were supposed to represent? How do we judge and measure the economy, and recommend policies for it, without some acknowledgement of the ethics and politics of doing so?

Economists seem wont to believe that their “thinking like an economist” mindset is merely a technocratic, ideologically neutral one, but in fact it often comes with a whole lot of baggage. For example: an insistence on quantifying things that may not be quantifiable, and comparing incommensurate concepts (cost-benefit analysis for environmental catastrophe); the idea that people are mostly driven by incentives (see Freakonomics); a use of particular criteria – such as Pareto Efficiency and GDP – to judge the economy/society. We are not claiming that this mindset is ‘wrong’ per se, but that all too often it is taught to students as if it is unquestionable and scientific, rather than simply one of many lenses through which to view the world. Economics as taught certainly equips students with a toolkit, but it doesn’t seem to equip them with the skills that tell them where and where not to apply it, or any of the many other toolkits needed when analysing the real world.

What can be done?

Having said all this, we understand that economics is currently a certain way, and we can’t just pretend it’s possible – or even desirable – to sweep all this away and ‘start over’. Lone universities and lecturers face significant institutional, economic and cultural constraints. How can you change the syllabus if that means graduates won’t have a chance of studying further at Oxbridge? How can you make the degree less quantitative if that means they will have less chance of getting top jobs? Hell, how can you make any changes if regulations or funding considerations prevent you from doing so? However, we are trying to work with the department to address these problems and have ideas on how this can be done.

For instance, the more abstract theoretical and mathematical modules could still be available, but would be optional courses for those truly interested in pursuing economic theory. Perhaps then it would even be possible to make these harder and hence prepare future academics for the more difficult post-graduate courses. But as a ‘regular’ undergraduate, do you really need to know the axiomatic foundations of consumer & producer theory to understand demand-supply? The university certainly doesn’t do this for econometrics, skipping over the theory for undergraduate purposes, and this seems to work fine. Instead of copying problem sets off a whiteboard, tutorials in core macro and micro courses could be used for discussion of how realistic the assumptions underpinning the model are and how well models explain real world data.

Furthermore, is it true that employers value the abstract theorising taught on an economics degree? Actually, no: some employers have complained about this mind set. We believe that a more realistic approach – for example, ‘Business Economics’ having more emphasis on case studies of how firms price and make decisions – would be an attractive prospect for any employer. We are certainly not suggesting simply chucking everything out; econometrics, for example, remains a highly useful and widely applicable tool, and there’s not much room – at least not that we know of – for philosophical debate there (although more focus on data collection would be welcome). However, in many modules it would not be difficult to make room for critical discussion, and this should apply even to the ‘advanced’ theoretical courses suggested above.

A key point is that it is not true that ‘neoclassical economics’ is a meaningless slogan, although it can sometimes be used this way. This is a common refrain for economists but the fact is that the overwhelming majority of economic models follow a simple unifying theme: the optimising agent(s) who interact through a market. Indeed, despite initially denying this, Peter Backus goes on to acknowledge this sort of underlying methodological agreement among economists, despite debate at the fringes (mostly, it seems, over policy). Whenever we point this unifying framework out to economists they shift from denying it exists to defending it. “Individuals are the smallest economically interested unit”; “but at some point people do have to make decisions”, and so forth. This is fine as it goes, but it reflects the fact that although the field has a degree of disagreement, particularly over policy, there is a common methodological framework.

We are of course not ‘anti’ neoclassical economics; we are pro-pluralism in a young discipline that, unlike evolutionary theory, still seems far away from solving many of its most important problems. We want to present alternative approaches not because they have a particular political content, but because they appear to explain phenomena like long term growth, short term business cycles, bubbles, development, or consumer and producer behaviour. Economists often defend their approach against accusations of unrealism on the grounds that theories are supposed to be useful abstractions. Well, that may be so, but other theories exist which abstract in different ways, and these may be just as useful – or more useful – than what is currently taught. The only way to find out is to make sure all relevant approaches are examined critically, rather than insisting neoclassical economics has earned an unquestionable status as ‘the’ starting point for economics, and that anyone who says otherwise is the equivalent of a flat-earther.

Prediction

The questions of whether economists could and should have predicted the crisis, and how much the crisis affects the discipline, is much debated – indeed, Steve Keen will be coming to our university to debate this very matter with Peter Backus on the 6th December. In the meantime, we have a few cursory thoughts .

First, the comparison with meteorologists and seismologists is erroneous in quite a few ways. From a practical perspective, seismologists tell everyone they simply can’t predict earthquakes and people respect that. People also know that weather forecasts get more inaccurate as we predict further into the future and so forecasters typically don’t bother with predicting much more than a week in advance, at least in public. However, economists do not refrain from unilaterally recommending macro policies based on their theories: in classes, at the end of their papers, in newspapers. Their models are also widely used by central banks and policymakers. If these models are really so useless and the economy is really too complex to model, then we’re better off without them, and economists should only comment on policy very, very tentatively.

Even more importantly, seismologists and meteorologists actually do ‘predict’ earthquakes or storms in the sense that critics of economics use ‘prediction’: they understand how these things happen. They identify where earthquakes or hurricanes are most likely to occur and at what magnitude, while engineers help them build dwellings that can withstand such occurrences. A push for similar checks and balances for the economy often seems conspicuously absent from economists’ thinking. Furthermore, we have a degree of control over the economy whereas we do not over the atmosphere/planet. If we could affect the direction of tectonic plates we might try to prevent earthquakes; if we could alter the direction of the wind we might do something similar with hurricanes. Arresting these key trends is entirely within the reach of policymakers, and they have managed it in the past. Perhaps economists have something to learn from these kind of predictions and the preventative measures that arise from them.

To reiterate, nobody expects economists to “predict” the crisis in the sense of “Lehman Brothers will go bankrupt on September 15th 2008”. We agree that that would be ridiculous. However, what we are looking for is identification of key recurring trends – debt build ups, asset bubbles, etc – along with conditional warnings based on these: “if you don’t do something about variable xyz, there will be a crash at some point soon”. There exists a comprehensive list of people who did manage this, compiled by Dirk Bezemer. These people made detailed predictions and even got the timing of the crisis roughly right. So this is more than just a ‘broken clock’-style prediction, and such models surely warrant your attention.

Economists, alive or otherwise

We understand that ‘economists’ as a group are not necessarily responsible for policy. Many feel the crisis was caused by caused by politicians, regulators and bankers, and this surely isn’t economists’ fault. However, it is simply the case that many economic theories were the rationale behind major policies: New Keynesian DSGE for inflation targeting; the EMH/RatEx for financial deregulation. Obviously we face a ‘chicken and egg’ problem here: does the economics create the bad policy or do bad policymakers spawn/lend credence to bad economics? However, we firmly believe that if the next generation of policymakers, business people and academics are more aware of competing explanations for how the world works, they may well be more hesitant in pushing their own worldview. Also bear in mind that washing your hands of politics cuts both ways: if economists don’t want to be blamed when things go wrong, they shouldn’t take credit for the ‘good’. For example, although the bailouts and central bank interventions superficially cross over with Keynesian and monetarist theories, they’re probably better characterised by a headless chicken mentality, and the policies that fully followed the Keynesian or monetarist rationale were incredibly limited.

The debate about whether Keynes and Marx are relevant follows history of thought lines that many economists consider peripheral to actual theoretical debates. However, we believe that understanding the history of thought can be incredibly important. ‘Great’ thinkers build comprehensive theories that are supposed to form a coherent whole, and if you rely on second hand, watered-down impressions, picking and choosing the bits you like, you’re likely to miss the point – then end up reinventing the wheel 100 years later.

The fact is that whatever we currently call ‘Keynes’ in economics, it really is not Keynes. It’s IS/LM, developed independently by John Hicks in his debates with Dennis Robertson and others during the 1920s, well before the General Theory was published. Keynes didn’t really like IS/LM, and by 1980 neither did Hicks. Furthermore, the other ‘New Keynesian’, DSGE-style models we are taught – based on rational expectations – are about as far from Keynes as you can get. Students at Manchester are not exposed to Keynes’ theories first hand and are definitely not exposed to modern post-Keynesianism, which has developed and built on Keynes’ own framework substantially. Many of these ideas – such as Minsky, Godley and Keen – are surely relevant following the crisis. As for Marx: the comments on Backus’ original post – particularly Louison’s – have dealt with this issue comprehensively. Suffice to say that Marxism is really just a tool for understanding capitalism, rather than a blueprint for alternative societies. There are numerous, empirically based Marxist explanations for the financial crisis and we see no reason – other than ideology – to dismiss them a priori.

What’s more, when we call for economics history and the history of thought to be taught, we are not only calling for there to be classes specifically on these subjects. Instead, what we want is a general change in how theories are taught. Rather than merely teaching them as standalone, abstract frameworks, it should be acknowledged where they came from and what problems they were intended to solve. Keynes can be shown as a reaction to the great depression, monetarism to stagflation, etc. Whilst economic events of the future will not mirror those of the past exactly, studying them will help students better understand the economic system they are studying, and so know its problems in greater depth. This can be no bad thing.

Finally, we as a society are careful not to implicate ‘economists’ as a group for only caring about money, having certain political views or what have you. As we say in our petition, we appreciate that many economists do interesting, largely empirical research. However, it is true that such research is frequently accompanied by ‘neoclassical’ theory (one of our econometrics lecturers told us to use established theory to “fill the gaps” in the data); further, it is true that despite a lot of pushing and tweaking around the edge, the fundamental methodological framework outlined above is rarely or never challenged. Undergraduate economics remains incredibly resistant to change and some areas of it – such as ‘Walrasian’ microeconomic theory – have been the same for over a century. We are taking aim not at everything economists do, but at the overly abstract elements of it, and calling for a more pluralistic, evidence-based education.

4 Comments

  1. A very fair and balanced post. I will not be able to attend the debate with Steve Keen, but I would welcome the opportunity to view it on U tube or read a transcript. Keen is very good in debating economics, and it will make compelling viewing. Events of this nature rarely happen, so its important that it will, and that its given a broad audience.

    Reply
  2. By the way, I cant find any reference to Michael Hudson on your web site.
    http://michael-hudson.com/
    He has written many books and has a major contribution to make to your cause.

    Reply
  3. Misguided incentives (short-termism), lack of due diligence, poor regulatory structures, excessive institutional control, a general fall in the rate of profits, rentier economics et al. are better explanations for economic failures than discrete mathematics.

    Infact, if my intentions were to further confuse and make docile an already confused, docile mass of people I would create a video substantiating the mainstream fait accompli storyline, fill it full of experts, hyperbolic imagery and those hard to understand mathematics: pacification is not explanation.

    Reply
    • *posted above his documentary

      Reply

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