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Mainstream Economics And The Threat Of Irrelevance: A Challenge To Economics Teachers

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By ADEREMI MEDUPIN

By mainstream economics, I mean neoclassical economics, with its basic assumptions about human behaviour ably articulated in 2017 by the group, United Nations Women, as being the following: a) all people are perfectly rational and have perfect information; b) people are utility and profit maximizers, making decisions by comparing the marginal benefit and marginal cost of their behaviour; c); preferences are formed by external factors that are outside the realm of economics; d) people are egoistic, self-interested and competitive by nature; e) preferences are formed independently and without the influence of others; and f) insatiability-that is, more is better; granted, the utility we receive is high at initial levels of consumption of a good or service but as the quantity consumed increases, the utility we receive from the additional units of consumption decreases. Even a casual look at these assumptions reveals doubtful validity if not triviality; hence, other schools of economic thought, including the one embraced by this writer, question them.

Building on the assumptions listed above, mainstream economics has at its core the following interrelated claims: i) decentralized market economies work very well and maximize the welfare of society as a whole; and ii) the reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. These assumptions and principles are anchored to the concept of the “Invisible Hand” credited to Adam Smith. Meanwhile, various researchers have punctured holes into these principles and demonstrated their falsehood; for example, that people are not motivated by self-interest only. Several experimental studies have revealed that real people systematically deviate from the textbook representations of homo economicus. As opposed to the economic theory which views self-interest as the only variable governing human economic behaviour, people are motivated by social norms of cooperation, trust and charity. Also, decentralized market economies do not necessarily work very well and there are success stories from East Asia where active government intervention produced positive results. More significant, contrary to the predictions of the efficacy of invisible hand, greed and competition lead to bad outcomes, whereas generosity and cooperation contribute much more significantly towards promoting the collective wellbeing. In reality, therefore, market economy is not capable of maximizing social welfare on its own. Indeed, as demonstrated on Share The World Resources platform, contrary to the common misconception that people are individualistic and selfish by nature, anthropologists have shown that gifting and sharing has long formed the basis of community relationships in societies across the world. A recent spate of scientific research has built on this evidence to demonstrate that as human beings we are naturally predisposed to cooperate and share in order to maximize our chances of survival and collective wellbeing. Without the act of sharing and reciprocity, there would be no social foundations upon which to build societies and economies.

Finally, on the literal infallibility of the “invisible hand” thesis attributed to Adam Smith, the truth is that long after him, there emerged distinct voices preaching “greed is good” philosophy when things began to fall apart following the tumultuous events of World War II in western society, which saw fragmentation and individualism rapidly replace the social cohesion. In this vein, the noted investment banker Ivan Boesky is quoted in a commencement address to MBA students declaring, “You can be greedy and still feel good about yourself”.

Unfortunately, one of the central goals of mainstream economic theory is to indoctrinate students into believing that free markets work very well and that government interventions always cause ‘distortions’ and loss of efficiency. This teaching philosophy runs against the democratic model enunciated by Colin Doyle which is that, we need to be teaching our students how to think, not what to think. In effect, the practically valid approach is to present our students with a range of competing economic frameworks; Marxian economics, Keynesian economics, Behavioural economics, etc., and then allow them to come to their own conclusions based on the weight of evidence and their explanatory power. For as the saying goes, ‘let a hundred flowers bloom, let a hundred schools of thought contend’.

Meanwhile, mainstream economics has shown itself to be remarkably resistant to any kind of self-reflection and reassessment. The insularity of the discipline is a big problem, because it further entrenches its bunker mentality. As concluded by Cillian Doyle, an economist with the People Before Profit Alliance of Ireland, “this is a serious problem, because a discipline which cannot engage with the ideas of other fields, nor in a critical re-examination of its own core tenets, especially when reality and the weight of evidence seems to invalidate them, can in no way claim to be following the scientific method”.

Joan Robinson, of Cambridge University, was most probably operating in the lighter mood when she remarked that: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists”.

The point is that if today’s economics has become less relevant to the social problems that formed the subject matter of classical political economy a century ago, this is partly due to the fact that its scope has been narrowed in large part because of the technocratic role played by mathematics which on its own could be a very useful tool of analysis. This is the context in which Michael Hudson, the radical economist talks about “the use and abuse of mathematical economics”.

As Hudson contends, the education of modern economists consists largely of higher mathematics whose use remains more metaphysical than empirically measuring the most important underlying trends.

To Alfred Marshall, “mathematics can be a good servant to thought, but not a very good master in the realm of economic discourse” More basic, there are some instances where the important questions defy mathematical rendering; in particular, the flawless precision of mathematical economics may prove impotent in addressing the complexity of the social world. Peter Boettke, in his 2007 article on “Mathematical Economics as an Aid to Economic Thought” provides a nuanced perspective of the issue, with the following statements: “I think it is a matter of having some perspective on the issue of mathematics in economics.

Is it a good signal of intelligence? It certainly can be. Does it guarantee good economics? Certainly not, we can prove much economic nonsense using higher mathematics. Being a good economist is about a lot of things, mathematical acuity may be on the list, but certainly doesn’t exhaust it.

History, philosophy, political theory, languages, demography, technology, etc. would be on my list of the skill set that usually is found in good economists”. With mainstream economics increasingly emptying itself of the otherwise essential ingredients from other disciplines, it inevitably reduces its relevance to the resolution of socio-economic challenges of our time.

The following voice of the emergent worldwide grass-roots movement of economics students, the International Students Initiative (ISI), articulated in WEA Newsletter, Vol. 4 Issue 2 April 2014, titled, “An international student call for pluralism in economics”, registers both in its immediacy and pungency, in their words: It is clear that maths and statistics are crucial to our discipline. But all too often students learn to master quantitative methods without ever discussing if and why they should be used, the choice of assumptions and the applicability of results.

Also, there are important aspects of economics which cannot be understood using exclusively quantitative methods: sound economic inquiry requires that quantitative methods are complemented by methods used by other social sciences. . . Economics is a social science; complex economic phenomena can seldom be understood if presented in a vacuum, removed from their sociological, political, and historical contexts. To properly dis-cuss economic policy, students should understand the broader social impacts and moral implications of economic decisions. The essential falsity of mainstream economics is brought into sharp relief by Varman (2012) with the indictment, that:

While the global economy is mired in ever-deepening crisis, there is no abatement in the propaganda rationalizing free markets and perfect competition. In the world of “perfect competition” governed by the “invisible hand” of market forces, no single actor (or even a combination of a few) is in a position to influence the market equilibrium, and prices are determined by the balance of demand and supply.

This is a win-win world, where actors have sufficient information for arriving at their respective choices, consumers are free to make the correct decisions, and this self-governing system leads to progressively increasing welfare for all.

Further, such competitive forces are expected to result in optimal allocation of investments, an equitable distribution of returns to capital and labor, and the highest levels of productive efficiency and technological development. In this mythological world, there is also a hell, whose name is monopoly or oligopoly, the exact opposite of perfect competition, where a few sellers or producers distort the markets and generate inefficiency, monopoly profits, and compromise consumer choice.

In other words, in the world dominated by oligopoly, producers are not “price takers” but “price makers.” This is followed with a sarcastic but revealing message of proven falsification, to the effect that: The only difficulty with this mythology is that, while we are constantly told that the world is increasingly being governed by competition and market forces, the real world of business and industry is moving rapidly away from such free competition, as concentration, domination, and control of most economic activities has become common place.

The public might assume that the rivalry between Coke and Pepsi or Apple and IBM means that there is market competition, but in neoclassical economic theory, the fact that these companies are “price makers” means that there is monopoly and not competition. It might be that perfectly competitive markets will provide answers for all of our ills, but in the real world, there is an absence of “free markets,” with market rigging and failure everywhere in the economy.

In attempting to figure out where and how the economics discipline started taking the wrong trajectory, Cillian Doyle’s observation becomes useful, with the illustration of how it is a widely held view today (but by no means uncontested) that economics is a value free science of choice, detached from any kind of moral concerns.

But this is not how it started out. On the contrary, the discipline began life within the humanities as a subsection of moral philosophy – no less, after which time it shifted to the social sciences as it attempted to apply the scientific method, and today through its use of complex (and often entirely inapplicable) mathematical/statistical modelling, it has pretensions of joining the hard sciences. But this contemporary lack of moral/ethical concern would outrage many of those who are considered its early proponents, such as the enlightenment philosopher Adam Smith. Smith, the man considered to be economics’ founding father, is the hero of Conservatives as the supposed champion of the free market, largely through his notion of the ‘Invisible Hand’. The ‘Invisible Hand’ is a metaphor for the supposed unintended social benefits, which arise in a market economy from individuals acting self-interestedly. But this is a highly selective interpretation of Smith, one that is quite at odds with the general thrust of his work, which stated the importance of things like banking regulations and progressive taxation. Hardly the usual stuff that conservatives advocate for!

Without doubt, the ultimate basis for assessing the performance of mainstream is its policy implications and consequent impact on human condition with income distribution and poverty profile serving as reliable indices. Ironically, one of the most damning critiques of mainstream economics has come from a physicist while deploying his professionalism in the service of humanity to rise to the urgency of climate change.

According to Erald Kolasi in “The Physics of Capitalism”, published in Monthly Review of May 2018: Orthodox economic philosophies, from monetarism to the neoclassical synthesis, focus on describing the transient financial features of capitalism, mistaking these for immutable and universal laws of nature.

Capitalist economics has largely been transformed into a metaphysical philosophy whose goal is not to provide a scientific foundation for economics, but to produce sophisticated propaganda designed to protect the wealth and power of a global elite.

All the foregoing defects and more are what the late Egyptian economist of note, Samir Amin, synthesised-leading him to dismiss the entire mainstream economics as “the absurdity, the absence of simple realism, the nonsensical hypotheses and unforgivable errors in logic, that characterize the whole of vulgar economics—the “neoclassical” self-proclaimed mainstream economics”. What else do I need add?

 

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