Simon-Wren Lewis (SWL) and Chris Dillow have both recently argued that criticising economics for the 2008 financial crisis distracts from the real source of the blame, which is banks, and therefore undermines the progressive cause. While I don’t disagree that the banks deserve blame, I want to push back a bit on their argument that economics as a discipline has little to do with regressive ideas.
But firstly, it is my view that criticising economics needn’t have an ideological motivation. Many critics, myself included, simply believe that neoclassical economics has severe shortcomings and that in order to understand the economic system properly we need better ideas. In many cases criticisms of neoclassical economics are so abstract that it’s not even clear to me what the political implications of either side would be (e.g. the fact that Arrow-Debreu equilibrium might be unstable has no bearing on my view of whether capitalism itself is). I respect both SWL and Dillow immensely, but taken alone I consider this line of argument a rather feeble attempt to shut down an important scientific and philosophical debate.
Despite this, the point has some force to it: why devote so much intellectual effort to criticising economics when we could be devoting it to getting the big banks and other corporate wrongdoers? And here I think SWL and Dillow both paper over the extent to which economics has served those in power, as I will try to illustrate with a number of examples. To be clear, I’m not ‘blaming’ economists for all of these occurrences, but I do think the discipline seems to eschew responsibility for them, and that progressive economists have a blind spot when it comes to the practical consequences of their discipline.
Economics in Practice
I’ve always acknowledged that economists themselves are probably more progressive than they’re usually given credit for. Nevertheless, the absence of things like power, exploitation, poverty, inequality, conflict, and disaster in most mainstream models — centred as they are around a norm of well-functioning markets, and focused on banal criteria like prices, output and efficiency — tends to anodise the subject matter. In practice, this vision of the economy detracts attention from important social issues and can even serve to conceal outright abuses. The result is that in practice, the influence of economics has often been more regressive than progressive.
Consider the case of monopoly. The economics textbooks may be against monopoly, but this is largely on the grounds that it reduces consumer welfare by increasing prices. Building on this logic, the Chicago School of anti-trust regulation has shifted the focus of anti-trust law to lowering prices for consumers. As this recent article on Amazon details, this has hidden other forms of monopoly abuse such as predatory pricing, market dominance and reduced bargaining power for workers, consumers and smaller companies.
Similarly, textbook ideas about profit maximisation and rational agents responding to incentives featured prominently in the promotion of shareholder value by Milton Friedman and other economists, which has been dominant over the past few decades and has been instrumental in increasing inequality and corporate short-termism. The potential macroeconomic impacts of corporate concentration have also been ignored by discipline until very recently — a consequence, perhaps, of the narrowing of particular subfields and the neglection of more critical systemic analysis (something similar could perhaps be said for the 2016 Prize in contract theory, though I am no expert in this area).
One type of institution which is dominated by economic ideas is central banks, yet many of their policies have had regressive elements. For instance, SWL praises economists at the Bank of England for implementing Quantitative Easing, but forgets that the Bank itself admitted that this has disproportionately benefited the wealthy. This problem goes even deeper: as J W Mason has argued, inflation targeting — a key central bank policy across the world — in practice results in workers’ wages being kept down and their jobs being made more insecure in the name of combating inflation. In both cases what is painted as a relatively benign process — reducing interest rates and managing inflation, respectively — actually has quite serious social consequences, which generally aren’t discussed in class or by policymakers.
In the realm of international trade, economists have been all too inclined to support trade deals — often quite vociferously — on the basis of simple ideas like comparative advantage, while ignoring (a) the actual details of the trade deals, which as Dean Baker frequently points out, tend to favour the rich and corporations and (b) their own more complex economic models, which as Dani Rodrik frequently points out, do imply that trade will harm some people while benefitting others. Uneven and unfair international trade has been a key element of the harm to workers over the past few decades, and was undoubtedly a factor in the election of Trump.
Global trade institutions like the IMF and World Bank have been dominated by economics since their inception, and using economics they inflicted massive pain through their free market ‘structural adjustment’ policies, which can only be described as regressive but which were fundamentally based on context-free neoclassical ideas about markets. True, these institutions may have softened somewhat in recent years, but that doesn’t undo the harm they have caused. In fact, even their more recent ‘bottom up’ policies such as microcredit and Randomised Control Trials — both inspired by economic ideas — often seem to have benefited global and local elites at the expensive of the poorest. As Jamie Galbraith once noted in the context of the financial crisis, the discipline just has a blind spot for how ideas interact with power to produce unfair outcomes, sometimes taking the form of outright abuse and fraud. Which leads me nicely to my next argument.
Economists may complain that economic ideas have been misused by vested interests, and that this isn’t their responsibility. But a huge problem with the discipline of economics is that it has virtually no institutional shields against mistakes and wrongdoing. Merton and Scholes won the biggest prize in the profession for their model of financial markets — which had become commonly adopted in options trading — in 1997. A year later those same economists required a hefty bailout when the use of their model was implicated in the collapse of the hedge fund Long-Term Capital Management, where they were both partners. Was the prize revoked? No. Were they discredited? No. Actually, even the model is still widely used, despite massively underestimating fat tails and therefore being implicated in a number of other financial crises, including 2008.
Or consider Reinhart and Rogoff’s famous ‘90% debt threshold’, where their statistics purportedly showed that after a country reaches 90% of sovereign debt, its growth would stall. This was used by many politicians, including George Osborne, to justify austerity — until it was revealed to be based on ‘statistical errors’. Sure, R & R received a fair amount of flak for this, but they have been incredibly stubborn about the result. Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce of credibility? The case for austerity undoubtedly didn’t hinge on this research alone, but imagine if a politician cited faulty medical research to approve their policies — would institutions like the BMA not feel a responsibility to condemn it? (Answer: yes, even when the politician was in another country).
There are many more examples like this, such as Andrei Shleifer, who despite being prosecuted for fraud in post-Soviet Russia was awarded the John Bates Clark medal, probably the second most prestigious prize in the discipline, was subsequently allowed to publish papers in respected journals about how well privatisation went in Russia, and was eventually bailed out of the case by his incredibly wealthy university to the tune of $26 million. This is not to mention the disastrous Russian privatisation as a whole and the role of certain economists/economic ideas in it.
Even worse were the Chicago boys, who advised Augusto Pinochet’s horrific economic policies (and no, they were not just humble advisors, they were knee deep in the absolute worst excesses of the regime.) Without any substantive ethical code and without procedures for weeding out corrupt, dishonest or discredited work, the profession creates an environment where people can act like this and get away with it, all under the banner of the intellectual credibility ‘economics’ seems to confer on people.
And this leads me to my last point, which is the rhetorical power that invoking ‘economics’ has in contemporary politics. ‘You don’t understand economics’ is — rightly or wrongly — a common refrain of those attacking progressive policies such as Ed Miliband’s proposed energy price freeze, the minimum wage, or fiscal expansion. As with the above abuses of economics, those such as SWL complain (perhaps correctly) that these are inaccurate representations of the field.
But these same economists then invoke ‘economics’ in a similar way to justify their own policies. In my opinion, this only reinforces the dominance of economics and narrows the debate, a process which is inherently regressive. The case against austerity does not depend on whether it is ‘good economics’, but on its human impact. Nor does the case for combating climate change depend on the present discounted value of future costs to GDP. Reclaiming political debate from the grip of economics will make the human side of politics more central, and so can only serve a progressive purpose.