9. ‘Economics’: a modern mystification machine

Back in the Middle Ages, in Europe between 1500 and 1650, an estimated 50,000 people (mostly women over the age of 40) were burnt at the stake for being witches. What on earth was going on? Had the world been taken over by a bunch of evil, sadistic maniacs?

No. The 16th and 17th centuries were a deeply religious age. People wholeheartedly believed in the power of supernatural forces and were highly fearful of the cunning works of the devil. Strong moral imperatives followed from these beliefs. Proper Christian worship was the road to salvation. Black magic was malevolent evil to be rooted out and destroyed. It was therefore a morally up-standing thing to do to hunt witches. By doing so you were protecting all that was good in society.

Which is why witch hunts were conducted by the grown-up, sober, respectable, responsible, intelligent educated leaders of society. Take Joseph Glanvill for example. A Fellow of the Royal Society, he was a leading proponent of what we would now call the scientific method, arguing that constant scepticism rather than over-eager belief was the only route to useful knowledge.

Glanvill brought his sceptical approach to witch-hunts. People fall foul of multiple ‘fallacies of the imagination’, he argued. Humans’ senses are unreliable, they are liable to jump to conclusions and to be fooled by devious fakers and impostors, personal attachments and loyalties warp their judgement. Using his sceptical approach, he accused “many of the gravest and wisest Judges [of being] Murderers” for wrongly condemning people to death for witchcraft.

But Glanvill was also a man of his times. Deeply religious, he saw the scientific investigation of the laws of nature as a way to worship God’s majesty — and his main worry was that false accusations of witchcraft were undermining the legitimacy of the real ones. His 1680 book Saducimis Triumphatus was a sustained plea for the belief in supernatural spirits which, he argued, was inextricably linked to belief in God. For him, the alternative to hunting (real) witches was tantamount to embracing atheism, rebellion and social chaos.

Glanvill was a super-bright guy. In 1661, he predicted that “the time will come, when making use of magnetic waves that permeate the ether … we shall communicate with persons on the opposite side of the globe.” He devoted his life to the advancement of the scientific, experimental method. Yet he could not escape from the prevailing belief system of his times.

Now fast-forward to the present day. Could the sober, responsible, respectable, intelligent, educated leaders of our society possibly be labouring under a similar degree of superstition?

Ignoring the facts

I now have a difficult task in front of me: to persuade you that actually, there is as about as much evidence for modern economic theories than there was for witchcraft: that economics is to the understanding of real wealth creation as astrology is to astronomy, alchemy is to chemistry and phrenology is to psychology.

On what grounds could I argue this? Let’s start with some basics. Modern economics is an axiomatic belief system. That is, it doesn’t start with an empirical investigation of what we see in the world around us. Instead, it starts with a core set of propositions which it simply declares to be self-evidently true. It then builds its entire edifice of theory, policy recommendations etc, on these assumptions. The exact opposite of the scientific approach, in other words.

Gary S. Becker, a Nobel Prize winning economist, summed up the axiomatic nature of economics when he declared that: “the combined assumptions of maximising behaviour, market equilibrium and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach”.

I’m not interested here whether these assumptions are true or untrue. (They are spectacularly false.) Rather, I’m interested in his approach of starting with a set of assumptions that are simply assumed to be true and then using them ‘unflinchingly’ without investigating the facts of the matter.

This methodology — what Becker called the ‘heart of the economic approach’ — has its consequences. For example, it helped cause the Great Financial Crash of 2007–8. Adair Turner was Chairman of the UK’s Financial Services Authority as the crisis unfolded. In his subsequent book Between Debt and the Devil he notes that economists’ “argument by axiom and willingness to ignore real world complexities” meant the role of banks in the creation of money was “written out of the script”. Their axiomatic assumption was that banks were just a veil through which money passes — with no effect on how much money is created or what it is used for. This meant they could ignore consideration of how the banking system actually works. Said Turner: the economists were “uninterested in the empirical reality of what banks actually do”.

Mervyn King, Governor of the Bank of England at the time, agreed. In his reflections, The End of Alchemy, he concludes that “the intellectual framework that has come to dominate economic thinking rules out by assumption the disequilibrium” that actually created the crisis.

A confusion engine

When it comes to learning, confusion is worse than error. When you make a mistake, if you can recognise the fact that it is a mistake you can learn from it. But if you can’t see it’s a mistake, if you cannot distinguish truth from error, you have no way of finding a way forward.

This often happens if you ask questions that can never be answered. For thousands of years, for example, people believed that the world was made up of four basic building blocks: of ‘earth’, ‘air’, ‘fire’, and ‘water’. This belief system saw ‘fire’ as a separate indivisible ‘thing’ in its own right. Natural philosophers called this ‘thing’ phlogiston, and in the Middle Ages they went in search of it.

Result? A centuries-long wild goose chase. Why? Because phlogiston does not exist. Fire is not a ‘thing’ but a reaction between different chemical elements in things. It was only when Antoine Lavoisier broke through this conceptual confusion with his notion of the element ‘oxygen’ that alchemy could be seen as the confusion engine that it was, and the modern discipline of chemistry could be born.

Today we have our own phlogiston quest: the search for perfectly free markets. Like phlogiston, pure free markets do not exist, have never existed and will never exist. In the real world, real markets (for cabbages, for cars, physical marketplaces like ‘Norwich Market” or institutionalised trading platforms like the Stock Exchange) depend for their operation on a wide variety of rules and regulations, practices, standards and norms that ‘restrict’ the ‘freedom’ of market actors to behave as freely as they might wish.

Examples include rules and regulations about weights and measures, trades descriptions, the making and keeping of contracts, restrictions on cartels and price collusion, accounting standards, agreed mechanisms for payment such as invoices and credit terms, and norms (that forbid, for example, the trading of slaves or children for sex).

Without such ‘restrictions’ markets simply cannot work. Of course, not all of them will always be helpful. Understanding why some ‘restrictions’ are helpful and others are not is a matter of empirical investigation which throws up a design challenge: how to design the institutions (e.g. rules, regulations, standards, practices and supporting norms) that help people exchange goods and services for mutual benefit?

The challenge before us, then, is not to ‘free’ markets via a ‘bonfire of regulations’ but to build appropriate, fit-for-purpose institutions. But by defining their question in terms of ‘more’ vs ‘less’ restrictions rather than ‘useful’ vs ‘not useful’ institutional frameworks, economists’ notions of ‘free markets’ rules out the possibility of ever even investigating, never mind understanding, how to make markets work as well as they could.

Back in the day, when natural philosophers studied phlogiston, they thought they were investigating the real thing — fire. But actually, they were investigating a figment of their own imagination which blocked them from actually seeing how the world actually works. When economists tell us about ‘free markets’ they, too, are telling us about a figment of their imaginations. This sort of economics does not provide us with the tools we need to understand how the world actually works. It does the precise opposite. It throws a veil of obfuscation over it, hindering our ability to penetrate any further.

Impossible to disprove

Historically, multiple belief systems (especially superstitious ones) deployed a logic wheeze that made their theories impossible to disprove. When the Shaman told the villager that his crops had failed because he had only sacrificed one chicken rather than two, he was deploying this strategy. No matter how many sacrifices the villager makes, he could always have made more. The Shaman’s theory could never be disproved, blocking the ability to distinguish truth from error.

Ditto with the modern equivalent of the Shaman’s sacrifice: the admonition that we must free the market. No matter how far we go in ‘freeing up’ markets, if things don’t turn out well (as is almost inevitable if what I’ve just said about institution-building is correct), then the economist can always turn round and say “you should have gone further”. Because no matter how far you go, you could always free it a bit more. After all, why shouldn’t there be a free market in slaves? Of the lifting of all regulatory ‘burdens’ on business such as product safety or health and safety at work provisions?

By defining their question in terms of more or fewer ‘restrictions on our freedom’, the economists have done two things. First they have smuggled the really important question off the agenda. That question is ‘which rules, regulations, standards and practices produce beneficial outcomes — where the definition of ‘beneficial’ involves much debate — versus those which don’t?’ Second, they have set their own question up so that it can never be answered satisfactorily.

Putting doctrinal purity ahead of learning in this way leads to ISIS-style scorched earth fundamentalism. The ISIS fanatics sought to destroy everything and everybody who failed to adhere to the pure, pristine standards of their idealised Islamic Caliphate. Today’s free market extremists adopt a similar mindset: to sweep away every conceivable restriction on the freedom of market actors to do whatever they like. They will never be satisfied because, like the Shaman and the villager’s sacrifice, if it doesn’t work out as intended or promised, you always have the same irrefutable answer: “you could have done more”.

Politics in disguise

But why should a belief system with such shaky intellectual foundations be so widely promoted? One simple reason is that the people promoting it aren’t actually interested in what ‘economics’ has got to say about … er … economics. They are interested in its political payload.

Lionel Robbins wrote about economics in the 1930s when the battle between capitalism and Soviet-style communism was at its height. He came up with a definition of economics that is still widely used in textbooks. Economics, he said, is “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

It sounds plausible doesn’t it? But by presenting economics as a physics-like, value-free, ‘objective’ set of natural laws that lie beyond the control of human beings, like relationships between physical bodies operating under physical forces such as gravity, Robbins defined away awkward issues he didn’t want to confront. Like the exercise of power.

In reality, in every society across history, resources ‘with alternative uses’ such as land, food or energy have been allocated via the exercise of power. Whether it was military power, political power, religious power or financial power doesn’t matter. It was still the exercise of power.

The economics he talked about was not an objective, value-free science. It was pretend science, using its ‘scientific’ cloak to disguise its stealth promotion of a political power agenda (the promotion of ‘free markets’ and ‘property owning democracy’ which place power in the hands of those with the most money). The ‘free market’ is not a thing, it’s a policy; a political choice.

There is no such thing as ‘economics’

In my last blog I suggested our society faces much bigger, deeper challenges than many people countenance. The really difficult bit, I suggested, was that we allowed the Great Corruption and the increasing impoverishment of a growing proportion of the populace because we believed in the Money Mirage: we believed that money equals wealth and that money-making equals wealth creation. We believed in economics.

Belief in witchcraft and belief in ‘economics’ might seem very different. But as intellectual systems they are strikingly similar. Both are axiomatic in their approach, basing everything they do on taken-for granted assumptions about the nature of the world. They both appeal to the ultimate authority de jour for unchallengeable legitimacy (God and ‘science’, where ‘science’ is interpreted as ‘unflinching’ reasoning on the basis of taken-for-granted assumptions).

They both believe in non-existent mystical entities with magical powers, whether it is evil spirits or the Magic Wand (‘Hidden Hand’) of market forces which, if ‘freed’, always results in the best of all possible worlds. Both frame their questions so that they can never be proved wrong. Both are vectors of a dark age, setting action agendas that deliver terrible consequences.

(Another such belief system was medieval physicians’ notion that people were healthy if the four humours of phlegm, black bile, yellow bile and blood were in balance and that the best remedy to restore imbalances was bloodletting. In acting on this belief, they killed more patients than they cured.)

In reality there is no valid, coherent field of investigation called ‘economics’ that studies the workings of an economy isolated from the exercise of power. There is only political economy (which is where ‘economics’ started out).

Belief in ‘economics’ keeps us mesmerised by the Money Mirage and enables the domination of Universe Two. It also tells us precious little about the real world of wealth creation. It’s time we left the Money Mirage and ‘economics’ behind us and replaced it with something better.

But what does this ‘something better’ look like? Ironically, one of the best places to start is with the founding father of modern economics, a man who did more than anyone else to place the Money Mirage centre stage: Alfred Marshall.

Next in this series: 10. How economics ‘forgot’ wealth creation

Previous: 8. The Nature of the Beast

Bibliography

Books and articles I found particularly useful researching this blog include:

• Adair Turner, Between Debt and the Devil: Money, Credit and Fixing Global Finance, Princeton University Press, 2017
• Mervyn King, The End of Alchemy: Money, Banking and the Future of the Global Economy, Abacus, 2017
• Steven K. Vogel, Marketcraft, How Governments Make Markets Work, Oxford University Press USA, 2018
• David Warsh, Knowledge and the Wealth of Nations: A Story of Economic Discovery, W. W. Norton, 2006
• Jon Mulberg, Social Limits to Economic Theory, Routledge, 1995