It was the enlightened economist, Joan Robinson who said 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. Many students today continue to be deceived by their professors who even after the great financial crisis still teach a fantasy, or other worldly versions of economics. So on this program we ask: How do we begin to reverse a heavily entrenched education system that manufactures economists that have such a detrimental effect on wider society?
Joining us to discuss how academics are failing us: Renegade economist Professor Steve Keen, fresh off a redeye from Sydney Australia, and the author and economist Dr Steven Payson.
The quote commonly attributed to the economist John Maynard Keynes is, ‘when the facts change, I change my mind. What do you do sir?’ The thing that makes this quote remarkable today is that not only do academic economists point blank refuse to change their minds, they continue to actively peddle theories that are plain wrong.
Economics at a crossroads
Dr Payson tells Renegade Inc. that academia is at a crossroads. In fact that is the tagline of his new book.
“I think we’re at a crossroads because, especially in the last recession, there’s been true questioning of economic theory, more than ever before,” he says. “And I think there’s been a lot of outcry for more practical, more problem solving economics, but at the same time there’s the status quo which continues to play a lot of the games that they’ve been playing for so long. So we’re at a crossroads as to where we go. Do we continue the way things have been, which have actually gotten worse in various ways? Or do we take a new path to make economics better?”
Professor Keen tells Renegade Inc. that the status quo has entrenched itself to stay relevant.
“In some ways they’ve been pummelled by a steamroller of reality since 2008, and they refuse to admit they’ve been flattened by a steamroller,” he says. “They’re trying to revive the same way of thinking again. It’s becoming so outrageous in terms of some of the articles which are now being published where mainstream economists criticise as dilettante anybody who criticises their approach to modelling. That ‘if you don’t do our approach to modelling, you’re just a dabbler’.
A recent paper claimed that the orthodox approach to modelling is the only way to model the economy.
“The paper was titled, ‘dynamic stochastic general equilibrium models’,” says Professor Keen, “which is the dominant approach to modelling that completely failed to see the financial crisis coming because they’re predicated and designed on the non-existence of financial crises.”
Keen says their claim that the DSGE is the only plausible economic model is a mathematical falsehood.
“That is a mathematically false statement because there are numerous other approaches to modelling the economy, but they are so narrowly trained that they think that’s the only way, even though it completely failed to see the crisis coming,” he says.
“They are going back to that same belief system.”
So why do so many economists rely on such an antiquated belief system when it is so clearly bankrupt?
Dr Payson says it involves an element of escapism.
“A lot of economics professors, especially the more junior ones who are more focused on research and really trying to develop new ideas and process new data, there’s an escapism to a large extent, in that their career depends so much on getting published in high ranking journals,” he says.
“That deviates from the practical problems of understanding the economy as it truly is and trying to address the policy questions that truly exist, because they’re confronted with the pressure in their own careers to develop these journal articles and the game of getting these journal articles written and published is truly a game in itself that involves so much more from observing reality and trying to make things better.”
This then adds to the fantasy because these economists come up with these fanciful explanations of the economy, someone marks it, and in doing so, it creates a self reinforcing loop
“They don’t believe it’s a fantasy,” says Professor Keen. “They believe it is reality. This is partly the reason why it’s so entrenched, because they have a model of the world which is almost, but not quite completely unlike the real world. Its superficial appearance is so convincing, if you fall into that way of thinking, it eliminates any other approach as being an invalid way of looking at the economy.
“I think it was Coase who actually coined the term ‘blackboard economics’. Using terms like ‘GDP’, and ‘labour’, and ‘capital’, words that bear almost no relation to any of the describable real world economy. The training they go through is to get them to master this vision of the economy; the vision they believe is the economy. Once you’ve got that lock in, you automatically reject any other way of thinking about the economy as being non-scientific because it’s not using the language and frameworks you expect”.
Entrenching the status quo
Is this what some would consider as brainwashing, or inculcation? Is it the education system? Is what we’re saying here that the academic professors continuing to peddle this stuff are ultimately responsible for the fact that younger economists are going into the world and not being able to read it in a real world way?
“Well you have people who become experts on very esoteric advanced models,” Dr Payson says.
“Looking at particular deviations in certain financial variables and how super niche they can be. Then they are doing research that a lot of the time is to please 20, maybe, 30 people in the world who truly understand and are developing the same models.”
Things like game theory is another example.
“Game theory becomes evolutionary game theory and that’s not a little branch,” Professor Keen says. “Then you have their pathetic attempt at what they call ‘dynamics’, using what they call ‘overlapping generations models’, where the world starts in period zero, they have two cohorts doing something in period zero. Period one is where a change occurs and period two – and literally this is quoting one of them once at a conference – peaking at period two, the world ends. That’s that’s the clumsy approach they take to dynamics. Any decent mathematician would be using different nonlinear differential equations to deal with what they’re talking about.”
So why are we getting caught in these fanciful niches? That comes back to the reinforcement system Dr Payson’s book focuses upon.
“What’s happening is that economics professors are doing what’s best to promote their careers, and the incentive system that exists in their careers based on this sort of publication element, and impressing their particular peers, in their particular little subfield,” Dr Payson says. “That’s what their incentives are, that’s how they get promoted, that’s how they get more money, that’s how they get more attention and more grants which the universities then like as well. And they’re out of touch in terms of responsibility to society.
“In a way, they underestimate greatly the amount of responsibility and influence they truly have. They think that they can just merrily go along producing their publications and then it’s up to the rest of the world to decide whether the publication is relevant or not.
“That’s not true. The rest of the world is relying on them to tell us what this best understanding is and they are not providing that best understanding.”
Professor Keen says the classic example on that front is the Bernanke defense of mainstream economic modelling after the financial crisis. (Ben Bernanke is the former chair of the Federal Reserve, America’s central bank).
“He argued that yes, the models failed to see the crisis coming,” says Professor Keen. “He said, however, these models were part of the success we had in stabilising the economy before the crisis occurred.
“He said the models were not designed for financial crises and therefore they provide guidance in good times and in bad times you’re on your own.
“In the real world, most people would think that economic modelling should be there to warn of bad times or to prevent them from happening in the first place.
“But they go back and say ‘well, they work when things are good. They work really well.’ But if things are good, you don’t bloody need them.”
The cost of challenging orthodoxy
Both Professor Keen and Dr Payson says they have paid a price for refusing to tow the orthodox line. Their careers have been almost diametrically opposed to what we’ve just heard. They haven’t rolled over, or written for the sake of pleasing their peers.
“I’ve written to annoy them, frankly,” says Dr Payson.
Professor Keen says he really has to thank some of his previous heads of school the heads of department he worked under.
“I was very lucky to have four consecutive good people managing the department,” he says. “They liked what I was doing, they thought I was innovative in various ways, and they basically gave me my head start. I ended up becoming a professor in the University of Western Sydney before I came here. And I got a very good offer from Kingston as well, which was also taking a risk with me, but what the cost has been is that I’ve been going down in terms of the status of universities I’m in.
“I started off at the University of Sydney which is, in Australia, the top ranked university. I did my undergraduate degree there. I led a student revolt over political economy, forming a Department of Political Economy. I could never go back to Sydney because I literally burned my bridges there. I did my masters and PhD at the University of New South Wales. I then got a job at the University of Western Sydney which is a long way down the rankings system. I ended up in Kingston which is even further down on the global system.”
There’s been a sort of persistent ratcheting down of Keen’s seniority for the grave sin of creating modelling that reflects the economy as it operates in the real world.
“You can’t get a top level job, professor, or head of school in a leading university unless you’re a complete devotee and promoter of the orthodoxy,” he says.
“Orthodoxy is neoclassical economics. The stuff that Dr Payson is attacking in his book is the school of thought which basically says the market economy is the best way to allocate and decide anything, and the more market ideas we bring in anywhere, the better off it’ll be. It’s the vitamin C of economics. They just add markets. You’ll make things work better, rather than looking at areas in which markets don’t work particularly well at all, such as the financial system. The last thing you want to do is give people the capacity to create large amounts of money for their own benefit which is what the financial sector largely does.
“There’s an ideology built so deeply into economics that they’re not even aware of it being an ideology, because what it basically says, is that if we leave it all to the market, equilibrium applies and we’re in the best of all possible worlds and therefore all their arguments about how to get to equilibrium, and it normally involves getting rid of unions and governments.”
Dr Payson says he wishes he could give economists a pass on the grounds of ‘forgive them, for they know not what they do.’
“I wish I could,” he says.
“You know, one thing that might shed a little light on this is, let’s say somebody gets their PhD in economics. They’ve already got a leg up if they’ve come from an Ivy League university, and they’re applying for a teaching position. What will make the difference in whether they can teach at a high ranking university or not is their score in publications, already. In the next few years whether they can get tenure or not, it will be their score.”
The way it works, is that each technical journal has a ranking. A high ranking journal like American Economic Review actually scores points in the same way that a figure skater scores points for different movements. If you have an article, or you co-author in a journal like that, it counts so many points. Whether or not you get that job depends on your publications in these journals.
“Literally, there is little attention paid to how good your ideas are, because it’s become so easy for this system, the scoring system, to be established,” he says.
Professor Keen says this wouldn’t matter if we actually had an accurate paradigm of the economy.
“Because you’d say ‘we’re going to reward you for extending that paradigm’,” he says. “What we have is a completely false paradigm of the economy. All the attempts to improve inequality, which the bureaucrats and the politicians are as responsible for as the economists themselves, things like the Research Excellence Framework here in the UK, it’s rewarding linear progression in the profession. As if where we are now is good, and anything which extends that and gets higher marks in four star journals is better than anything in two and three star journals. But in fact, the innovative stuff is being done in lower ranking journals and you take a real career risk to go down that direction.
“There’s only now a handful of universities anywhere in the world that will appoint non-orthodox economists.
“The orthodoxy is self-reinforcing. If the paradigm happened to be correct, we’d be fine. The financial crisis should have been a lesson to everybody, it’s not correct. But that’s what we’re reinforcing today.”
Economics half a millennium out of date
Professor Keen says the economics being taught in universities today are centuries out of date.
“Centuries is almost being polite,” he says. “They actually described neoclassical economics as being like Ptolemaic astronomy, with epicycles and equants and stuff like that. So I’d say it’s about half a millennium out of date.”
Dr Payson says that economists too often let values, rather than economics, guide their choice of model, and pretend they haven’t done so.
“Economic theory is based so much on mathematical impressiveness, what so often happens is that a lot of political leaders have just looked upon economics, not as a science that actually tells us what’s going on in the world, but as just another form of advocacy for whatever policies they want to promote. And so taking that same principle to the extreme, what often happens is the cart is in front of the horse, where you’ve established political soundbytes beforehand and then work backwards to establish the theory that’s going to support that soundbyte.”
Dr Payson’s ‘How Economics Professors Can Stop Failing’ is our book of the week. He says he wrote it primarily to explain to the world as he sees it, and how different economics professors are from the way that they’re commonly perceived.
Professor Keen’s ‘ECONomics: Taking the Con Out of Economics‘, is a slightly a thinner tome but it’s as necessary a book as Payson’s because we need this kickabout fun to try and undermine this terrible system that we all endure.
He says the intention behind what has to be one of the world’s only graphic novels about economics is to demonstrate that the economics profession shouldn’t be taken seriously.
“I think that economics professors focus too much on impressing each other and not enough on solving the world’s economic problems,” he says.
“They shouldn’t be taken seriously, they should be laughed at.”
“Actually Robert Solow has made the same case. He said whenever somebody starts explaining a DSG model to them, he simply starts laughing at them because he said if you found yourself sitting across the table from somebody who said he was Napoleon, the last thing you want to do is start discussing battle tactics at the battle of Austerlitz. You’d simply laugh at them because it’s simply ludicrous. So this is three satires, sending up economists as they deserve to be sent up.”
The Pinochet principal
Economist, Professor Michael Hudson tells Renegade Inc. that you can’t turn a cold blooded frog into a warm blooded mammal by saying ‘why don’t you just warm up the blood?’.
“It takes an entirely different entity,” he says.
Professor Hudson says academic economics cannot be formed from within because old vested interests are ‘locked into the system’.
“You can’t change the thoughts of somebody whose mind is trained into a tunnel vision,” he says. “You have to do what was done a century ago and create a new discipline.
“Unfortunately sociology has met the same fate as economics, largely at the hand of the University of Chicago. You’d have to have something like, future studies, you could call it, or reality economics, but it would be a different discipline. “
They still call it economics at the University of Missouri at Kansas City where Hudson is a professor. But their graduates have great difficulty being hired by other universities because in order to be hired in America, you have to publish articles in refereed journals.
“The right wing, the monetarist, the libertarian and the neo liberals, especially through the Chicago School, have taken over the economic journals and will not let any alternative analysis or views be published,” he says. “That’s the genius of Chicago free market economics.
“It’s the Pinochet principle: that you cannot have a Chicago style free market unless you’re willing to kill or eliminate everybody who disagrees with you.
“A free market economics Chicago style must be totalitarian. There must be no alternative. This is how economic education in the United States is. It’s a Pinochet without the machine gun.”
Tune into the rest of the episode to find out the ways dissent can succeed.