In 2008 the Queen asked Luis Garicano, an economics professor at The London School of Economics, why nobody saw the global financial crisis coming. He was unable to answer her question. Is there a collective noun for economists? A dither would be appropriate, or perhaps a hindsight – but certainly not a vision. How is it that a handful of economists could see that the global economy was headed for the rocks while most remained blissfully unaware? How did the discipline of economics become so unfit for purpose?
Ask a non-economist to define economics and you’d get a blank look or a jumble of terminology gleaned from news reports. The public perception of economics is of a complex and rather dull discipline veiled in impenetrable jargon. But economics is fundamental to all our lives and so vital in shaping the future that it’s too important to be left to the current dither of economists.
If the general public is unsure about what economics really is, then so are the guardians of the English language and even the profession itself. The Oxford English Dictionary defines it as, “the branch of knowledge concerned with the production, consumption, and transfer of wealth”. The authors of the standard economics textbooks are unable to agree. For Alfred Marshall it is “the study of people in the ordinary business of life”; for Lionel Robbins, “the science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses”.
The American Economic Association claims that “Economics is the study of how people choose to use resources.” You have to wonder which people they are thinking of, bankers who award themselves million-dollar bonuses for moving money around, or African peasants who don’t have the resources to feed their children?
Each of these definitions describes an aspect of what economics is about and what economists do, but none is sufficient. And there is a bigger problem: the gulf between what economics is and does, and what it should be and should do.
Over the last century, economics has become a pseudo-scientific discipline. Economists have become obsessed with the internal management of an introspective system, the parameters of which have been set in stone by its practitioners. We are now lumbered with an economic system to which no alternative will be considered by mainstream economists. Instead, they spend their time creating ever more complex mathematical formulae for interpreting and justifying the behaviour of a largely defunct system. Few of their assumptions, equations or models have anything to do with the real world.
Today the dominant school of economic thought is known as ‘neo-classical’ economics and it makes a number of frankly absurd assumptions:
- overall wellbeing is maximized when individual behaviour is primarily motivated by self-interest;
- free markets always maximize wealth creation and assure its optimal distribution, wherever they are applied;
- the current entitlements of landownership are just and efficient;
- public revenue is best raised by taxing effort and enterprise;
- speculative investment has no negative impact on the capacity of the economy to create genuine wealth;
- the process by which money is created is best left in the hands of privately owned commercial banks;
- a competition-based economy best suits the character of most human beings; and
- the market mechanism is best placed to determine the rate of natural resource depletion.
These assumptions render economics impotent as an aid to creating a more just and sustainable society. Nor do they do anything to help us extricate ourselves from the current crisis. As a ‘rational and scientific discipline’ neo-classical economics refuses to involve itself in debates about values or morality. But by refusing to engage with essential moral questions, neo-classical economics implicitly makes the biggest value judgment of all. It says: this is the way world is and economics can have nothing to say about how things should, or could, be different. What gives economists the right to place limits on our ambitions for a better society?
Thankfully there are some economists who recognize the philosophical absurdity of this position. They are trying to change the discipline from within but they’re not yet sufficient in number to change the way economics is taught in schools and universities. As each new generation of economists graduate, they emerge into the world convinced by the received wisdom. Their young minds have been moulded to fit the prevailing ideology, so they are unlikely to question the foundations of their discipline.
So what should economics be about? Well, that depends on your values. If you believe that everyone should have an equal chance in life, and that currently they do not, then you will support changes to the economy that promote the equal distribution of life chances. If you don’t care about equality of opportunity, or think everyone already enjoys adequate life chances, then you’ll be less excited by prospects of a reformed economics that sees ways to build a more inclusive society. This book takes a clear position: the distribution of life chances is currently extremely unequal, and the discipline of economics currently helps reinforce this injustice.
The economy has one purpose: it is the means through which people interact with the natural environment to produce the things they need to survive and flourish, along with other less essential stuff that improves the experience of life. This doesn’t mean the structures and institutions that make up the economic ‘system’ should deliver an equal distribution of wealth among the population. They should, however, ensure an equal distribution of opportunities. Former IMF Chief Economist Simon Johnson claims: “It’s true that when you organize human society some people get ahead and some people struggle, but that’s a natural mechanism.” He’s right. Some people use their opportunities better than others. Some will use their innate talents and abilities to earn more than most; others will forego great wealth and choose work that satisfies their particular interests. But, whatever their choice, in an inclusive society everyone should be able to secure their basic needs.
By any measure, the current economic system is failing to distribute economic opportunities equally. The objective of economics should be to work out why this is, and then propose improvements. By reaching consensus on what constitutes a successful economy we can then make economics accountable to those it’s supposed to serve: everyone in the world who depends on the economy for survival. It’s astonishing that economics has got away with its failure for so long. No other academic discipline is so influential and so unaccountable.
When an aircraft crashes there is an extensive investigation into why the accident occurred. When the global economy crashes – an event that affects millions of people – there is no such inquest. Why? Could it be that economics deliberately underwrites a system that delivers minority wealth and privilege, grudgingly providing opportunities to the majority only because the elite would rather not dirty their hands with real work? Over the last three decades, the economic system has been redesigned to serve elite greed rather than the basic needs of the wider population. It no longer has any moral dimension. And, since the academic discipline that supports it was turned into a pseudoscience, the impact of economics on the lives of ordinary people has been disastrous. So how did the noble and innovative discipline handed down by Adam Smith and his fellow classical economists turn itself into a major factor in the decline of our civilization?
Excerpt from Four Horsemen: The Survival Manual.