Many, if not most of us, listen to economists, or read their pronouncements, on issues of daily life such as the economy, cost of living, jobs and careers, the environment and the looming crisis of global warming with a degree of awe. They are supposed to be the experts and the public expects from them not just technical and analytical expertise to explain the vicissitudes of daily life, but also some credible metaphysical perspective on how the world is organised and our place in the overall scheme of things. Almost no one else, other than medical doctors, is vested with so much authority by the general public. But are economists and the subject of economics really entitled to such deference and respect?
Interest in economics is roughly 150 years old and began with the Industrial Revolution in Britain. At the beginning it had mainly to do with a combination of politics and economics within the rubric of political economy, a branch of moral philosophy, the subject so presciently discussed by the two giants of classical economics, Adam Smith (1723–1790) and David Ricardo (1772–1823). Writings on political economy gradually extended to other subjects that eventually comprised the core of classical economics, such as how value is created, how factors of production are rewarded, how markets function, how international trade takes place and the whys and wherefores of population issues.
Across the Atlantic, the American Economic Association was established in 1885 and Cambridge University in the UK established a degree in economics in 1902, essentially based on the ideas of Alfred Marshall (1842–1924). Economics then also began to grapple with more philosophical, but also more practical matters, such as the idea of utility, the notions of needs and wants, the interaction between the demand and supply of commodities, and the role of prices and markets in everyday life. Indeed, many of Marshall’s contributions germane to these concepts are still taught in economics textbooks today. Also, it is worth recalling that the setting for all discussion within the ambit of political economy was the nation state and that nation state was Britain. In these early writings cultural considerations were ignored, as were the benefits from Britain’s colonial possessions as, indeed, was the contribution of slavery to the British economy.
But, by far the most important contribution that Marshall made was that of the notion of ‘equilibrium’ in which he postulated that left to themselves, markets, by virtue of competition between rival producers, would automatically lead to a state of equilibrium (stability) in which demand and supply, prices and factor rewards would become mutually consistent. On one side were the utility-maximising consumers; on the other were the profit-maximising entrepreneurs and investors and both by their independent actions and behaviour would lead to equilibrium in not just individual sectors or markets in the economy but in the economy as a whole.
However, equilibrium would be based on the historically inherited distribution of income and this was to be taken as given. Based on these assumptions, no superior deployment of resources or rewards could be envisaged within the equilibrium. However, the process of getting to equilibrium could/would involve temporary states in which resources might be under- or over-employed. But flexible prices would ensure that the economy would keep on moving toward equilibrium. Here, it is worth noting that no timescale was defined for getting to equilibrium and no remedies were proposed to counter the effects of the supposedly temporary disequilibria, such as the phenomena of the trade cycle, export/import imbalances and of boom and bust in the economy.
The popularly known LSE had been given the title London School of Economics and Political Science when it was established in 1895, thus effectively claiming that economics was, in fact, a science no different from the natural sciences
Marshall also made a distinction between static and dynamic equilibrium, incorporating primarily the impact of new technology in the latter, and between partial and general equilibrium in the economy when individual sectors might be developing at different rates. To make the analysis simpler, Marshall and his many worthy successors right up to the early 1930s introduced concepts like ‘open’ and ‘closed’ economies and the wonderfully convenient assumption of ceteris paribus, i.e. other things being equal, meaning the absence of any random external shocks that might upset this built-in tendency towards equilibrium and maximum efficiency. Marshall also came up with the concept of ‘marginality’ in his analysis of production, whereby the objective of optimality would be achieved in the economy beginning with the individual firm and then replicated across other sectors. All this was formulated in quasi-mathematical terms and ‘models’ of the economy became de rigueur for all serious students of economics from the 1930s onwards.
As it happens, most of these concepts were borrowed from the methodology of natural science in general and from astronomy, or astrophysics as it is now called, in particular. Early practitioners in the field of political economy can, in all probability, be acquitted of the charge of harbouring any malicious intentions in developing this methodology but introducing concepts from mathematics and physics threw open the door of adding the appellation ‘science’ to the subject of economics. Indeed, the popularly known LSE had been given the title London School of Economics and Political Science when it was established in 1895, thus effectively claiming that economics was, in fact, a science no different from the natural sciences.
Science or not, economics was confronted with its first test in the immediate aftermath of World War I. The then coalition government of the Liberal and Labour parties in the UK wished to start a programme of public housing but then, as now, was met with strong Treasury resistance who saw this as a grave violation of the prevailing rules of public finance and it could not countenance the government borrowing money to this end. In this respect, economists had, and continue to do so, over-simplified the notion of public finance by making the state comparable to a household. More remarkably, these comparisons are still used more than a century later! However, matters came to a head with the 1929–33 depression that began with a stock market crash in the US but then generated a domino-like series of corporate and individual bankruptcies not just in the US but virtually across both the rich and poor countries of the world, including the UK.
Mass unemployment followed, for which there were no economic remedies, and governments looked on helplessly. It became obvious that the idea of economies moving effortlessly toward equilibrium, if not a fiction, was an idealised version of reality. If economics were, indeed, a science, it had failed both to predict the global depression and suggest any meaningful measures/policies to deal with it. Something eerily similar occurred eight decades later in 2007, called the Great Recession. This, too, had not been foreseen by anyone, and the then prevailing neoliberal consensus proved unequal to the task of remedying the situation without massive tax-funded support from the state.
Economics, whether classical or neoliberal, was only partly a scientific study of society; it was more a vehicle for the propagation of ideology
Lord Keynes (1883–1946), a Cambridge mathematician/philosopher but also a prolific contributor to the economic and political issues of the day, suggested that the real problem was a deficiency of demand in the economy, not high wages, which caused the depression in 1929. In fact, by borrowing from the banks and the public, or even by printing money and adding to demand, the government could have revived the economy via the multiplier effect. Not only would unemployment have fallen by doing so, but even the resulting budget deficit could have been eliminated in no time. Thus began the Keynesian revolution in economics. This revolution was not only a lifeline for the embattled governments of the day but had a dramatic effect on the prevailing economic orthodoxies.
During the post-World War II period, it was the widespread adoption of Keynesian ideas in economics that resulted in the unprecedented growth of the global economy between 1945 and 1975, a revival that created the mixed economy, the welfare state and led to the acceptance of redistributive fiscal measures, such as social security, as part of the overall management of the economy. Instead of the modelling based on classical assumptions economics now began to deliver detailed models based on Keynesian precepts. US universities and think tanks were at the forefront in this field developing more and more complex mathematical and statistical techniques that effectively created the impression that policies for the management of the economy, especially unemployment, could be devised with the precision and accuracy of engineering, as embodied in the acronym NAIRU, or non-accelerating inflationary rate of unemployment. But, almost immediately, resistance to these ideas also began.
One of the most visible effects of Keynesianism was the huge enlargement of the state vis-à-vis the economy and this had entailed a substantial increase in taxation and borrowing. Although inflation remained low, the extra liquidity did put upward pressure on prices. Chicago University was at the epicentre in the fight against Keynesianism and concentrated its ire on inflation and blamed it exclusively on fiscal laxity. The reasoning was that Keynesian ideas had led to high taxes, which were a form of ‘theft’ and therefore had to be reversed. In addition, the extra liquidity in the economy had to be countered by much higher interest rates, regardless of its consequences. By the 1970s, such ideas had become mainstream, and by the 1980s both the UK and the US elected governments whose programmes were based on these ideas. From the 1980s onwards, neoliberal ideas became the prevailing framework within which economics would now be taught in universities and practised by governments, both developed and developing.
However, despite the support of sophisticated modelling and quantitative techniques economic policy-making remained constrained by the unpredictability of the economy and the stubborn persistence of social problems. The war in Viet Nam and two oil shocks resulted in the new phenomenon of ‘stagflation’ and the recycling of the dollar earnings of oil producers brought the first of several international financial crises. Nonetheless, economics now had a Nobel Prize. But, despite such accolades, its status as a science continued to remain in doubt. Inflation and unemployment, while serious problems, were not the only challenges facing governments. Issues relating to social deprivation, such as poverty, and the widespread incidence of negative externalities, like environmental degradation, had remained distressingly unchanging – essentially beyond the scope of market-driven solutions – and were now dominating public discourse nearly everywhere.
The British economist Joan Robinson (1903–83), who had already made her name in the 1930s with her analysis of the economics of imperfect competition by saying that, far from being a state of affairs towards which all economies driven by competition gravitated, the very idea of equilibrium was a mirage. In fact, most economies in most sectors were prone towards monopoly or oligopoly, both sub-optimal outcomes. She also argued that economics, whether classical or neoliberal, was only partly a scientific study of society; it was more a vehicle for the propagation of ideology. Ideologies arose from the contending world views of classes, pressure groups and of the ruling elites in individual countries. In the so-called marketplace of ideas, the ideas of these groups generally tended to become the ruling ideas of societies through constant repetition in the media and in think tanks and universities.
Economics remains unequal to the task of addressing the great issues of the day. And their solutions do not lie in markets or the small state or more marketisation, the standard prescriptions of economists
Meanwhile, the mathematisation of economics had given it the superficial credentials of a science so that any other views, particularly value judgements, were given short shrift and dismissed as lacking in rigour. The claim – essentially untested – was that policy-making relating to issues of social justice and equity should not interfere in the functioning of markets, as it would lead to sub-optimal outcomes. Ideally, the state should only concern itself with internal security and defence and leave everything else to the markets.
What is the reality? As an intellectual discipline, economics has built its theoretical framework on several assumptions regarding the behaviour of individual men and women and about society within which those individuals live. But the economic system that we have to live with, apart from its own internal mechanics and rationale, is not only concerned with inflation and unemployment; it has to operate within some ethical framework. It is man-made and needs to conform with the underlying value system of society. However, many economists contend that introducing morality is outside the remit of both traditional and neoliberal, market-driven economic theorising. The question is whether such a contention can be seriously maintained. While people might take a relativistic view of morality it is also the case that there are basic ethical feelings that virtually all of us as human beings share – kindness, harmony, fairness and justice.
Furthermore, economics being an investigation into social phenomena, cannot escape judgements as to outcomes resulting from the implementation of policies based on its supposedly ‘scientific’ precepts. Hence, in the pursuit of optimisation, economics must be prepared to answer questions regarding, say, the chronic presence of poverty, inequality, the cavalier attitudes to environmental degradation and now, its ultimate test, the causes and consequences of global warming, i.e. the negative externalities emanating from years of burning fossil fuels. In the final analysis, the objective of optimisation is only relevant to the current deployment of productive resources and how the underlying status quo can be strengthened. Outside this framework, the historical costs of the negative externalities cannot simply be wished away. In addition, if the status quo is politically unstable, physically unsustainable and socially inequitable, the pursuit of optimisation will only amount to whistling in the wind.
Today’s economies, where the role of markets has been elevated to the status of a religious creed, economies still remain dangerously prone to bouts of financial instability that have involved large tax-funded bailout packages. There are also widespread instances of market failure in the provision of critical goods, such as health, housing and education. Similarly, inequity, whether in terms of widening inequality in society or in the gross disproportionality of rewards going to capital and labour is a fact of life and is increasingly visible across the world. The expressions ‘social dystopia’ and ‘powder keg’ are not exaggerations when describing the social and political situation in the world today. Against this, the only solutions currently on offer from orthodox economics are a smaller state, lower taxes, more deregulation, more privatisation and more marketisation. Here, think tanks, universities and general political debate continue to peddle a ‘panglossian’ optimism – i.e. all will be well eventually.
Moral philosophy talks about means and ends; economics talks about means and wants (and not needs because here, at least, these are defined as being necessary for physical survival and have to be met regardless of circumstances). Lionel Robbins (1888–1984) defined economics ‘as the study of human behaviour as a relationship between ends and scarce means that have alternative uses’ and all human beings are considered to fall within the two metrics, i.e. ends and means. But, do they? Given the vast inequality in society everywhere ‘means’ vary from the poverty of the impecunious to wealth of the ‘filthy rich’. Can there be any kind of comparability between the two? Professor Meade (1907–1995), the British Nobel laureate stated that ‘for the pricing system to work with equity it is necessary to achieve a fair distribution of income and property.’ Indeed, he also said that inequality would make the system not only inequitable but also inefficient as it creates a host of non-competing markets in the economy that make optimisation impossible.
We live in a world today where needs, wants, and desires are in uneasy co-existence in that acute poverty persists in large parts of the world, while there is a growing class of the super-rich for whom wants have long since ceased to have any meaning and it is desires that animate their daily lives, such as the size of their yachts. Roughly speaking, out of a global population of 8 billion only a few million are in this category, while the great majority of the world’s population either goes hungry to bed or leads lives of such insecurity that they stumble from one physical or mental crisis to another. As Professor Robert Skidelsky (1939–) asks in his What’s Wrong with Economics? ‘what has (classical) economics contributed to … the reduction of poverty?’ Well, very little. Ten years ago, world leaders at the UN agreed on the SDGs.
These were inevitably followed by the familiar cycle of grand promises and modest or no delivery. Of all the newspapers, the UK’s Economist recently remarked that ‘an ideological faith in market-based approaches has blinded policy-makers to their shortcomings’. In other words, economics remains unequal to the task of addressing the great issues of the day. And their solutions do not lie in markets or the small state or more marketisation, the standard prescriptions of economists.
As Keynes said: ‘The master economist must possess a rare combination of gifts… He must be a mathematician, historian, statesman, philosopher – in some degree and touch abstract and concrete in the same flight of thought.’ He also said that ‘the fundamental problem is to find a social system which is efficient economically and morally’. Keynes made these comments nearly a century ago and they remain as valid today as in the 1930s. It is a harsh judgment but economics, pretending to be a science, has failed abjectly to provide solutions to the world’s most pressing problems. Let it now learn humility. Perhaps, wisdom can then follow.