Bringing About Debate and Change in Economics.

By Peter Smith

The financial crisis has raised serious questions about the validity of mainstream economics and whether it addresses some important aspects of reality. This does suggest that at least some radical changes are needed in the core economic models of ‘how the world really is’. I’d like to suggest that outsiders can have a useful role when change of such a radical kind is needed; at the very least, we may have tools and approaches that economists are not familiar with. History is on my side here: some of Thomas Kuhn’s famous paradigm shifts described in his [amazon_link id=”0226458121″ target=”_blank” ]Structure of Scientific Revolutions[/amazon_link] arose from just this sort of cross-fertilization.

[amazon_image id=”0226458121″ link=”true” target=”_blank” size=”medium” ]The Structure of Scientific Revolutions: 50th Anniversary Edition[/amazon_image]

Getting a productive debate going may not be so easy, however, given the mutual suspicion and hostility between (some) external critics and (some) mainstream economists. The latter have perpetrated some appalling examples of arrogance. Lionel Robbins, in [amazon_link id=”0333370392″ target=”_blank” ]the essay[/amazon_link] that defined (mainstream) economics, claimed it was: “A body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse.” Much more recently, Robert Skidelsky’s description of economics as ‘a branch of logic’ shows that this tradition of disdain for critics is alive and kicking. (Skidelsky seems to hold the mistaken belief that you cannot arrive at erroneous conclusions using logic.)

In the opposite direction, though, external critics perceive a theme (about the need to reduce the size and role of the state) that runs from undergraduate textbooks and teaching, right through to the formulation of public policy. It appears to unify the discipline and all its members around a body of theory that provides politically-convenient support for laissez-faire – despite having a number of serious flaws that have persisted, un-mended, for many decades (such as the lack of any realistic model of how buyers and sellers get to know the ‘true’ price). What is really going on here?

Our critical instinct is to go into even the earliest stages of contact with academic economists eager to trash this set of ideas – totally missing the point that not all economists are tarred with the same brush. If we, the external critics, imply that all economists are engaged in a conspiracy to suppress our criticism, we brand ourselves as ignorant, and thereby lose potential allies within the profession. (I’m using ‘we’ because my home discipline is management – not sure quite where I belong now.)

In reality, there are many senior academics who have long held deep reservations about the power of markets to optimise anything, and do not subscribe to the old easy certainties about laissez-faire. (Curiously, [amazon_link id=”1907994041″ target=”_blank” ]these reservations[/amazon_link] are almost entirely absent from undergraduate teaching and textbooks.) The profession is still deeply-divided, though, and other eminent academics do still adhere to the old certainties. In an article in The Economist, Robert Lucas claimed that the post-2007 crisis should not be taken as evidence of deep-seated flaws in mainstream economics, because the Efficient Market Hypothesis (EMH) showed that such crises were inherently unforeseeable – this despite the considerable body of evidence against the EMH. (There is a summary of this in Robert Shiller’s [amazon_link id=”0691166269″ target=”_blank” ]Irrational Exuberance[/amazon_link].) At the very least, we are able to see when we are entering a period of great potential instability – the case studies of earlier crises in Paul Krugman’s [amazon_link id=”1846142393″ target=”_blank” ]Return of Depression Economics[/amazon_link] identify some interesting indicators.

[amazon_image id=”0691166269″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance[/amazon_image]   [amazon_image id=”1846142393″ link=”true” target=”_blank” size=”medium” ]The Return of Depression Economics[/amazon_image]

The profession also includes those who studied economics, years or decades back. They were taught that (mainstream) economics is indeed ‘a body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse’. A lot of my old colleagues in the major international development organizations belong to this group. With few exceptions, they certainly subscribe to the belief that mainstream economics has got it just about right – as do many economic commentators, notably The Times columnist, Daniel Finkelstein. I am thinking particularly of his encomium (14^th Dec 2014) on the late Gary Becker. (Becker was probably the most over-confident advocate of extending mainstream economic principles to cover much of human non-market behaviour.)

Finally, there are politicians who want to use the simple messages about the beneficence of market forces to promote an agenda of ‘rolling back the state’ – some from sincere conviction, some in cynical pursuit of personal or factional interests.

Mainstream economics isn’t a single, monolithic body of experts and expertise. Rather than attacking this mirage, we all – meaning internal and external critics alike – should be thinking about a radical review of the mainstream paradigm, and seeking more realistic alternatives. (One thing that my particular school of outsiders can contribute is skills and approaches for managing that process.) That, however, is a much bigger story, one for another day.

Peter blogs as EconomicsEye. Since starting out in the natural sciences, he has worked in project management, and the management of R&D and innovation.