The Trouble with Economics

If you were to ask which group of academics had the most direct influence over the state and destiny of our society, a good bet would be those of economics. They mould the thinking of the economics graduates of tomorrow, who go on to advise, possibly even run, banks, businesses, governments and international institutions. Yet this same group of academics is by all accounts the most dogmatic of them all, with academic power and influence across the globe staying exclusively with one group of thought (the neo-classical), who monopolise the most prestigious economics journals, the appointments for academic posts, and the shape of economics syllabuses in universities. The ideas of these people have massive power over the world, and yet the inadequacy of their ideas becomes immediately obvious to anyone who looks out beyond the narrow assumptions of their mathematical models. This is a disastrous example of the power of the self-justifying left hemisphere in action.

I have become increasingly aware of this recently when writing about economics as (a small) part of my new book, when I discovered that there is a growing protest movement amongst economics students protesting against the narrowness of the teaching they receive. My perception of the disastrous impact of academic economics has been reinforced by listening to an excellent radio programme from BBC Radio 4, in which Aditya Chakrabortty provides widespread evidence both of the narrowness and its consequences. I highly recommend this programme, which is linked here (on BBC iplayer, which means it will only be available for 30 days and only within the UK). It’s 38 minutes long but well worth that expenditure of time. The people interviewed by Chakrabortty admitting the huge inadequacies of academic economics include a big cheese from the Bank of England, billionaire George Soros (who said he made his fortune by ignoring his economics training) and some eminent (but still marginalised) economists such as Robert Skidelsky and Ha-Joon Chang, as well as a great many frustrated students from around the globe.Teaching economics after the crash

The situation in economics sounds very similar to the one I encountered as a postgraduate student in philosophy: the ascendency of a narrow view of the subject is maintained by a positive feedback loop. Only the people with the mainstream assumptions get published in the most prestigious journals. Only the people who publish in those journals stand any chance in the massive competition for academic jobs. Once they get there, those people have sunk costs and vested interests that make them very slow to change anything, and their ability to support the beliefs of the powerful ensures that they are never seriously challenged. They just mould the next generation and the cycle continues.

In evolutionary terms, this would involve selection for narrow-mindedness and fragility, where people who flourish in certain very restricted conditions but take no account of wider uncertainties continue to rule – until they bring the whole of their society down with them. The only difference between philosophy and economics in this respect is that the effects of philosophy on society are much slower and more long-term than those of economics, whereas people can see the defects of narrow economic thinking clearly and amply demonstrated in the crash of 2008.

In the chapter on economics in my forthcoming book, I identify five common and influential dogmas in economics – all dogmas that can be related to wider ones beyond economics. These are:

  1. Rational choice theory, which assumes that a unified self will make consistent consumption choices
  2. Perfect information, which assumes that people know what is happening in the markets they are participating in
  3. Cosmic justice in a free market: i.e. Adam Smith’s ‘Invisible Hand’, which ensures that the narrow choices of individuals will be transformed by the power of the market into general good by helping to create wealth
  4. The growth model, which assumes infinite resources can be used for unending growth (or that growth can somehow be decoupled from a lack of new resources)
  5. Profit maximisation, which assumes that the best strategy for a company is always to maximise profit, whilst other motives (e.g. those of fair trade) simply distort the functioning of the market

It is not as though these assumptions have no challenges in the wider world. Psychologist Daniel Kahneman won a Nobel Prize for demolishing rational choice theory. The Invisible Hand has long been questioned by left-wingers, whilst the growth model has long been questioned by Greens, and is cogently deconstructed by green economist Tim Jackson. The movement for corporate social and environmental responsibility, including the fairtrade movement, also offers a challenge to profit maximisation. Above all, Nassim Nicholas Taleb provides a strong challenge to the over-certainties of economics (see my review of his book Antifragile). There are also plenty of alternative models being developed (such as Tim Jackson’s account of prosperity without growth), so the criticism is not merely destructive. But all this criticism from the voices of experience seems to make little or no impression on the self-sufficient, self-reinforcing dogmatic bubble of the core academic discipline.

Of the five dogmas above, the one that concerns me most is the fourth. The growth model appears to be analogous to a car that is constantly accelerating because it is being chased by a police car of debt, speeding along behind it. But it is only a matter of time before the car crashes, runs out of petrol, or runs out of road, at which point the debt police car will also catch up with it. In this respect it just provides a particularly urgent and striking model of the dangers of metaphysical dogma. All dogmas, in some ways, speed up to try to preserve themselves, pursued by police cars of wider conditions, and then they crash. But it seems, at present, as though the economists will do for us long before the other dogmatists get close to doing so.

About Robert M Ellis

Robert M Ellis is the founder and chair of the Middle Way Society, and author of a number of books on Middle Way Philosophy, including the introductory 'Migglism' and the more in-depth 'Middle Way Philosophy' series. He has a Christian background, and about 20 years' past experience of practising Buddhism, but it was his Ph.D. studies in Philosophy that set him on the track of developing a systematic account of the Middle Way beyond any specific tradition. He has earned his living mainly by teaching, and more recently by online tutoring.

13 thoughts on “The Trouble with Economics

  1. I just can’t get my head round economics. It seems not to correspond to anything I know about money, from everyday use of it. ‘Macro-economics” seems to operate in a parallel universe that is totally disengaged from my world, maybe deliberately concealed from me, and from most others?

    Take ‘borrowing’ for example. I’m told that the Chancellor has ‘borrowed’ £98,000,000,000 to fund public expenditure, because revenues don’t match what it costs to run the country. OK, but who has £98,000,000,000 to lend the Chancellor? Any how did they have that money to spare? Where did it come from?

    Furthermore, it is said that our children and grand children will have to pay it back? Does a contract actually exist, and did I sign it so that my grand-daughter is committed to honouring ‘my (or her) part’ in it? I don’t remember doing that, or being asked or consulted about this contractual arrangement.

    Am I to understand that the grandchildren of the mysterious lenders are also parties (as hereditary creditors-in-waiting) to this debtor-creditor arrangement? How will they (the anonymous creditors or their testamentary beneficiaries) enforce the contract, and what will they do if Freya won’t or can’t pay up? I can imagine she will have something to say about it, and she won’t be a push-over. She’s a feisty and determined young Scot.

    Or is mine a silly question, or one that will lead to my disappearing without trace? Do other people entertain the same questions as me?

  2. Hi Peter,
    I’m not sure that I’m the best person to answer your question, as I’ve been interesting myself in the overall assumptions rather than the specific details of economics. Someone better trained in economics will be able to give you more accurate and detailed information here. However, I’ll give it a go. As I understand it, the national debt is financed by a combination of private and foreign creditors. So some of the creditors will be financial institutions or individuals, others foreign governments. In the UK I believe our foreign debt is much worse than our private debt. As to who will have to pay it back in future, it’s the government as a corporate body, not individual citizens. Fortunately your grand-daughter won’t be personally responsible for paying it!

    1. Thanks Robert, but I still fail to understand how a combination of individuals (wherever they are situated) could have amassed such huge fortunes as to be able to lend such astronomical sums to governments on an annual basis. What kind of enterprise could ‘earn’ £98,000,000,000? Doing what? Turning straw into gold, like Rapunzel imprisoned in her fairyland tower?

      How is it possible to amass such a huge treasure as to have £98,000,000,000 to give away on one year just to the UK government, let alone similar sums to other national governments everywhere? Does the Chinese government have such a surplus to give away? Surely the Russians, the Americans, the Brazilians and the South Africans don’t.

      My intuition is that the whole economic edifice is a house of cards. What is its basis in reality? Once upon a time money was some kind of reflection of the amount of gold stored in national vaults. Now, it’s just a row zeros generated by computers! I think we should be better told than we’re being told. It just doesn’t make sense to me, and I’d like to get to the bottom of it. Like the economy students mentioned in your article above.

  3. Regarding the growth assumption, I think there is a simple mathematical refutation. Growth is always a percentage of the present state, it is a form of compound interest. It is thus an exponential which, in the long term, tends towards infinity. Thus in the long term it is unsustainable: resources are not infinite. If we are using resources as if they were infinite, we are taking from future generations resources they will not have which we take as ours.

    1. I agree, Frank. Some resources are renewable (e.g. water, timber), but even these can be over-stressed if they are used faster than they can be renewed. The ethical question is then why we should care about future generations, which I suggest we should do because in a state of greater integration we do identify with them. If one is only concerned with immediate identifications that takes us back to assumption no.1, of a unified self, where actually there are changing desires and beliefs that just have a deluded egoistic idea that they are unified.

  4. I can see the comparison between economics and academic philosophy is apt to some extent, however I would be more positive about the latter. I think economics as taught these days has actually blinded us to reality while philosophy has merely fostered a too narrow approach. I can think of philosophers who have illuminated my thinking, such as Socrates, Kant and Hume and these are still taught in Philosophy courses. Comparable figure in economics would be Keynes or even Minsky but these are not even taught these days, according to what was said in the broadcast referred to.

    1. Socrates, Kant and Hume are taught on some philosophy courses, so I agree that this is a different picture from economics, where it seems most students do not get a sense of historical change and thus of the plurality of perspectives and fallibility that goes with that. However, there are a surprising number of philosophy courses that allow students to concentrate solely on modern analytic philosophy, and students can actually complete them ignorant of any larger perspective. What’s more, it’s those more specialised students that probably stand a better chance of success in subsequent academic competition for jobs.

  5. A fascinating read. I share and echo Peters confusion and exasperation, I just don’t understand economics and quite often I get the impression that those that claim to don’t either. It is sold to us as a kind of scientific law, like gravity. The difference is that we can only observe, experience and try to explain gravity, economics on the other hand is man made – we don’t just observe and experience, we started it and continue to affect it (willingly and unwillingly). Economics can be, and has been, changed and manipulated.

    Growth, and the obsession with it worries me. It is clearly unsustainable and unless the system is fundamentally revised, human society will be condemned to eternal periods of growth followed by damaging and destructive financial crashes. We seem to have short memories, as a species, but a quick look at the history of the capitalist system shows a unmistakably regular pattern. I might be missing something here, but why can’t individuals and corporations be content with profit? Why must they have more and more year after year. There is more money floating around at the top than I can begin to comprehend and yet there are people really struggling to survive, even in the worlds richest countries – I find it very hard to give a shit about the ‘defecit’ when there are individuals with more money than they or there families will ever need (sorry, I digress, and am probably just being nieve and idealistic).

    I can understand (but not condone) somebody getting dogmatic about gravity – both experiential and experimental evidence is consistent and compelling. I fail, however, to see how any body can become dogmatic about a man made mess such as economics, yet there are still powerful individuals that seem to subscribe to Adam Smiths ‘invisible hand’.

    I don’t usually go on about economics, because my understanding is narrow and I can offer no alternative to the current system.


    1. Thank you Rich, I sometimes think I’m the only person in the universe who questions these economic ‘facts’. The Chancellor of the Exchequer tells us that the nation has an accumulated debt of £1,500,000,000,000,000 and that “our grandchildren” will have to repay this debt, a burden that it would be “immoral” to leave them with.

      Everyone nods miserably and agrees that this would indeed be immoral, and something must be done. What is being done is that house prices (and mortgages) are so preposterously high that my children (two of whom earn more than the median national wage) have given up hope of ever saving enough to put down a deposit on a home of their own, and can’t even afford to rent a bed-sit.

      Today I saw a Sunday Mail 30-page supplement advertising two-bedroom apartments in London at £9,500,000. They are advertised as “homes, investment opportunities or as buy-to-let”. To millionaires.

      Young people seem to be in a stupor of hopeless resignation. The “invisible hand” seems to be round their throats and over their eyes.

      We never see or hear from those to whom we are hideously in debt. Only generalities from “go-betweens” like the Governor of the Bank of England, The Secretary General of the International Monetary Fund, or the President of the World Bank. Presumably they meet and talk with our shadowy creditors, but we never know who they are, where they live, and in which vaults they stash their trillions (or zillions).

      I don’t think it naive to ask these questions at all although my intuition tells me that it may be dangerous. I am reminded of “The Emperor’s New Clothes”, a fable pointing to the immense folly of group-think, and the willingness of all of us to be hypnotised into the acceptance of grotesque falsehoods, lest we be thought of as foolish, or seditious.

      Surely the Middle Way has a perspective on this. I’m not intelligent enough to articulate one, beyond the comments I’ve made here. I think your own remark about not giving a shit about the deficit hits the bull’s eye smack in the middle. I don’t give a shit about the national debt: I smell a rat somewhere, and I’d like to see it dragged from its sewer where we can all see its red eyes, its teeth and its tail. Let’s see the size of it, and see what it does when we corner it.

  6. HI Rich and Peter,
    I agree with you that economics is constructed, but I’m afraid that doesn’t mean we can dismiss it as unreal. The problem with economics is not that the subject doesn’t investigate and engage with some conditions that we need to understand and know about, but that the understanding currently dominant is a dogmatic one that prevents us understanding and engaging with the wider and longer-term conditions. You can’t just dismiss the deficit (or the debt) because it is of human construction, any more than you can dismiss, say, war or poverty. Debt and deficit, like war and poverty, only seem real to us because people believe in them, but that doesn’t stop them being damaging.

    Approaches based on growth economics have brought us much of the prosperity we experience today, so I think we should appreciate that prosperity. Without credit and reliable systems for borrowing money (in the process creating debt), the industrial revolution could not have occurred, along with the massive advances of education, communications, travel, cultural life, medicine and science that have accompanied and depended on it. The problem is that beliefs that have worked reasonably well in past conditions are threatening to prevent us from addressing new ones.

    There are other models from the currently dominant economics. I’m currently still reading ‘Prosperity without Growth’ by Tim Jackson that offers one. But I’m sure that other approaches, if they are to follow the Middle Way, will have to start with a recognition of the current situation, with its strengths as well as its weaknesses. Denying debt would not be facing up to current conditions, and I think it would be dangerous if people responded to the issues of economics by starting to live in a fantasy world where debts and deficits were denied because they were too intangible.

    1. Hi Robert

      I appreciate your Middle Way analysis, and take your comments on board and will use them to steady my take on debt and deficit.

      I do still think, though, that members of the thinking public are entitled to have more flesh put on the bones of debt and deficit, perhaps along the lines I’ve suggested i.e, for us to know who the creditors are to whom our political leaders have tied us (some names and simple biographies would make them more tangible); and for us to have an inkling of how they were able to accumulate such enormous wealth as to be able to ‘lend’ it to national governments, to fund our excesses.

      Members of the public aren’t so naive nor so unintelligent as to be unable to grasp these issues. After all, we are told crude things like “the last Government has ‘maxed out’ on its credit card” as if the national debt was of the same order as a personal loan. We are also expected to assent to phrases uttered by senior politicians like “UK plc”, which implies that the nation state is a public limited company run by a board of directors which offers shares to subscribers. Nothing in my history has given me cause to believe this to be true. Can the Middle Way help to clear up such murky concepts?

      Anyway, it’s an interesting topic and I’m interested to learn more. I’ll look up the Jackson reference. I can (I hope) assure anyone who reads this that I don’t take my relative prosperity for granted, and I have no way of knowing how far my contribution to the national wealth falls short of my notional contribution to the national debt. Some means of calculating such a discrepancy ought to be within the competence of an economist, so if anyone wants to use me as an example in the interests of wider enlightenment, please get in touch and I’ll consider volunteering.

      Peter 🙂

  7. I have found two books recently which are well worth reading. The first is by John Lanchester called ‘Whoops, why everyone owes everyone…’ explains a lot of the basic terms and how we got into the mess we are in at the moment with an excellent outline of the corruptions within the current financial system. The other by Thomas Piketty is a massive tome which might be hard going to read but does show where the wealth has gone that has been extracted from the income stream of economic growth. He makes a very good case for shifting to a wealth tax so that those who have gained most from the current financial system should pay tax to reduce the deficit rather than just lend the money to governments which then will have to be paid back thereby increasing the problem of inequality in wealth.

    1. Thanks for this Frank which does make some clear statements about what lines of investigation may offer straightforward answers to the questions I asked, and other people want answering too. It’s what I thought, some individuals have siphoned off a lot of money by whatever means, but in ways that are obscure and secretive, and are now making more by what used to be called usury.

      When ‘transparency’ and ‘accountability’ are so often invoked as overarching values of a free society, why aren’t we told who these individuals are, where they live, and how they ‘abstracted’ wealth that I assume was produced by the labour of the ordinary Jills and Joes – like me and my wife – who worked to generate it?

      I’m sorry I didn’t reply to your very helpful comment on my own re teaching and learning, Frank. The days of website down-time didn’t help, but it gave me lots to think about, and the way you explained the contexts in which you teach pin-pointed the importance of how ‘conditions’ operate in complex human affairs, as a helpful middle-way-philosophy lesson for me . I do need help in adjusting my thinking which is conditioned to leap to absolutist positions, although nowadays I occasionally ‘look before I leap’, and need to continue to cultivate the looking and restrain the leaping more often.

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