Review: “Debunking Economics” by Steve Keen; and “Seven Bad Ideas” by Jeff Madrick
or
Towards a new Discipline "Social-Political-Economics"
I have been a skeptic of academic economics for many years, starting when I first took introductory economics classes in college. Finally, when I retired, I had the time to delve into the subject to try and dispel or confirm my skepticism. These are two of the most recent books I have read in that pursuit - I admit to seeking out books that seem to confirm my distrust of economics as a science.
In that sense I found both books very helpful. They offered a plethora of evidence on the shortcomings of mainstream academic, or “orthodox” economics, as Jeff Madrick refers to it, not only as a “science”, but even just as a useful tool for analyzing failures and guiding policy. One of the most useful chapters in “Debunking Economics” is the last one, where Keen presents his enumeration of the different strains of economic thought and theory. I have seen other lists even more diverse and confusing, with all sorts of “neo-“, “new-“, “post” modifiers, all the way to monikers such as “sweet-water” and “salt-water" economics. This multiplicity of different flavors of economics is more reminiscent of the splintering of Christianity since the Reformation, each sect claiming to be the only representation of “true” faith.
The comparison with religious sects is purposeful, because like religion, orthodox, mainstream economics is based on a belief system rather than verifiable scientific observation - that belief system being rational, fully informed decision making. This belief may have been apropos in the time and place of Adam Smith, observing the emergence of the Industrial Revolution in Scotland, and against the backdrop of general social science of the time embracing the “rationality" of humans. But with the increased understanding of the complex ways in which human decision making, singly and in social contexts, is influenced, even dominated, by instinctual, unconscious, non-rational processes, this dogmatic assumption of rational decision making in economics cannot be maintained, and indeed is unprovable. “The Invisible Hand”, as derived from the notion of rational decision-making, has become almost a religious mantra and symbol of the most orthodox adherents to neoclassical economics.
The most helpful chapters in “Seven Bad Ideas” are the first (A Beautiful Idea: The Invisible Hand) and the last (Economics as a Science). Madrick admits to being captivated by this beautiful idea of the “Invisible Hand”, where society is guided by almost magical, supernatural means to ever increasing prosperity and “well-being”. The supposed linkage between the free market, guided by the Invisible Hand, and the personal and political freedoms of democracy are an added reason why this idea was so powerful. But it is just that, an idea, simple and beautiful, to be sure, but unprovable, and thus unsuitable as the basic tenet of a scientific discipline.
The most pernicious side effect of Adam Smith’s Invisible Hand was that, in spite of the field’s original moniker, “political economy”, it seemingly established “the economy” as independent of politics and other social sciences, with its own set of "immutable laws”, and thus set the stage for the adversarial relationship between politics/government and economics, which by and large persists to this day. We are forever saddled with the false notion that, but for government interference, “the economy” would be forever growing, stable and optimal.
The last of the seven bad ideas enumerated by Jeff Madrick, Economics as Science, is to me, as an Engineer with a strong science background, the most satisfying, as it debunks that notion completely.
The many strains of economics alone, alluded to above, which often lead to opposite interpretations of past events and contradictory policy proscriptions for the future, should be enough to invalidate any claim by Economics to being a scientific discipline, i.e. adhere to the “scientific method”. The fall-back position to claiming “scientific" status then becomes that economists pride themselves in using mathematics to formulate their theories and models. But mathematical models based on untenable assumptions and endless oversimplifications do not make the results anymore tenable as a science. In the old days of IT we used to refer to this as "garbage in, garbage out”.
Keen's third chapter, "The Calculus of Hedonism" was, for me, another very valuable read, albeit, as Keen himself warns, a bit of a slog. Taking introductory Economics classes as electives during my Engineering studies, I kept looking for any objective, empirical, that is to say “scientific", validation of the postulated smoothly downward sloping demand curves. Most economic textbooks dispense with this by offering what economists like to call "thought experiments", which read more like children's bed-time stories. An example of this can be found in the “Introduction” to “Macroeconomics” by Krugman and Wells, where the authors tell the label of the time traveler from 1776, seeing the wondrous commercial activity, with all the multitude of goods and services available, all steered by “The Invisible Hand” to be available at the right time in the right place.
In this chapter Keen illustrates in detail why these beautiful demand curves cannot be objectively validated - because they are fanciful inventions which are demonstrably not true. With the utmost credulity, one can possibly make a case for such well-behaved demand curves for a single consumer and a single good. Even expanding the model to a basket of goods brings about significant problems maintaining the fiction of a monotonically downward sloping demand curve; going beyond that, even in microeconomics, to "markets" and classes of consumers (e.g. by income), causes the whole house of cards to collapse.
And then there is the heroic leap of faith by economists in moving from micro- to macro-economics, postulating that individual demand curves can be aggregated, added, to form an economy-wide demand curve, with all the (as Keen shows, fictional) smooth characteristics of individual demand curves. Interestingly, efforts to prove this postulated aggregative nature of individual demand curves to create a well-behaved global demand curve resulted in the Sonnenschein-Mantel-Debreu (SMD) theorem, which actually disproves this postulate. Keen, in Debunking Economics, then goes into an exhaustive (and exhaustingly) detailed description of how mainstream economists have “deep-sixed” all mention of SMD. I have verified this for myself by searching two Economics textbooks for references (“Macroeconomics” by Paul Krugman and Robin Wells; “Economics” Sixth Edition, by Samuelson and Nordhaus), and indeed, there are no references to SMD work.
In trying to independently learn more about SMD and its implications for macroeconomics, I hit upon the blog "UnlearningEconomics". This is an amazing resource for anyone who is skeptical about mainstream academic economics, written by an insider, a student of economics, struggling with his (or her?) own doubts about economics as a science. The name of the blog is prophetic - given the sway traditional academic economists have had over teaching that discipline for many decades now, one must indeed "unlearn" all the nonsense about economics as a science, and the almost religious fervor of "The Invisible Hand" as an unerring guide to, and guarantor of, universal happiness.
Although both authors call for radical renewal of Economics as a discipline, Keen much more directly and forcefully than Madrick, both seem content, or resigned, to fighting the battle on traditional economists’ home turf. That is, their arguments in many instances devolve into the traditional intra-economics battle between neoclassical and one form or another of Keynesian strains, with overtones of how much a role financial/fiscal analysis should play, and, of course, the degree to which government should be involved. On this turf, as Keen points out, efforts at a basic renewal and redirection of economics as a discipline are destined for failure - academic economists will protect the status quo, as will the major, and powerful, Economics associations, which determine to a large extent what gets funded and what gets published. A confrontation in that arena strikes me as much like the little dog, barking and nipping at the heels of the postman, who, with a swift kick, forces a yelping retreat to the back yard.
To really bring about meaningful change in the academic field of economics, which claims to be a scientific discipline, the case has to be made much more forcefully and overtly, that academic economics does not adhere to the scientific method: "the scientific method involves making conjectures ( hypotheses), deriving predictions from them as logical consequences, and then carrying out experiments based on those predictions" (Source: Wikipedia). Today's academic economics is much more like a religion, based as it is on a belief system (rational, fully informed decision makers), complete with religious symbolic (The Invisible Hand), with its unerring, all powerful, benevolent guidance towards universal happiness. And like a religion, it has its denominations and sects, each claiming to have the true message of the deities (Adam Smith and/or John Maynard Kaynes). Academic institutions must be reminded of their responsibilities to truthfulness and not allow a blatantly non-scientific, even religious discipline to represent itself as "science". Would credible universities allow the teaching of "creationism" along side "evolution" as a science?
However, there is an even more basic failing of current academic economics, and that is that it fails to draw a proper boundary around the "system" it endeavors to understand, analyze and model. I am thinking here of "system" in the sense of "systems analysis" or "operations research". Central to this methodology is the definition of appropriate "system boundaries" so as to capture all necessary interactions which influence the functioning of the "system".
In the time of Adam Smith the discipline was called "political economy", which was a much more appropriate description. "Market economy" is only made possible by a political environment (social and legal infrastructure), which enables the functioning of markets. Yet modern academic economics has chosen to define "economics" as an independent phenomenon, with inexorable natural "laws", or "market forces", which determine market performance and outcomes. Added to this has been a mythical and almost religious element - "The Invisible Hand" - which guarantees a beneficial and equitable outcome, the mythical "utility optimization", "self-regulating", and “self-optimizing" characteristics of "the market".
To demonstrate how illogical and counter-productive this myopic systems boundary of "economics" is, lets just look at how it treats "labor" as an external, often expendable "resource", even though this "labor force” are, in another view, really the central focus, the rational, utility-optimizing actors in the "economic system". When "market forces" demand a reduction in labor, "workers are released back into the marketplace to power other companies and sectors”, as Ian Bremmer so nicely puts it in “The End of the Free Market”, with other words, "they" cross the boundary of the economics "system" and become an "externality". When this "labor force" is needed again, possibly with different skills, "it" is miraculously assumed to be available, and with the correct skills to boot. What happens to this "labor pool" while it is an externality is of no concern to the currently defined "economic system", even though it takes economic resources to feed and house, and most likely, retrain the human beings making up this "labor pool". In current economic thinking it is much more important to be concerned about other elements of the "supply chain", as for example in "just-in-time" production and inventory strategies, than with the human labor force, which is always assumed to be available "just in time" and with the appropriate skills and characteristics. Note that in official, economist-driven definition of “unemployed”, people who have given up looking for a job are not even counted, are not even just an externality, but do not exist.
This example points to at least one other dimension along which the "system", of which economics is a part, needs to be expanded - the "social" environment within which both politics and economics operates. We need to consider the social environment, and most importantly, the social goals and objectives which both politics and economics are to serve. The current narrow definition of economics only has one assumed, implicit goal for the human actors within the "system", namely "utility optimization". In the time of Adam Smith, being originally a moral philosopher, the notion of "happiness" was still considered and discussed, but because of the intractable nature of "happiness" and the inability to measure it, it was summarily dismissed from consideration within traditional academic economics.
Whether economists like it or not, people, human beings (and not just in the ridiculous sense of "corporations are people too”), are still the central characters within economics, even in its current myopic, narrow definition, and thus social concerns and objectives need to be within "the system". For example, the economic cost of feeding, housing and possibly retraining the people in the "labor pool" currently not employed should enter the calculations of "optimization" and "equilibrium seeking" economists are so proud of. Currently, that is an "externality", largely ignored in any calculations of "utility optimization", optimal allocation of resources, and “equilibrium”.
With that in mind, a systems-analysis-based definition of an appropriate “system” for analyzing economic phenomena would be called “social-political-economics”, where “social” includes those parts of the social sciences which concern themselves with how “we” (any group of people considering themselves a “society”) can and want to live together. One might argue that this is subsumed in “politics”, but politics can often pervert social preferences and desires.
Having defined the “system boundaries”, the next step in the Systems Analysis approach is to explicitly define goals and objectives which our "social-political-economic system" should achieve. This, of course, leads immediately to another confrontation with traditional academic economics, which has claimed for itself to be “value-free”, another of the vain-glorious attempts by academic economists to fashion themselves as scientists, as strictly speaking, science concerns itself only with objective, testable and reproducible facts, and not subjective preferences. But even traditional economics is not value free. The notion of maximization of "utility" as the driving force and ultimate goal in economics is itself value based, and the notion of Pareto efficiency, i.e. distributive justice, is not value free (http://economistsview.typepad.com/economistsview/2012/03/value-free-economics.html). So the “value judgements” in traditional economics are present, but are hidden and implied, which is potentially very insidious.
One of the general goals and objectives, and value judgements, a society can make is the degree to which membership in a society requires “solidarity” (Def.: "unity or agreement of feeling or action, especially among individuals with a common interest; mutual support within a group.”) Traditional academic economics idealizes “individualism”, as in individual utility-maximizing behavior, which according to their mythology, guarantees the most equitable distribution of “utility”. This itself is rife with value judgements, and certainly in American politics, infused as it is with traditional market economic thinking, is often portrayed as a desirable characteristic. Any social-political-economic analysis which is to produce useful results for any given society must make explicit such goals, rather than leaving unstated (and unchallenged) a hidden, implicit goal of “unfettered individualism”.
Even Paul Krugman makes some concessions to the valid need to explicitly state society’s goals (Macroeconomics, Second Edition - First Principals, page 11): “Resources should be used as efficiently as possible to achieve society’s goals”.
Once one accepts the validity, even the imperative, of explicitly stating social goals which our “system” is to achieve, then it becomes obvious that these goals can, and indeed will, be different between societies. Economics then changes from a dichotomy between “market economics” and “command economies”, or “state capitalism”. Ian Bremmer, for example, after the disastrous collapse of the text-book free market economy (the US) in 2008, pushing the whole world to the edge of financial and economic melt-down, felt obliged to write a book, “The End of the Free Market”, making sure to remind his readers, notwithstanding all the objective evidence, that US-style market economies as still so much better (value judgement) than his straw-horse, China’s “state capitalism”. It is interesting to see how economists like Bremmer dance around the problem of having an “inferior” economic system have significantly higher GDP growth (according to traditional economists, the ultimate sign of a “good” economy) than the US.
This ignores the fact that there are not just two competing economic models, but a continuum of social-political-economic models, depending on the social goals and the political organization of a given society. For example, there are the “social market economies" of most of Europe (and much of the rest of the world), which US economists and politicians like to discount as “failed socialist welfare states” (value judgement), which, because of different implicit and explicit social goals, have economies which function differently. In these societies “solidarity” is rated much higher than “individualism”, which influences the politics and laws governing economic activity, including how enterprises are run, and thus changes the whole calculus of what constitutes “efficient use of resources”.
From my own experience in Operations Research/Systems Analysis early in my professional life (Aerospace Engineering), I know that the scope of “systems” addressed by these techniques are limited, certainly not encompassing an entire national or even world economy, but as a starting point, these techniques could provide a roadmap towards a more inclusive view of how “economies” work. This would, however, require academic economists to give up their grand vision of a unified theory, allowing “understanding how the [whole] economy works”, having “discovered” a set of “laws” which govern economic activity, and formulating these laws as “elegant” mathematical models" - many of the more arrogant academic economists claim to have done just that, but as Keen, Madrick and many others have shown, that is delusional.
Nonetheless, the techniques of Systems Analysis/Operations Research can be quite useful, if one is willing to take a more engineering approach, that is, identify specific problems, define goals and objective for a solution, and then apply inter-disciplinary techniques towards their solution. At the micro-level, these methods have been applied to “economic” issues, such as increasing efficiencies within production techniques, even of entire corporations, improving transportation systems, and the like. Again, the critical elements are the inclusion of other disciplines which are central to realistic economic analysis, such as social sciences and politics (i.e. defining appropriate “ system boundaries”), and explicitly identifying goals and objectives to be achieved, rather than allowing the implicit (and very subjective) goal of “utility optimization” to dominate.
Let’s look at a couple of example problems, continually being discussed and speculated about by economists and politicians alike, and see how one might approach these problems in a more inclusive, less myopic view than traditional economics has and does.
The US is currently debating raising the minimum wage. Germany, which to my surprise, had no minimum wage laws (possibly because of the well defined collective bargaining laws on the books) recently passed a first (more or less) all-inclusive minimum wage requirement.
Today’s economists will offer recommendations and predictions on the effects of such a new minimum wage, or increasing it, all the way from disastrous increase in unemployment, and thus increase in income inequality, to the other extreme of minimum effect on unemployment with significant decrease in income inequality.
The other issue continually being speculated about is the effort of raising (or reducing) taxes. Again, as above, traditional economists will make diametrically opposed predictions on the effects of such changes, and there will be Nobel-laureates on both sides.
One would expect, or at least hope, that economists, as supposed scientists, would be able to offer consistent predictions on such economic phenomena. Note that, according to the “scientific method”, hypotheses derived from a theory must be validated or disproven by independent, repeatable experiments. If disproven, the underlying theory must be rejected. Somehow, economists, whose predictions turn out to be wrong, always manage to obfuscate by pointing to one or the other “externality” - the infamous “ceteris paribus” cop-out.
From the very beginning, economists have pointed out that “economics” is such a complex and multi-faceted “social system” that conducting scientific experiments to test hypotheses is impossible. To me, that is a cop-out. Physics, a discipline which many academic economists have pretended to emulate, especially with reference to Physics' continuing search for “the unifying theory” (economists are actually arrogant enough to claim that they have found such a unifying theory of economics), will define and conduct extremely complex and expensive experiments (see the CERN Large Hadron Collider, for example), which take decades from formulation and execution.
Given the importance to society of being able to reasonably accurately predict the outcome from policies, such as a minimum wage and changes in taxation, one would expect society, politics and the academic community to be willing to invest the time and money to monitor in great detail the actual effects of such policies. It would require some pressure by “society” on politicians to structure such policies (laws) in a reasonably unambiguous way (e.g. without all the related and unrelated “riders” attached to satisfy special and local interests). In parallel, during the enactment of such policies, the academic and research community should prepare the “instrumentation” (primarily detailed data collection) of all input, output and possible ancillary statistics, which will allow the unambiguous measurement of the outcomes.
We live in the age of “Big Data”, where huge quantities of data are being routinely collected, stored, and analyzed by commercial and governmental organizations. It is not believable that we (inquisitive humans that we are), given the vital importance of better understanding the effects of such policies on societies, cannot cooperate to define and execute large-scale experimentation along these lines. Some of it is already happening, albeit almost exclusively as “after the fact”, historical analyses, not as a targeted, forward-looking “experiment”. These after-the-fact, historical analyses suffer from incomplete, incompatible and indirect “data”, and are thus routinely discredited, based on these inadequacies, by those economists who do not agree with the findings. The community of academic economists seems completely at ease with this situation, as it prevents them from truly being called to account for their hypotheses and predictions, and allows them to engage in their seemingly favorite activity, lambasting each other in the different sects of their “religion”.
Given my assertion that “social-political-economics”, as a new discipline, is a continuum, from "laissez-fair free markets”, via “social market economies”, to “command economies”, such controlled experiments would also shed light on the (in my view) important and pervasive influence of societal goals and norms, political and legal infrastructure and other cross-societal differences on the outcome of similar or the same policies, such as changes in taxation and minimum wages. It is thus quite possible that minimum wage legislation in Germany has different outcomes than in the US. Currently such differences, viewed through the myopic lens of traditional economics, are explained away with political polemics (“failed socialist welfare states”) or ignored as “externalities”.
In summary, the evidence presented in books like “Debunking Economics” and “Seven Bad Ideas”, and many others like it, show that today’s traditional, academic economics is certainly not a “science”, has largely failed in “understanding how the economy works” and has proven completely inadequate as a tool to help define and analyze policy, even in a restricted “economic” sense, not to mention in a larger social context.
Because this false science of economics is currently so deeply entrenched in academia and in society in general, given many generations of brain-washed students graduating from our colleges and universities, there must be a broad, concerted, even polemical effort to “debunk” this discipline. Traditional economics has a pernicious and destructive influence on society - think just of the legion of MBA’s, brainwashed in the religion of “The Invisible Hand”, going on to run our business enterprises in completely destructive and asocial ways, justified by imagined “laws” of economics and supposedly immutable “economic forces”.
In parallel, open-minded economists, in conjunction with other disciplines, must work to produce meaningful and workable tools to actually predict economic development and the outcome of policy changes, even if these tools, at least initially, are limited in scope and specific to one or a few policy variables, rather than pursuing the grant (and arrogant) vision of the unifying theory of economics.
Traditional economics made the mistake early on in its development, and repeatedly throughout its history, of taking very limited evidence from specific (and often unusual) periods (e.g. Adam Smith in Scotland, early in the industrial revolution, John-Maynard Keynes in the Great Depression and post-WW II period) to try and formulate grand, all-inclusive theories of economics. In reality, our understanding of how society in general, and economics as a specific sub-area, works, is rudimentary, in the pre-Newtonian stage, if you will, where we have not even done a good job of observing how the apple falls from the tree.
Pre-planned and well designed monitoring efforts must accompany (ideally) all legislation and policy implementation to actually obtain verifiable data on the effects of such policies. In this way, with baby steps, we can perhaps build our understanding of how these policies actually work. Then, perhaps in two, five or ten generations, in conjunction with non-brain-washing economics education, we can actually start assembling the pieces of the puzzle to better “understand how the economy works”, likely differently, depending on the social and political environment in which it is embedded. Only after such diligent and long-term “observations” can we hope to start predicting “how the economy works”, and even then most likely not with neat little mathematical models, but more likely with large scale, complex, and interdisciplinary simulation models, much like the large scale meteorological simulations, which today do a fairly decent job of predicting the weather perhaps ten days into the future, and are able to predict the path of a hurricane with reasonable accuracy.
