Economics

Why You Should Blame The Economics Discipline For Today’s Problems

The people responsible for national economic policy are economics professors

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By John T. Harvey 

We are experiencing deep economic problems and it is the fault of the economics discipline. Their macro theories suck. But, there is no mechanism forcing it to alter its models when they don’t appear to work. This is so because economists basically write for each other in a language only they understand and their jobs depend on impressing a limited number of journal editors and referees, not correcting real-world problems. The academic inbreeding that has resulted has led to dysfunctional theories and, despite the fact that there were economists who accurately forecast the Financial Crisis, because their work is incompatible with what is published in “good” journals it has been all but ignored. Economics is broken and there is no internal incentive to fix it.

There is no question that this has been one of the most divisive presidential campaigns on record. Hatred for each candidate runs deep and whoever becomes the new White House resident on January 20, 2017, many Americans will be bitterly disappointed — perhaps even angry.

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And yet, despite all the vitriol and personal attacks, there is something about which both parties and candidates agree: a key problem facing our country is economic stagnation. The middle class is suffering, private-sector debt is weighing us down, government services are being starved of income (especially in education), and full-time jobs with a complete range of benefits are few and far between. What happened to the decades of post-war growth when each of us could safely assume that we’d have a better standard of living than our parents? That’s hard to do when you are living in their basement, trying to pay off your college debt.

The consequences of our current economic woes go well beyond our checkbooks and our borders. Many of our domestic political and social struggles are linked in some way to a lack of economic opportunity, as are a number of the conflicts and controversies around the globe. People who are not hungry, bewildered, and scared find it much easier to compromise and cooperate.

What happened? What mysterious force knocked us off track?

It is my contention (and that of many of my colleagues) that the fault lies not with the rich, not with corporations, not with China, not with the Illuminati, not with Al Qaeda, but with the economics discipline. Bad ideas have done at least as much damage to our world as anyone’s bad intentions. Decades of misguided policy from both political parties and in other nations has critically weakened the core of our economy and left us in a situation where, despite our tremendous level of technological achievement, we seem to be regressing. Just as in the Great Depression, we have the ability to solve these problems practically over night. What we lack is sound theory to guide our actions.

Economics As A Profession

Here’s something that may frighten you: the people responsible for national economic policy are economics professors. Donald Trump may develop a different plan than Hillary Clinton, but they both pick and choose from the same set whose contents is determined by that joker who stood in front of your introductory macro class–well, assuming you did so at Harvard, MIT, Chicago or the like. But make no mistake, it’s professors nevertheless. Just do a quick Google search to see who the current and past members of the Council of Economic Advisers or the Federal Reserve Board are. This means that whatever those college professors think is a good idea eventually affects whether or not you can find a decent job.

But that should be good, right, since a major part of being a professor–especially at the most prestigious universities–is doing research? They spend untold hours reading others’ analyses, building models, running regressions, and writing and publishing articles of their own. Who better to tell us how we should be running the economy than those paid to study it?

Yeah, you’d think that, wouldn’t you? Except that…

1. Economists write to impress each other in a language only they can understand.

Economics emerged as an academic discipline some time in the late 1800s. At that point, we stopped writing for policy makers and the general public and started writing for each other. That, in and of itself, is not problematic, except that a) we became increasingly insular as we spent more time with each other than those using or being affected by our policies and b) the language we used became much more specialized so that those outside our group couldn’t really look over our shoulders and say, “Hey, wait a minute, that doesn’t make any sense!” If you aren’t an economist, it’s very difficult to decipher what economists are saying.

A huge part of writing to impress each other is getting published in refereed academic journals. You spend months, maybe years, writing papers that you hope some journal editor and referee(s) believe is worthy. Typical rejection rates are at least 75%, often higher. That doesn’t prevent the individual from sending the article elsewhere, but since our etiquette dictates that the paper can only be under review at one journal at a time, it means that the lag can be considerable. Nor is this just for fun. If the portfolio you submit when you come up for tenure is inadequate, you’re fired (they give it a nice name: you are offered a terminal contract). Thus, any economist who wants to keep her job must be able to impress the senior faculty in charge of the publication outlets. There is absolutely no incentive to engage with anyone other than these individuals. Indeed, one can have a fantastically successful career having never once written something understandable by a policy maker, business person, or consumer. Furthermore, unlike, say, engineers, we don’t get clear and direct feedback from those who employed our policies. There is a very large disconnect.

2. As an economist, you are encouraged to think outside the box–except don’t!

On the other hand, there’s nothing inherently wrong with the idea that economists need to impress other economists to prove their mettle. Who else should be evaluating your new and innovative ideas except those who also spend their careers trying to understand what causes inflation or unemployment?

But, please, don’t make them too new or innovative, or they might not get published in the “right” journals!

This is problem number two. Almost every department (not ours, thankfully) maintains a list of journals that count toward tenure, promotion, and raises. They are either exclusive in the sense that “if you don’t publish here we don’t count it at all” or they are ranked from best to worst. You can submit articles to the latter if you like, but you’ll need ten of those to add up to one of the former. Given the intense time constraint under which those seeking tenure operate, the choice is obvious. Either you fall in line with what everyone else in the department thinks is “good” or you get your CV ready. Nor do these lists vary significantly from department to department so that one could choose where to work on that basis. Rather, they are all basing theirs on the same of academic articles that did the ranking for them.

Again, however, this seems reasonable enough on the surface. Surely it must be true that the review process is more rigorous at some journals than others and that the referees at one place might be better than those at another. But that’s not how they rank them because it’s extremely difficult to measure such things. Rather, the most common method is by citation. The more authors cite work that originated in a particular journal, the better that journal must be. This is considered an indirect way of getting at those other quality issues.

Yet again, this seems logical on the surface of it, but there’s an inherent bias in the system and one that creates a positive feedback loop. I explain it to my students this way. Say you had to have a publication record of a certain caliber in order to enter Heaven. You walk up to St. Peter, hand over your CV, and he peruses it and decides whether you go up or down. Further say that Heaven ranks journals and that this ranking is based on frequency of citation (just as above). Last, assume that journals are divided into different religions: Catholic journals, Baptist journals, Jewish journals, Buddhist journals, Islamic journals, Greek Orthodox journals, Flying Spaghetti Monster journals, etc.

Now the problem: if 90% of humans are Catholic, then journals from that religion will, by default, get cited more often. Hence, regardless of which faith you may actually follow, if you don’t publish in Catholic journals you don’t get to Heaven–and so you do. But that means that as non-Catholics add to the citations of the Catholic journals, so the latter’s position as the most highly ranked outlets becomes stronger. Indeed, we don’t even have to start at 90% Catholic. Everything else being equal, whichever religion starts out as the largest has the inside track to being the one that can claim the top of the ranking. (Also note that while it is also likely that there will be more Catholic journals, thus lowering citations per journal, simulations suggest that the very act of creating a ranking in the first place then creates an advantage for those who come out on top after the first calculation.)

This is precisely what happens in economics. Our Catholicism is the school of thought called Neoclassicism and our St. Peter is comprised of the university department chairs, deans, and presidents who are forced to try to maximize their position in the various rankings published by US News and World Report and the like. The result is cookie cutter departments, with everyone desperately trying to look better than everyone else but by the exact same set of criteria! Even departments that aren’t part of any university or college ranking system get caught up in wanting to emulate the big boys. So much for the theory of comparative advantage or for developing unique niches within the discipline.

All this means that while innovative research is possible, it actually has to be within some pretty narrow confines. Nor is this the fault of Neoclassicism, per se. If any school of thought were to achieve a position as dominant as theirs, it would have the same impact. The problem is the journal ranking system And so we have everyone struggling to get a publication in the same journals and even when you have earned tenure and are more free to pursue other lines of research, the fact that you’ve spent all those years establishing a reputation means that you are unlikely to stray. Either be Catholic or go to hell–which is definitely not what I learned in twelve years of Catholic school!

3. Mainstream economists have next to no knowledge of the schools of thought that did the best job of forecasting the Financial Crisis.

The story so far is that economists write to impress each other along a narrow range of topics and theories as dictated by the hierarchy of journals. Again, however, maybe that’s not so bad. If all the other schools of thought and areas of study are the economic equivalent of alchemy, then this should be encouraging.

But they’re not.

This is a huge discussion that I can’t possibly address properly here. Suffice it to say that there exists in economics a much broader range of approaches than just Neoclassicism and I think one would be hard pressed to dismiss these out of hand. I have studied Post Keynesianism, Austrianism, Marxism, Institutionalism, New Institutionalism, and Feminism and my formal training is in Neoclassicism. I have learned something unuique and useful from every single one. This is not to say that I think they are all correct–they can’t be since they contain mutually exclusive propositions. But I would argue (and have elsewhere) that Neoclassicism hardly has a monopoly on the truth. Indeed, when we look at who saw the Financial Crisis coming, their track record is actually pretty grim.

Prominent mainstream economists have claimed that no one saw it coming. Paul Krugman, for example, wrote a piece entitled “How Did Economists Get It So Wrong?“ and Her Majesty famously asked the London School of Economics why no one forecast this catastrophic event. Meanwhile, Neoclassical economists have scrambled to try to figure out how to make their curriculum more relevant since, by their own admission, at present it “…fails to give students even imperfect answers” (Blinder, Alan. “Teaching macro principles after the financial crisis.” The Journal of Economic Education 41, no. 4 (2010), p.385). The picture painted is one of a discipline that failed miserably at job #1.

This is only true, however, if we exclude from the definition of the discipline non-mainstream schools of thought. In point of fact there were actually a number of economists who correctly anticipated the coming collapse both in terms of the timing and the causes. I do not mean Polyannas, who regularly preached the end of the world and therefore had to be right at some point, nor do I mean those who used tea leaves and listened to mysterious voices. Dirk Bezemer did an excellent study of economists who “got it right,” and in his paper he limited the latter to scholars who 1) cited an actual economic model in support of their argument, 2) pointed to the specific set of forces that really did lead to the crisis, and 3) got the timing right (Bezemer, Dirk J. “The credit crisis and recession as a paradigm test.” Journal of Economic Issues 45.1 (2011): 1-18.). Not a single one of those identified used Neoclassically-based models.  By the way, the journal in which that study is published is ranked #674. It is safe to say that the average economist has never seen it.

So, yes, Paul Krugman, you didn’t see it coming, but that doesn’t mean that others didn’t.

4. Academic inbreeding has led to dysfunctional theories.

This begs the question of what a “Neoclassically-based” model is. In macroeconomics, it means the assumption that the economy tends to come to full employment automatically (so long as no obstacles stand in its way) and that it is not particularly important to model the financial sector beyond saying that changes in the money supply can affect interest rates. Nor is there much discussion of the impact of policy (if it fixes itself, what’s the point?).

Those claims sound ridiculous and I wouldn’t believe me, either. So let me offer some evidence. First, here’s a quote from Christine Romer, former chair of the Council of Economic Advisers:

Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever (emphasis added).

She’s probably right that that’s the prevailing view, but then that’s why none of them forecast the Financial Crisis. According to their view, all we need to do is sit back and let the economy take care of us. On top of that, popular macro models like Real Business Cycles build into their assumptions the idea that all unemployment is voluntary. The same is true of Monetarism. Their models therefore have to argue that Great Depression, for example, was the result of masses of people deciding they just didn’t want to work any more. Do they think that’s really true? No, but they figure it’s close enough. There are also Neoclassical theories (New Classicism, for example) that assume that in the back of every person’s mind is a perfect model of the macroeconomy. Therefore, government policies can’t really have any impact because we will all anticipate its effect and alter our behavior accordingly. And these are popular views, not fringe theories. The fringe ones are those that predicted the Financial Crisis!

I can remember learning these things in my graduate macro classes and thinking that it was absolutely ridiculous. I even considered quitting the program. And it’s not just me–believe it or not, many Neoclassicals feel exactly the same way! Take this quote regarding graduate student attitudes at top PhD institutions (this journal is actually ranked #9, by the way):

In the interviews, macro received highly negative marks across schools. A typical comment was the following: “The general perspective of the micro students is that the macro courses are pretty worthless, and we don’t see why we have to do it, because we don’t see what is taught as a plausible description of the economy. It’s not that macroeconomic questions are inherently uninteresting; it is just that the models presented in the courses are not up to the job of explaining what is happening. There’s just a lot of math, and we can’t see the purpose of it” (Colander, David. “The making of an economist redux.” The Journal of Economic Perspectives 19.1 (2005), p.180).

The author goes on to explain other student frustrations with the macro classes, finally concluding, “In short, the macro that is taught to the students in the core has lost touch with both policy and empirical evidence” (Colander 2005, p.196). This sentiment echoed by James Galbraith, who argues that today’s economists are busy with their own little puzzles and don’t really care much about macroeconomics or economic policy. He blames, among other things, the hierarchy of journals discussed above.

I also mentioned above that little effort is expended in explaining the very sector that imploded before our very eyes in 2007-8. Again, you don’t have to take my word for it. They admit it:

The Great Recession, with its origins in the financial sector of the economy, highlighted limitations of existing intermediate macroeconomic models (de Araujo, O’Sullivan, and Simpson, 2013, p.75  de Araujo, Pedro, Roisin O’Sullivan, and Nicole B. Simpson. “What should be taught in intermediate macroeconomics?” The Journal of Economic Education 44, no. 1 (2013): 74-90).

In addition, Dirk Bezemer, the author of the above article analyzing which economists “got it right,” concluded that not only did those individuals take much more explicit account of financial factors, but that those aspects of their models could not simply be tacked on to existing ones because “most of these elements are incompatible with core tenets of the neoclassical paradigm” (Bezemer 2011, p.15). Let me close this section with a passage from Colander, et al. (2009) that is worth quoting at length:

The global financial crisis has revealed the need to rethink fundamentally how  systems are regulated. It has also made clear a systemic failure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors—including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession (Colander, David, Hans Föllmer, Armin Haas, Michael D. Goldberg, Katarina Juselius, Alan Kirman, Thomas Lux, and Birgitte Sloth. “The financial crisis and the systemic failure of academic economics.” Univ. of Copenhagen Dept. of Economics Discussion Paper 09-03, 2009 p.2).

The only place where I would take issue is in the first sentence. There are already models that don’t commit these errors.

5. There’s no incentive to fix those dysfunctional theories

Mainstream macroeconomic models suck. This is not just the opinion of detractors, but of many within the broader confines of Neoclassical economics (especially Neoclassical microeconomists). They assume away the key problem in macroeconomies from the get go (i.e., unemployment) and as a consequence their analyses really don’t need to address anything messy like financial systems. So they don’t. This is not to say that they are not carefully constructed, complex, and internally consistent. Unfortunately, carefully constructed, complex, and internally consistent models based on false premises come to incorrect conclusions just as much as simple, straightforward models based on false premises. It just takes longer to get there and it’s harder to see what went wrong.

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Nor is there truly an incentive to fix this given that a) we are writing for each other and b) those affected by our policies can’t really understand what is being said. My promotion depends on what journal editors and referees–my sibling economists–think of my arguments and not whether the theories are applicable to the real world. As suggested above, you can have a fabulous career and never once write anything for anyone other than your colleagues, near and far. If those top-ranked journals aren’t insisting on more relevant macro models–and they aren’t–then there is no incentive to change what’s already being done. And that appears to be exactly what is happening.

Conclusions

The terrible bottom line here is that the school of thought that encouraged the idea that the financial system could properly price subprime derivatives is the same one that assumes the economy fixes itself and we don’t really need to pay too close attention to the banking sector. They also brought us the view that exporting jobs to China won’t really hurt us (remember, they assume we return to full employment automatically), we can allow merger after merger and not experience a decline in competitiveness (you know, like in health care), austerity measures help fix economies (they’ve done wonders for Greece), tax cuts for the rich increase investment (they actually increase saving, which lowers firm sales and thereby lowers investment), education needs to be privatized (so the poor get excluded), etc, etc.

Of course, Neoclassicism also does not have a monopoly on bad ideas, either (although their macro ones are pretty bad). The problem is that there is no incentive for communication and cross fertilization among different schools of thought, even when there is substantial evidence for the failure of one approach and the success of another. Rather, we have a strong case of institutional lock in. Creativity is discouraged and our insularity has allowed macro theories based on the idea that economies fix themselves, the financial sector is unimportant, and there is no such thing as involuntary unemployment–ludicrous to anyone outside my profession–to survive. Actually, to thrive.

There was a very clever Saturday Night Live skit, “Black Jeopardy,” that played on the fact that some of the core concerns of both Donald Trump and Hillary Clinton supporters are really the same. They are poor, confused, and scared. They are also very mistrustful of a system where they don’t think they can get a fair break. Unfortunately, from my perspective, neither candidate is going to fix that. Until the ideas coming from the ivory towers are aimed at solving macro problems and not just getting another publication, we’re screwed. As John Maynard Keynes observed in the General Theory:

“…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else…But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”

The longer I live, the more I realize how right he was. And the more scared I am because I don’t see it getting fixed.

Originally published here.

2016 November 3

 


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  • Dick Burkhart

    Neoclassical microeconomics sucks just as much as macroeconomics. Many basic assumptions are blatantly false in both cases. Just read Steve Keen’s fabulous book on “Debunking Economics: The Naked Emperor Dethroned”, Keen being one of the few economists who did predict the crash of 2008 using mathematical models, simply by adding a banking sector and paying attention to debt.

    To see how to do proper mathematical economics (without false assumptions), just study “complexity economics”, one of the schools of economics not cited by Dr. Harvey. A good introduction is Eric Beinhocker’s “The Origin of Wealth: The Radical Remaking of Economics and What It Means for Business and Society”. An even more neglected, but necessary, aspect of economics is “biophysical economics”, which is based on the origins economics in the natural sciences, especially energy and thermodynamics. For example, by far the simplest way to get a good grasp of global economics is to the net energy, especially the net energy from oil. Another area not mentioned by Harvey is “behavioral economics”, such as in the book “The Moral Economy” by Samuel Bowles that I’m reading right now, which gives the lie to the foundations of micro-economics.

    Finally, we have some outstanding examples of how to do good economics in the real world: Just study the Scandinavian countries, a good read being the new book “Viking Economics” by George Lakey. In addition, I think economists overrate themselves. I see bad economic theory in the US as primarily the result of escalating economic inequality and its associated plutocratic governance, which needs an ideology to justify itself and as a defense against challengers. It’s no accident that Piketty’s work came out of France, not the US, or Keen’s work out of Australia.

  • blackdogsailing

    “What happened to the decades of post-war growth when each of us could safely assume that we’d have a better standard of living than our parents?”
    Show me an economist who will admit that the ‘standard of living’ we westerners had is unsustainable, is rapidly destroying the ecosystems necessary for human survival.

    “The problem is that there is no incentive for communication and cross fertilization among different schools of thought, even when there is substantial evidence for the failure of one approach and the success of another.”
    These shouldn’t just be schools of ‘economics’, clearly. These so-called smart people have their noses in the weeds and consistently fail to see reality.

    • Dick Burkhart

      Right on!

  • Duncan Cairncross

    Interesting article – but the author seems to miss the actual root cause of this situation in the USA

    The problem is “tenure” – or more accurately it is lack of “tenure” that causes the problem

    If you have a metric that you “have to meet” or else you lose your job then naturally you will concentrate on that

    In the “Rest of the World” – people cannot be terminated for no reason – effectively we ALL have tenure – people who perform badly can still be sacked – its not that difficult but you do need to
    (1) Tell them what they are failing at
    (2) Give them a chance to fix it
    (3) – If they don’t – goodbye

    To me it is bloody silly to have academics who have to justify their existence by the amount that they publish – surely some more flexible metrics can be found

  • dilgreen

    Of course, it’s much, much worse than this. The article says nothing at all about power or hegemony. The notion that economics is a neutral discipline, only serving us poorly because it is plagued with poor theories due to internal structural issues like which journals count towards tenure is an astonishingly navel-gazing attempt at explication of the current inability of macro-economics to address economic malaise. Is the author simply trapped in a larger, more insidious version of the trap he is describing?

    Yes, the models that macro-economists use are crappy (applying poorly adapted reductionist C18th science modes of thinking to an inherently complex scenario involving the desires of billions of humans is a deeply flawed proposition for starters).

    Yes, the impossibility of conducting controlled experiments means that even if reductive macro-economic models were appropriate, they could hardly be tested.

    Yes, the fact that reliable experimental results cannot be adduced to refute accepted theories turns the inherent conservatism of the tenure system into a stranglehold of outdated ideas.

    All of this is true.

    But even if macro-economics were a proper science, with effective insights and provable results, it would still have the misfortune to be the discipline most directly relevant to the predominant current means of acquiring and storing accumulated power – to capitalism and to money.
    Which means that only theories, approaches, insights, suggestions and policies that do not undermine those who currently have power will ever be adopted.

    Worse still, directions of investigation which tend to undermine the position of those with power will be blocked – not just systematically, but also structurally (publications and tenure), accidentally (perfectly well-meaning people will simply not understand them because they seem stupid from the current perspective), benevolently (when the professor points the student away from heterodoxy, knowing it will likely harm their career), without even mentioning personal ambition or active desire to bury approaches which are threatening.

    Dick Burkhart’s mention of ‘complexity economics’ is encouraging. In various disciplines now, from climatology to physics, and even history (https://www.newscientist.com/article/mg23230950-600-the-database-that-is-rewriting-history-to-predict-the-future/), people are using computer techniques to build navigable, non-reductionist models of complex systems. These have the potential to give rise a new scientific method which can ascribe at least probabilistic, parameterised ‘truths’ to aspects of irreducibly complex systems.

    Economists have the opportunity to begin building agent-based networks which can believably be brought, step-wise, into greater and greater accord with real conditions. This would also allow us to limit to the very limited practical use-cases the game-theoretic approach which so spectacularly fail even to approximate human behaviour, and bring the insights of ‘behavioural economics’ into the picture with the deep relevance it (obviously) has.

    Then we might be able to think rationally about the choices of the elites. Economists might approach the position of climate scientists!

    Which last thought probably explains why all these ideas are so marginal….

  • John Elder

    Being just an old engineer in retirement puts me in a unique position: an unbiased observer of a semi-science that is on the rocks. My view of economics is that there are clearly no universal laws, and even no statistically reliable laws. Until such laws are discovered, the only feasible approach at present is computer simulation.

    (1) Economics is the study of wealth.

    (2) Wealth is an accumulation of assets by individuals.

    (2) (a) ‘Individuals’ include corporations, governments, banks, funds, as well as real people.
    (2) (b) An asset is anything that can be given value. .
    (2) (c) The value of an asset is the amount for which it can be sold.

    The are several types of asset owners and several types of assets. The first job of economics is to define the the types of assets and the types of owners.

    The definitions of assets and owners must be made with an eye on the data that will be used to calibrate and verify the models. The Federal Reserve Board is perhaps the primary source of macroeconomic data in the US.

    (3) The flow of assets among owners is a network problem. Given m asset classes (types of links) and n owners classes (nodes), we can expect a maximum of m(n!) links. For n = m = 10 that is about 36 million possible asset flows. Clearly most links are not needed. Which are needed will be determined by the size of the flows, since flows below a certain critical level can be ignored in the model. The major links need to be identified and modelled.

    If I were an economist, that is where I would be working right now, using the FRB data.

    Does this make sense to anyone?

  • David Abrams

    Is this really a problem restricted to one discipline? It seems like most divisions of academia have this.

    • Hector Sanchez

      Yes. They face the exact same problem.

    • stephengentle

      You are correct, to some extent – especially the ‘publish or perish’ curse. But it is especially, exceedingly bad in economics. While physics, chemistry, engineering, medicine etc. have all still managed to advance despite having some of the same problems, Paul Romer puts it bluntly in his recent paper – “The trouble with macroeconomics is worse. I have observed more than three decades of intellectual regress.”

  • Everything in the article is true enough, and still manages to miss the most salient point of our time.

    What Dick Burkhart writes is also true, Keen and Beinhocker are both worth looking at, I have a copy of Steve’s Minsky on this laptop, and many of Eric’s articles – which I have read.

    And still, both of them fail to grasp what is driving us into severe risk territory.

    Exponential growth in automation is the key.

    It is what make blackdogsailing’s comments on standards of living false.
    It is not the standard of living that is the problem, it is the technologies we employ to deliver that standard of living that give us the issues we have.

    Exponential technologies allow us to double productivity every year, but that is too fast for the needs of capital, so to slow that down in practice we have a vast array of legal and financial mechanisms that slow progress and increase profits for the major holders of capital. Economically, it is much more profitable to keep existing profitable polluting technologies than to invest in newer cleaner technologies – at some level. This is a profound “drag” on development.

    Barriers to entry have always been common, and usually disguised either as “standards” sold as some form of “health and safety” or “education” issue, or as some form of “Intellectual Property” (IP) laws. They have been with us for many centuries, and they are proliferating at present.

    We could, relatively simply in the engineering sense, develop automated technologies to deliver a high standard of living to every person on the planet, and at the same time reduce the environmental and ecological “footprint” of humanity substantially, yet by the definition of the incentive structures in our scarcity based market system of valuation, there cannot be any profit in doing so.

    Thus the abstract notion of value (money) that served us so well in times when the majority of goods and services really were genuinely scarce, now becomes the greatest threat to the potential of abundance for all in an age where automation really can deliver such a thing, but by definition, doing so reduces the exchange value (market value, money value) of all such goods and services to zero.

    Automation, and the abundance it can deliver, are now directly in conflict with money as a concept.
    Human needs are the current casualty.
    Exponentially increase existential risk is the outcome, as injustice radicalises increasing numbers of individuals.

    And I acknowledge the very many levels of information processing that economic systems do that both von Hayek and Friedman and others have identified; and alternatives are not technically difficult to develop.
    Stable transition is the issue.
    Awareness at many different levels is required.
    The greater the levels of awareness, the lower the levels of risk.

    It does seem entirely possible that this may be one of the “great filters” that is why we are not surrounded by hordes of sight seeing aliens.

  • MigT

    Neoclassical economics tells the rich and powerful what they want to hear. If we scrapped journals and tenure tomorrow, they’d just find some other way to make sure their shills influence policy.

    Good article though.

  • Not the economics discipline per se, but its organization and ‘paradigmatic’ dogma are the problem.

    As Hayek, Popper, Schumacher, Schumpeter, Smith pointed out: diversity of knowledge gained in local, small trial and error approaches (vs. large, overly centralized, complex and monopolistic ‘all-knowing’ organizations) is crucial as input to economic and political decision-making.

    There other economic schools and concepts than ‘the neoclassical school’ – as the article describes. You will need some kind of economics even in the future!

    If you want to promote realistic solutions and thus change, you need to be precise also in analysis and marketing. Otherwise, the solution will not be accepted by the stakeholders and your efforts in vain.

  • Peter Mersch

    I agree with most of your points, especially with your remarks on the scientific publication process. In some scientific disciplines the situation may even be worse, eg. medicine.

    One problem is that new scientific work is judged by competitors. This is like judging the singing of the nightingale males by other males instead of their females. The method could work if all participants are fair, but not if some of them are cheating. As scientific resources (jobs, public attention, research funding, …) are scarce science is very competitive today (scientists are “comparative competency loss preventing systems”). It is therefore very likely that at least some scientific referees will be cheating.

    We know from the Internet that anonymity encourages cheating. There could be an improvement if authors could request, that the scientific opinions (just the texts, not necessarily the names of the referees) are published together with the rejected work on the home page of the scientific magazine. In any case the transparency of the scientific publication should be improved.

    Now the problem: if 90% of humans are Catholic, then journals from that religion will, by default, get cited more often.

    Replace Catholic by ”not a native English speaker“ and you may understand how big the problem usually is for those who do not live in GB or the US.

    a key problem facing our country is economic stagnation. The middle class is suffering, private-sector debt is weighing us down, government services are being starved of income (especially in education), and full-time jobs with a complete range of benefits are few and far between. What happened to the decades of post-war growth when each of us could safely assume that we’d have a better standard of living than our parents? That’s hard to do when you are living in their basement, trying to pay off your college debt.
    (…)
    What happened? What mysterious force knocked us off track?
    It is my contention (and that of many of my colleagues) that the fault lies not with the rich, not with corporations, not with China, not with the Illuminati, not with Al Qaeda, but with the economics discipline.

    In principle I agree with that. What is missing to me is the evolutionary perspective. I think there are some other main reasons why especially the middle class is suffering or eroding and this is – fasten your seat belts please – gender equality. You cannot explain the financial crisis with this, but the erosion of the middle class you can.

    Here are the arguments:

    (1) If both men and women usually go to work there are – compared to patriarchal societies – more people competing for well-paid and demanding work.

    (2) In western societies parents usually have to provide the resources for their own children. This may be fair for families in patriarchal societies where men usually go to work (to provide the resources) while women raise their children because no one has significant opportunity costs for children under this paradigm. This changes dramatically with gender equality. Now it is especially difficult for middle class people to raise children. They usually have a middle class income but very high opportunity costs for children, especially as their jobs require often a lot of flexibility and overtime working. On the other hand the resources for the children of poor families are provided by the welfare state (this is at least in Europe the case). This has led to a general shift of human reproduction from middle class to underclass. Especially larger families now exist predominantly in the underclass (poor, low employment, low educated).

    In “The Selfish Gene” Richard Dawkins explains this in the following way (p. 117; paperback 1989):

    What has happened in modern civilized man is that family sizes are no longer limited by the finite resources that the individual can provide. If a husband and wife have more children than they can feed, the state, which means the rest of the population, simply steps in and keeps the surplus children alive and healthy. There is, in fact, nothing to stop a couple with no material resources at all having and rearing precisely as many children as the woman can physically bear. But the welfare state is a very unnatural thing. In nature, parents who have more children than they can support do not have many grandchildren, and their genes are not passed on to future generations. There is no need for altruistic restraint in the birth-rate, because there is no welfare state in nature.

    It is interesting that Richard Dawkins did not treat this case as a contradiction to his Selfish gene paradigm. Instead he declared the welfare state as “unnatural” (with the same argument he could declare honey bee colonies as unnatural too).

    (3) In human societies providing resources for children exclusively by its parents is a characteristic attribute of the patriarchal family structure. This attribute was not created by God. There is no need to keep it with gender equality.

    Unfortunately feminism has always fought against alternative solutions. Europe’s probably most influential feminist Simone de Beauvoir (“The Second Sex”, https://en.wikipedia.org/wiki/Simone_de_Beauvoir ) once argued strongly against any paid family work (Friedan, Betty (1998): It Changed My Life: Writings on the Women’s Movement. Boston: Harvard University Press, p. 397):

    No, we don’t believe that any woman should have this choice. No woman should be authorized to stay at home to raise her children. Society should be totally different. Women should not have that choice, precisely because if there is such a choice, too many women will make that one. It is a way of forcing women in a certain direction.

    Any prominent European feminist I know supports this view until today.

    (4) As I mentioned in another comment, all life is – from a physicist’s point of view – comparative competency loss prevention. In ancient societies women were primarily selected for their biological competencies (beauty, health, youth, sometimes intelligence). But in modern societies with gender equality they achieve a lot of cultural competencies (especially education). With these cultural competencies they are able to gain their own resources (independently of men or the state). Bearing and rising children would prevent them in reproducing (and keeping) their cultural competencies (which allow them to gain their own resources). That makes it extremely unlikely that well educated modern middle class women will have more than one or two children. Very often they stay childless. In the long term this erodes the middle class. In Germany (and many other countries) it has led to the extremely unsocial result, that the proportion of poor children (though total fertility is very low) under all births is increasing from year to year.

    One of the strongest supports for the above view comes from Clark, Gregory (2014): The Son Also Rises. Surnames and the History of Social Mobility. Princeton, NJ: Princeton University Press. On page 126 the author summarizes:

    The preceding Chapters explain why social mobility is lower than traditionally measured. But why are mobility rates seemingly constant across very different social regimes? Here I conjecture that this is because status inheritance is indistinguishable in form from the inheritance of genetically controlled attributes. This is not to say that social status is determined genetically. But whatever drives it is, on the tests performed here, indistinguishable from genetic inheritance. Status may or may not be genetically inherited, but for all practical purposes, nature dominates nurture.

    And on page 128:

    However, suppose that even half of the variation in this generation’s income is caused directly by the variations in income in the parent generation and the effects of those family-income variations on investments in training and education. That is, assume that parent income matters as much as children’s abilities in determining outcomes. Those conditions preclude the pattern of correlations of measures of status across multiple generations that researchers are now finding. The correlations in measures like income should decline quickly over multiple generations. To get slow long-run mobility at the same time as fast short-run mobility, the great majority of outcomes must be attributed to underlying abilities. Income can play only a very modest direct role in producing outcomes if the process is to describe the low long-run mobility we observe.

    If family characteristics are to account for observed dynastic connections in status across as many as ten generations, they must be much more persistent between generations. The persistent element cannot be earnings, income or wealth, because these have been demonstrated to be fluid across generations within individual families. This is not to imply that resource investments in children have no effect on the outcomes of the next generation, but that effect must be modest.

    There is much evidence that a lot of psychological human characteristics are at least partially genetically determined (intelligence, creativity, energy, discipline, endurance, frustration tolerance, willingness to cooperate, initiative, …). If at least some of these characteristics are required to become a qualified middle class person, from an evolutionary point of view it is very likely that the proportion of those people who are not just able to make a good job but even to create new jobs has decreased in the next generation. And this is the problem.

    Unfortunately in social sciences there dominates the very common illusion that evolutionary theory is no longer applicable in modern human societies. But obviously it is.

    So what to do? I once made the proposal to create a new paid profession (primarily) for women to raise their own children. This does not mean that every woman with children will be paid, but only those, who make the mandatory education, apply for the job and get hired. All other would have to raise their children under the current conditions. I am convinced that as long as there is not such a job, equal rights for men and women are an illusion.

    Currently a qualified young woman can try to become a successful stock trader at Wall Street or even “the next Sasha Grey” and earn a lot of money this way. But she cannot say: “Our society needs more well educated, well-behaved children? Well, I am willing to do the job. But only if I am sufficiently paid for this extremely important task.” As long as she cannot say something like this there is no real gender equality. I am convinced that the current family structure is not fully compatible with female emancipation and gender equality.

    I once tried to publish the proposal in the scientific paper “Zeitschrift für Soziologie”. I received two scientific opinions on that, one was remarkably positive, the other remarkably negative (it contained all the “Mutterkreuz” gossip as to be expected). Because I am not paid by an institution for my scientific work (so I have a lot of opportunity costs for publishing papers in scientific magazines) I decided not to publish in scientific magazines anymore.

  • nowhere

    I seem to have lucked out with the three economics courses I took while pursing an education in accounting. The professors made a point of teaching about a wide variety of schools of thought, pointed out the limitations of each and made plain the limits of economics as a discipline. Perhaps this is because I was attending a smaller university. One of the professors also taught at UBC which, though it is a pretty large school by Canadian standards certainly isn’t as influential as the real elite institutions. Modern economics seems to be one of the few disciplines in which one can find highly influential members essentially saying: “Yes, that may be all well and good in practice but it will NEVER work in theory!”

  • kid_you_not

    Economics departments are essentially mouthpieces for globalists. I would love to unveil how the money is funneling in to them. Sometimes it is obvious. Take a look at the TAMU Mays Business college vision: “Mays Business School’s vision is to advance the world’s prosperity…..” Really? WHY? Why is a Texas state school concerned with “world” prosperity? What if world prosperity is at odds with national prosperity?

  • davey_jones

    When Henry VIII founded the Church of England he made sure that a core belief was that kings ruled with God’s favour. The C of E was at the same time religious and political.

    The modern equivalent to the C of E is the Church of Mainstream Economics, once again religious and poltical at the same time. Its message glorifies not God, but capitalism, globalisation, trickle down economics, free enterprise, free trade and the like.

    The priestly caste (aka Professors) of the C of ME work in Universities to clothe economics in mathematical formulae, to “prove”
    that:
    # Giving tax cuts to the richest will benefit the poor,
    # giving free government money to banks for fraudulent mortgages will benefit the economy, # moving jobs overseas will strengthen the economy, # reducing and privatising social services will strengthen the economy and # removing all oversight on business will strengthen the economy.
    And the final mathematical proof is that an economy strengthened by all these measures will increase the standard of living of all in the country.

    The C of ME is funded by offerings from its most ardent supporters, co-incidentally those who have been enriched by its operations. And the priests themselves compete for lavish prizes for their efforts, including prestigious Chairs, Nobel Prizes, free trips to speak at conferences in tropical places, praise and invitation to write in the media, invitations to the White House etc etc.

    The heretics of the C of ME are dangerous to the religion, as heretics are to all religions. We no longer have burnings at the stake, now heretics are derided by their colleagues and laughed at by the media, languishing away doing unfunded research. It is not an attractive career option, being a heretic.

    The problem with the C of ME is that the people have been waiting for 50 years for trickle down, globalisation, cuts in social security, financialisation of health and social services etc to give them their share of the wealth. And the opposite has happened. Their wealth has trickled upwards to the already haves. The middle class is ceasing to exist. So, hello Donald Trump.

  • How did we get here?

    Take an institution like a university or the military. Now move forward in time.

    1. Successful people are under rewarded.
    2. The mediocre and unsuccessful are under punished.

    What tends to happen over a long period of time is that successful people leave and the mediocre/unsuccessful people stay. Gradually the mediocre people take over.

    In order to make this work you need a long period of stability. Then cracks appear. Then there is a big financial crash. Finally, there is a big war.

  • Ștefan Pădureanu

    This sounds like economists are just gaming the system and not really caring about the repercussions. I always believed that economic theories are nothing more than Dungeons & Dragons rule books but this article truly scared me. Not only is macro economy like D&D but the dungeon masters are only talking to each other, in a language nobody else understands!

  • Lev Shakhmundes

    And we should also blame the meteorology discipline for bad weather.

    • wysinwyg

      Some of the boundary conditions for the operation of the economy are physical — the cost to extract and refine a barrel of oil is determined by physical parameters. But many of the boundary conditions are social or cultural rather than physical. The repeal of Glass-Steagall changed how the economy operates (for good or ill can be debated), as do the details of contract law and many other legal and cultural considerations besides.

      Congress cannot repeal temperature forcing by carbon dioxide and the fed cannot raise the barometric pressure by fiat just because it seems like it might be convenient to do so.

      On the other hand, Congress did demonstrably change the qualitative nature of the weather by passing the Clean Air Act of 1990, which created a market for several pollutants and reversed the acid rain crisis.

      So your analogy is bad. The political economy is obviously much more susceptible to human intervention than the weather given that the political economy actually consists of human interventions whereas the weather consists of atoms zooming around at various speeds. But even if we took your analogy at face value for the sake of argument, we’d have to concede that acts of Congress can affect the weather and that therefore meteorologists COULD be held culpable if they gave Congress bad policy advice.

      • Lev Shakhmundes

        Hi, wysinwygwho?

        It’s not bad, it just was said with my tongue in cheek. Speaking seriously, the two sciences have in common the humongous multi-dimensional systems to deal with, where even relationships between variables are changing in time, and often probabilistic. That’s why forecasting within either system is far from being satisfactory. I do not have qualms with you, man/woman. But I do with the economists in professorial positions who Blame The Economics Discipline For Today’s Problems. My word for those is if you think that economics is a failed profession, why don’t you fire yourself. There is one entity which can rightfully be blamed for the problems in our country. Guess who? If you have a good guess, please get back to me.