In times of crisis the predictions of mainstream economics persistently fail; alternative approaches to economics are required
The theme of crisis continually recurs in the SPERI political economy blog. This is a reminder of two things. First, ‘crises’ seem to be everywhere. The language of the extraordinary has become ordinary. Second, social reality is a process. The present is a perpetual threshold between what has been and what will be. We call on the past in terms of different attempts to shape the future and do so in the now. Social reality is complex and it both changes and transforms. However, there is nothing to suggest that the process must be benign or beneficial. It can be pathological. This is ultimately what it means to talk about crises everywhere: we seem to be living in an age where dominant ways of conceptualising, constructing and intervening in the world solve problems by perpetuating them. Problems are reproduced in new guises and/or with unintended consequences, which expand their contexts.
When Andrew Gamble states that the political economy problems we face are deepening, it is this to which he is ultimately referring. When Tony Payne, Helen Thompson and Colin Hay point to various limitations in current policy responses (austerity, balancing, quantitative easing, and financial stability) it is also this to which they are ultimately referring. Craig Berry appositely phrases the whole as a ‘crisis of imagination’. He is, of course, not simply suggesting we live in a free floating world of words and waking dream-like states. He is referring to the entrenched power of positions, elites and policy.
Significantly, the crisis of imagination is also the triumph of the status quo under some description. Yet one should not reductively suggest that social inertia is analogous to a Newtonian property of matter. Rather it is the consequence of what matters to those most able to shape the world. Problems are often also potential solutions somewhere for some powerful group: failure is their success, but this can be to the detriment of all. The flawed climate change agreements which ‘reflect the short-term interests and concerns of those with the greatest wealth and power’ illustrate this point.
Jamie Peck has something of this in mind when noting that neoliberalism always seems to be ‘failing forwards’. However, to most mainstream economists this ‘failure-as-success’ is irrational or sub-optimal in so far as it is failure, but ideal or desired in so far as it confirms a commitment to a theoretical framework. Brexit, for example, seems set to become a choice between two versions of liberalised trade with different foci rather than different fundamentals: Britain within the single market within the institutions of globalization, or Britain within the institutions of globalization. This is, of course, different than suggesting globalization (as an outcome) is a cause of anything. It is something to be explained. At the same time, neither version seems set to address the underlying problems that were exploited in the referendum of 23rd June: inequality, employment security, democratic deficits and social cohesion.
The tension between ‘failures’ in the real world and an always and everywhere relevant theoretical framing is central to dominant or mainstream economics thinking, and critiques of it. This tension raises two issues, which I will be addressing here and in Part II of this blog: the role of the economist and the nature of economics as knowledge. In general, knowledge is a social product. Ideas come from somewhere – they are part of projects. In this sense economics is no different than any other discipline. However, it is very different in many ways and this bears careful consideration because it is an integral part of the problem of a crisis of imagination.
Political economists such as Ben Fine or Dimitris Milonakis, social philosophers, such as Tony Lawson and sociologists, such as Marion Fourcade have done much to clarify what is different about mainstream economists. Unlike other social scientists mainstream economists consider it a primary aspect of their role to intervene in public policy, and they do so with a degree of unity and self-confidence that other disciplines lack. This unity is internally hierarchical, narrow and exclusionary. To a greater degree than other social sciences economists tend only to reference their peers (mainstream economists), only seek to publish and reference within a tight core of journals, and do so based on shared commitments regarding what constitutes legitimate economic method and theory expression. PhD production, hiring, firing, career progression, and curriculum and textbook development are closely tied to this process. The recent QAA benchmarking for Economics in the UK clearly illustrates this. Ironically, mainstream economics bears no resemblance to the free market that is basic to much of its theory.
Part of the problem stems from the sense that economics is the closest approximation to a hard (physics-like) science amongst the social disciplines. It is the most conducive to quantification, expresses itself through mathematical models, and has a core econometrics focus on data processed via analytical statistics. Mainstream economists self-identify as scientists in a social setting. This suppresses any genuine recognition that their work is science within, and of, the social (that it is value-driven in a value-based world where numbers are constructed, and models have context, which is as much ideological as ideational-representational). Mainstream economics is integral to political processes and yet has little sense of itself as political. This is deeply embedded in the dominant definition of the subject: ‘The science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses’. In a discourse of science this definition becomes one that restricts the economic problem to seeking optimal allocation of resources, and within this framing economists suppress the basic issue that an economy is a deeply normative component in the fundamental question of how we want to (how we should) live. For economists, a scientist provides evidence to settle argument rather than recognizes that argument shapes evidence. This is by no means to suggest that evidence is arbitrary (a fiction by any other name). Rather it is a reminder that theory has context and worlds are produced in ways that favour some over others and in ways that require us to question the nature of evidence (the goals, what is claimed, what is intended, what occurs and what is silenced).
Again, this situation is somewhat ironic since the suppression within economics is on the basis of a science that can never really be the science it wants to be, since its concepts, models and methods are all deeply problematic as adequate ways to investigate and understand the real world. This all undermines the nature of its evidence. Prediction based on analytical statistics persistently fails. This is especially true when predictions are needed most – times of crisis. Economists are very good at predicting the past, and few non-economists are aware that much of economics as econometrics is actually concerned with this. This is where the Taylor rule for central bank interest rates comes from. They are also good at fitting data to any current period of relative stability. But who needs a guide to what is not changing, which cannot express the vulnerabilities that the processes that seem stable are cumulatively creating?
In mainstream economics, many models and most theory are based on ideal assumptions that cannot exist and can never be tested: one need only consider the growth theory work of Paul Romer who has just been appointed chief economist of the World Bank. The point here is that by its own standards much of economics is a failure. It has systematically failed to produce any universal law-like findings qua science that consistently hold for actual economies, though it continues to assert and then ‘test’ its ‘regularities’. Its predictive capacity dissolves to ranges of ignorance in forecasting systems. It remains fundamentally unrealistic. It remains so despite its failures, and one should not neglect that its failures have actively contributed through theory, policy, and practice to cause spectacular harms, such as the global financial crisis. The mainstream economics response to its role in that crisis was fleeting rather than fundamental. Who could be expected to predict a two or three or more sigma event? Perhaps we should be a little less confident in our models…
Mainstream economics is a powerful discourse, an influential world of highly regimented imaginaries. It speaks a language of hard data, tests and necessary logics. This translates into a policy architecture whose fundamentals are never put at issue, despite the manifest failures of theory, and despite the real world consequences for how we live. This is a position of basic denial as a crisis of imagination, and one that helps to solve problems by perpetuating them. Austerity, for example, is exactly this.
Click here to read part II.