Thought for the day: Neoclassical economics is specific not only in ‘scientific’ but also in ‘ideological’ terms.
from Peter Söderbaum
Mainstream neoclassical economics is a standardized language that claims to be helpful in understanding the world. Standardized or not; each language points in specific directions concerning relevant objects, relationships, processes etc. to focus upon. The language is socially constructed for specific purposes, for instance to deal with specific problems in specific ways. Neoclassical economics, as an example, is specific not only in ‘scientific’ but also in ‘ideological’ terms. ‘Ideology’ stands for a ‘means-ends philosophy’ and is not limited to more or less established political ideologies like socialism, social democracy, social liberalism or neo-liberalism. In this sense, neoclassical economics clearly qualifies as an ideology and as such is more specific and precise than the political ideologies mentioned.
Neoclassical economics tells us about the relevant actors in the economy (consumers, firms and government); about how to understand markets (supply and demand of commodities and of factors of production); about decision-making (optimization) and efficiency (usually a monetary concept or at best cost-efficiency). This way of understanding economics is clearly not neutral but specific in ideological terms. Gunnar Myrdal has argued that “values are always with us” (1978 p.778) in social science research and in my understanding “economics is always political economics”. This suggests that the neoclassical attempt to develop a ‘pure’ economics from about 1870 onwards as opposed to ‘political economics’ (which was the language used by classical economists) was a mistake. At issue is now whether neoclassical theory as a conceptual framework and ideological orientation is useful in dealing with the ecological crisis and/or the financial crisis.
The ideological features of neoclassical economics also suggest that it becomes relevant to inquire into the similarities between neoclassical economics as ideology and the established political ideologies referred to. Has neoclassical economics contributed, for example, to make neo-liberalism more legitimate? Alternatives to the neoclassical conceptual framework and paradigm, such as some version of institutional economics, feminist economics or ecological economics are equally specific in ideological terms but may perform better in relation to the ecological crisis and/or the financial crisis. This is – again – a matter of subjective judgment. The important thing now in economics is to open the door for pluralism and competing (or complementary) theoretical perspectives and approaches.
From: Peter Söderbaum “A financial crisis on top of the ecological crisis: Ending the monopoly of neoclassical economics”, real-world economics review, issue no. 49, 12 March 2009, pp. 8-19, http://www.paecon.net/PAEReview/issue49/Soderbaum49.pdf
“The language is socially constructed for specific purposes, for instance to deal with specific problems in specific ways.”
Yeah, that’s an impressive claim.
Isn’t Peter Söderbaum’s language socially constructed for specific purposes, for instance to deal with specific problems in specific ways? Of course it is, as our brilliant author notes: “Alternatives to the neoclassical conceptual framework and paradigm, such as some version of institutional economics, feminist economics or ecological economics are equally specific in ideological terms.”
What kills the deal is the kicker at the end: “but may perform better in relation to the ecological crisis and/or the financial crisis. This is – again – a matter of subjective judgment.” Why should we have any reason to believe they may perform better, especially if it is a matter of subjective judgment? – F
That neoclassical economics is ideological is not controversial. It was conceived in the midst of the early 20th century as a modification or extension of classical economics at a time when capitalism was in need of a defense both against failure, during the Depression, and alternatives, as in the Soviet Union and various Marxist experiments. Its architects sought to make it appear “scientific” or “positive” to mask this ideological content. They succeeded only in delivering an enabling intellectual foundation for neoliberalism later in the last century.
The problem with all hyphenated economics is precisely that it is hyphenated. None can claim to be scientific. All are motivated by a pre-existing political view. Whether this is avoidable is arguable given that the subject matter is embedded in human society.
One example: neoclassical thought centers on “the market”. Yet a market is simply a group of people. It is not a force like gravity. People, and thus markets, can change their minds. They can be limited by regulation. They are vulnerable to mistakes and constrained by social, institutional, cultural, technological, and cognitive biases or prejudices. The list of deficiencies goes on. Yet orthodox economists work with markets as if a gravity-like force was at work. Why? Because they want to justify a point of view: that markets are efficient allocators of resources. They are not, they are human artifacts, not one of which is perfect.
@ Peter Radford
Totilas has gone. Last thursday, this ‘dressage world champion extra ordinaire’ has been sold, for 15.000.000 Euro, to a large German stable. Accidentally, my students and me visited his ‘commissionaire’ (french for ‘horse trader’) the week before. She told us how, 35 years ago, she already made bets with a friend which horses would do best at horse shows. Soon, she was trading horses and acquired the horse skills to spot talent and to improve dressage horses and the people skills to buy and sell in this market which, as you might know, is not the least emotional of all markets. She has established her own company and builded ‘a name’ – which took decades. She is present at all mayor horse events around the world (the last one recently in Kentucky, for a week, as that’s where the customers are) and, besides training horses and leading a company, drives thousands and thousands of kilometers to her clients. Every evening, she makes a ‘To do’ list for her employees. That’s what it takes to become the ‘market maker’. One scandal, and it will all be over – ‘trust’ is what she needs (‘trust’, isn’t that daring to depend on other people in spite of uncertainty?).
Markets do not function by themselves. On many markets (labor, houses, machines, what marketeers call ‘specialty goods’, groceries (think of investments in malls)) it requires huge amounts of time, skills, investments and the like to make transactions happen. The market process itself (matching demand and supply) is far from efficient.
Which is why the obsession with markets must stop. Coase hit the nail on the head decades ago: if markets are so perfect, how come we have firms?
So much of the economy exists within enclosed spaces like business firms. The reason? Markets are weak at conducting anything but the most simple transactions. Anything involving complex production through time, complex financing, or complex infrastructure has to take place outside of a “pure” market. Uncertainty totally destroys the simplistic vision we learn from the textbook. Which is why the textbook assumes a magical world where uncertainty is banished. Parenthetically, this is also why the textbook has such an awful treatment of business in it.
When we simplify a market by eliminating all the things that make it function in order to examine its “processes” we have eliminated the market itself. There is nothing left to examine. Hence there is no “market process”. So the phrase “the market process itself (matching demand and supply)” is simply another way of saying “the relationships between the institutions, networks, people, technologies, cultures, knowledge and geography within which exchange takes place”. Supply and demand are descriptions of the outcomes of complex processes. They result from the search each of us undertakes in order to survive and satisfy our needs, however imperfectly, within the constraints imposed by those relationships. In this vein, tell your students to read Braudel’s “The Wheels of Commerce” to understand the emergence of markets in the real world.
Put another way: markets exist because our search implies exchange. And exchange is one way we cope with asymmetrical resource endowments and other forms of uncertainty. Markets are insufficient when our search includes complex processes and are thus superseded by superior transaction management technologies such as the modern business firm. Thus much economic activity takes place before a product even arrives in a market space.
Given the asymmetry of the initial conditions we are all impelled to into such a search. That implies constant change. The economy thus becomes a giant never-ending series of configurations of the relationships that result from each iteration of our search. It is never complete because the likelihood of arriving at a symmetrical distribution is so infinitely negligible that each configuration impels the calculation of a new one. Supply and demand are labels given to elements of that search – I think there are more apt labels. But the entire structure of that search is full of other elements, such as the constraints I listed above, and the processes of production etc, and it is that entirety that I prefer to call an economy. Of which, markets are just one small part.
@Peter Radford,
Dear Peter,
I do agree with your line of thought. A nice example comes from the post of Ietto-Gillies, on this blog:
“Weiner et al (2001: 19) report that in the US some 12-15 per cent of budgets go on administrative costs: they reckoned that the US system spent 100 times more per patient on administration than the British NHS which, at the time, was mostly public on both the funding and provision sides.”
Following your line of thought, these high administrative health care costs in the USA may very well be caused because health care sometimes is very complicated for markets, which is why an inordinate amount of time has to be spent on paperwork and contracts between individual companies as well as between companies and clients. The market process itself – i.e. matching supply and demand, including negotiations, contracts and paperwork and admitting that people do make mistakes – is not inherently efficient or effective. There is of course much more to health care economics than just this and I do not advocate that all health care has to be nationalized – but leaving it as much as possible to the market does not seem to be a good idea either, for the reasons you mention.
P.S. – did you ever try to let students read a 700+ pages book?
Merijn: No I have no students, which leaves me free to make impractical assignments! My experience was all in business so I my perspective on economics is driven by what I found there. When I turned to reading economics I was shocked at the complete irrelevancy of what I read. A reasonably intelligent reader can absorb all the essential insights of economics within a short while. All without the mathematics, and all without exploring the nonsense that passes for theoretical economics. That leaves plenty of time to read more relevant and more interesting things like the Braudel I suggested!!
I am completely convinced that to be a good economics policy maker, or a good business person, it helps to ignore modern economic theory. Put another way: I am shocked at the way in which some of the so called “great insights” of economics are viewed by economists. Too many of those insights are simple common sense. Couch those simple statements in complicated math and economists think they’ve discovered something valuable. All they’ve done is show off their ability to make things complicated.
Meanwhile: good luck with your teaching. I do not envy you trying to convey something useful from the morass of uselessness that fills the textbooks. That you succeed at all is a wonder to me.