Controversial Economics

from Peter Radford

A number of us have grown tired of shouting – in my case endlessly repeating myself – about current economic policy. I am sure we have worn out our welcome. We sound shrill. We sound partisan. We risk making ourselves irrelevant because our repetition doesn’t seem to add to the debate. Indeed we appear to be destructive and not constructive critics as our elite and leadership struggle to steady the leaking boat that is our economy.

I do not apologize.

Not one bit.

I do not apologize because this is not some arcane bureaucratic squabble being played out in board rooms or the conference rooms of big businesses. Nor is it the polite, but nonetheless cutting, discourse within academia. It is the denouement of a movement. It is the end game of a clash begun in the height of the Great Depression, which like a dormant virus, has sprung back in a more virulent and potentially dangerous form. 

Back during that time, in the 1930′s, the intellectual world was heavily engaged in practical politics. It was a time of momentous change, and depending on your point of view, either danger or opportunity. The collapse of western economics was a threat, not just to political stability, but to the theoretical framework that lent credence to the governing principles that fed into policy. Theory and practice were being tested. And when policy failed the need to articulate new theory became not just evident, but urgent.

It was within this heated forum that modern economics was formed. It may have taken a while for the various alternatives then developed to to be formally worked out – to reach their final specification – but the seeds were all sown. Everything that came later was an effort to clarify or to synthesize the ideas presented during those years.

Thus we recall the great arguments over the feasibility of central planning. We see for the first time the argument that economics is strictly interested in allocation. We see the Keynesian revolution and the emergence of uncertainty as crucial, and his use of aggregation in methodology. We see the beginnings of the modern Austrian school and its emphasis on entrepreneurialism. The list goes on. This was a high point for economic theorizing. The arguments were both public and severe. Great divides opened up that have never been bridged adequately despite the efforts in the post war era to accommodate pieces of Keynes within the classical project. The divisions were so deep that the landscape of the social sciences generally was re-written: sociology peeled away and reserved certain aspects of behavior, very often economic behavior, for itself.

This huge rewriting of what economics was and what its focus should be was the second such upheaval. The first being the so-called marginal revolution of the late 1800′s.

It is my belief that each of these two sea-changes were driven by political events and pressures as much as by developments within economics alone. The great marginalist thinkers sought to begin the cleaving of economics from its political economy roots. They wanted to make economics scientific. The great revolutions in hard science of the mid and late 19th century inspired them to establish economics in that same vein. But they were also reacting to the social upheavals of Europe. The revolutions and unrest of 1848 called forth the need for an economics based on more scientific, positive, precepts so that it could claim to be untainted by attachment to a political perspective. Even though it was.

In the 1930′s the same pressure built. The Depression brought capitalism to the brink of extinction. The rise of fascism and communism as apparently successful politico-economic alternatives, and the obvious destitution that laissez faire had brought to tens of millions of people, created the context for new ideas. Capitalism needed a defense. Just as in the marginal revolution economics rose to the challenge. It doubled down on its move into scientism in an effort to present itself as apolitical. It embraced mathematics even more than before to create a greater aura of rigor. It went to extraordinary lengths to make entrepreneurial activity not just important, but essential. These efforts fractured the subject in the way I described above. Different schools of thought emerged with an emphasis on different solutions and with different degrees of willingness to delineate themselves within the capitalist camp. All of them sought to avoid too much of a political taint. Even though they were so tainted.

Thus, in each great upheaval within economics one of the forces at work was to protect and carry forward the central belief in the efficacy of capitalism and its various intellectual core components. Each strand of thought had its own emphasis on those core components. Each had an attitude towards the state. Each adopted a view of individual behavior. Each incorporated more or less mathematics. Each varied in the space it gave to institutional structures. But underneath them all was the driving force that private enterprise was the essential engine upon which we should most rely for the generation of wealth.

I, of course, have done massive injustice to the history of economics in this highly simplified narrative. The divisions that carve economics apart are extraordinarily deep. But very often they are political in their origins. They creep into economics only after having been formed in politics. Economics is hopelessly ideological.

Thus the Austrian school agrees with the neoclassical camp that government intervention in an economy is almost always a negative effect. The Keynesians adamantly disagree.

But the Austrians also embrace uncertainty. That splits them part from the neoclassicists who build their theories on presumptions of varying degrees of certainty. The Keynesians have uncertainty at the core of their ideas, so they agree on this with the Austrians.

Money disappears from neoclassicism which is, essentially, a theory of barter, while Keynes brings money into the center. But he, rather curiously, ignores banks.

The Austrians, via Hayek, have a great deal to say about the centrality of knowledge and its evolution which makes them close to evolutionary economics and more comfortable with behavioral economics, yet they have a naive view of production and entrepreneurial activity which means they fall short of embracing complexity and thus have nothing much to say about the modern firm.

Which is odd, since institutions play a greater role in Austrian theory than in either Keynes or neoclassicism. This leaves new institutional economics straddling the gap between neoclassicism and the Austrian school.

Confused?

Of course you are.

Within this enormous range of thought are the seeds of a more comprehensive synthesis, but none has emerged.

The really strange aspect to these controversies is that it was the school with the least relationship to actual economic activity – the neoclassical school – that dominated recent history. Perhaps this was inevitable. Perhaps it was precisely because the neoclassicists ignored vast swathes of reality and adopted an extraordinarily narrow view of human behavior that they were able to keep up some momentum and rise to the top. Everyone else was bogged down in the complexity of actual economies. The neoclassicists carried on in a series of ever decreasing circles, narrowing down their borders rather than tackling the tough issues. Eventually they could claim to have resolved everything. Of course they had, their goals were so limited, and their assumptions so ascetic and restrictive, they had assured themselves of success. They created a great big tautology. If you make a series of pro-market asumptions, sooner or later your theory will claim markets are magical. The simple world described by neoclassical economics bears no relation to the world you and I inhabit. Yet they presume to transfer what they glean from their models and provide advice to policy makers everywhere.

Their work has a strangely supernatural air to it. It vaults over problems and establishes itself midair. Where it cannot explain, it assumes. Where it meets complexity, it simplifies. It makes the uncertain certain and the irrational rational. It eliminates time. It ignores space. It floats free of geography and is utterly bereft of cultural and institutional differences. It tolerates no power structures, and eliminates social constructs. It is neutral. It is positive. It is free.

And by so being it is inevitably ideological.

Which brings me back to the beginning.

This orthodox economics set out to be the most apolitical ever devised. It was simply the study of how a certain kind of system allocates resources efficiently. To an Austrian, Keynesian, or any other kind of economist, practically every word in that sentence: “system”, “allocates”, “resources”, “efficiently” are contentious. They are laden with preconceptions of the world and values that cannot be left aside. To pretend that these words are value free, and that economics has this arrived at an apolitical nirvana, that its theorizing can be teased apart totally from politics, is just nonsense. It denies reality. It denies humanity. Worse: to define them antiseptically as if they can be cleansed of ideology is to treat reality with contempt.

An economic system is not just a piece of machinery humming away. It is seething mass of humanity. It is a collective enterprise. It is the outcome of millions, billions, of individual actions every moment of every day. It is in ceaseless motion. It is intractable and opaque. That it may or may not allocate efficiently is happenstance. That it effects every one of us is undeniable. That it consists of us, variously competing and cooperating, as we try to match our ever changing means against equally volatile ends, implies that it is irrevocably political. Choice can never be perfectly value free.

So here we are in the midst of our crisis once again confronted by the question: if all economics is inherently political, whose interest does orthodoxy serve? After all it provided the core of thought behind the shareholder value based method as taught at our business schools; it informs the models used by the banks to manage risk; it is the essence of the argument presented by some to dismantle the New Deal; it is the basis upon which profits are protected over to wages; it is the underpinning for deregulation and the shrinkage of government; it is used to justify austerity to protect creditors; it also justifies the reduction of wages as the palliative for recession; it advocates that all unemployment is voluntary; and it calls for tight money in the face of incipient inflation even during a period of high unemployment.

And this is apolitical? It is scientific? It is positive, not normative?

And when I argue against this I am introducing politics? I am biased in some way and they are not?

The last two great convulsions in economics sought to eliminate politics in order to create a theory that was immune to the charge of ideological bias. That effort failed. It failed totally. It failed predictably.

Perhaps this third convulsion will set us on a different course: the reversion back to a more comprehensive social science that accounts for all the features of the social activity that is economic transacting within a cultural, geographical, institutional, epistemological, technological, and, yes, political context.

Pure economics is a failure. Long live political/social/cultural/economics.