Comment of the week: Surely economics is, and economists are, better than this

Peter Radford commenting on The GFC, the Great Recession and three structural changes in the US economy

All these three speak to an underlying common theme: the widespread acceptance throughout the ‘elites’ within policy making, business, and academia of the meld between neoclassical orthodoxy and individualist politics to create a powerful ideology. This ideology enabled the structural changes you speak about.

It became taboo to question the kind of outcomes you mention because those outcomes were deemed beyond the remit of orthodox economics. We had to accept them as they were, as long as ‘markets’ were unencumbered by government or other institutional infringements, and as long as the public could be persuaded that government ‘was a problem’, to paraphrase Reagan. The neat fit between positive economics and anti-government politics was made complete by the Lucasian project, which seems purposely designed to me, as an outsider, to be unreconstructed laissez-faire in a mathematical disguise. 

The redistributive consequences of this intellectual and political triumph can hardly be a shock. Especially when we consider the depth to which that combined ideology permeated. It altered the way in which businesses run themselves, it altered the way banks manage risk and view their role, it altered the public’s view of social programs, and it altered the tolerance for inequality throughout society.

From my perspective and given these kinds of outcomes, ‘positive economics’ was anything but positive.

Within my own limited experience – in banking – this dogma was especially pernicious.

Having bought into the neoclassical market magic mythology, the banks went about incorporating the technological by-products of that theory. That theory begat technology designed to alter the real world to look like the idealized environment used as the basis for theorizing. Risk models were based upon EMH, not on the real world. Economists were hired in droves not for their understanding of economies, but for their math skills. It was simply presumed that those skills were synonymous with economic know-how.

That orthodoxy is indifferent to outcomes provided convenient cover to those who could game the system. It gave them intellectual protection – and moral sanitization – from their relentless pursuit of wealth.

Bankers forgot that they are mere intermediaries, supposedly allocating capital to socially beneficial – efficient? – ends, and, instead, realized they could invent markets to absorb that capital for their own ends. Bankers stopped accepting risk, and, instead, realized that orthodox theory told them they could eliminate it. Once across that threshold the recent history of finance is easy to understand: it becomes a self sustaining activity, or an end use for capital rather than an intermediating activity.

Having lived through this sea change in banking the lesson I have learned is this:

When you strip away the social and political embeddedness of economic systems in an effort to enforce ‘rigor’, and in order to pursue a formalism or scientism in your theorizing, you have stripped away any resultant theory’s relevancy. You have abstracted away the very humans who populate the markets whose mysteries you are seeking to unlock. You have simplified your ideas to the point of absurdity. You have demonstrated an almost pathological disdain for reality. And your blind pursuit of the chimera of efficiency prevents you from making any statements about actual systems or the processes by which wealth is created or allocated because they are not efficient.

Above all else I have learned that an indifference to the outcomes of ‘efficiency’ is not a badge of intellectual rigor, it is an avoidance of reality and, worse, an admission of moral bankruptcy.

Surely economics is, and economists are, better than this.