Teaching of economics — captured by a small and dangerous sect
from Lars Syll
The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts. In the society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.
This fact shows up when mainstream economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identicalpreferences.
This could only be conceivable if all agents are identical (i. e. there is in essence only one actor) — the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!
How has manstream economics reacted to this devastating findig? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.
Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these modern mainstream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent.
That is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.
So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modeled as a representative actor and that this is a valid procedure. But it isn’t — as the Sonnenschein-Mantel-Debreu theorem irrevocably has shown.
Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to masters and doctoral courses. It could justifiably be reasoned that way – if what you teach your students is true, if The Law of Demand is generalizable to the market level and the representative actor is a valid modeling abstraction! But in this case it’s demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.
Once the dust has settled, there is a strong case for an inquiry into whether the teaching of economics has been captured by a small but dangerous sect.
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More like dangerous insects really!
Larry Elliott’s article is just about 10 years old. There doesn’t seem to be much follow up.It appears the Chicago mob just ignored it and so did the MSM[?] but it’s certainly not out of date. The battle now is cutting the ground out from under the mainstream. After all it’s not as if they have a defensible position. It’s just ignored. AOC has started the idea you cannot ignore the damage it does any longer. A “small but dangerous sect”, It is worse than that it is purveyor of Evil. Example; “wealthy nations with people homeless and sleeping rough. Totally at the mercy of neo-liberal ideology, a Chicago school given.
“There is a strong case for an inquiry into whether the teaching of economics has been captured by a small but dangerous sect”. There is a strong case and the sect is dangerous, but it is anything but small.
I’ve known about the Chicago Boys, the university, and its famous people like Friedman and Becker for a long time. One of my grad school professors was a Friedman protege. We were taught price theory from Friedman’s book of the same name.
The popular notion that market fundamentalism is limited to Chicago and such people as Ayn Rand is erroneous. I was trained at one of the most left-wing universities in the world, the University of California at Berkeley in the 1960s. With extremely few exceptions (the forementioned Friedman protege and socialist Abba Lerner), my professors at both undergrad and graduate levels were centrist Democrats of the Hubert Humphrey ideology. To a man (and all were men), they acted like true believers, dismissing both institutional and labor economics, along with Thorstein Veblen, Karl Marx and Henry George.
Several of my grad school colleagues, highly skilled in math and model building, were marginalized in their careers because they didn’t toe the market-fundamentalist line.
This true-believing sect has ruled for 150 years, continues to rule, and has utterly failed to serve the broader economics profession, at least in the United States.
One of the best exposes of the realities of the Chicago School of Economics (with such mentors as Milton Friedman) is Naomi Klein’s “Disaster Capitalism.” What must be recognized is that it is not a question of whether this school of economic theory is valid, but whose interests it serves. It continues to thrive because it provides an ideological underpinning for neo-liberal corporatism. Whether or not it works for the planet is a whole is immaterial, as long as it reinforces international corporatist dominance of the world economy. As long as it assists in helping to ensure the dominance of a tiny financial elite, it will never lack in funding in order to continue propagating its poisonous theories.
Agreed about Klein and “Disaster”, a core reading. David Korten’s “When Corporations Rule the World” also is essential reading.
Correct about “whose interests it serves”. Also, for any institutional action, who profits and who pays. Unfortunately in my long experience with politicians, I know of none who want to know that information when it comes to their policy decisions. Taboo. Of course corporations hire spin to turn their “socialized costs” into “public benefits”, such as jobs in the community. In practice, they care about neither. Privatize profits and socialize costs.
Economics is a bent (slang for dishonest or corrupt police officer) discipline in at least two ways. First, is the “one trick pony” way in which it is taught at the undergraduate and graduate levels. Students are told to listen and repeat. No intervening steps. Making economics a stable and secure discipline. Something valued highly by academics who value tenure and publishing security. Minimize, if possible, eliminate career risks. Second, when students earn their final degrees and go out to work some carry forward this career security refrain. Others want to do work that helps more than their careers. So, they do research, gather data, collate past research to provide useful facts about some facet of everyday life and it many uncertainties and questions. This pushes them to a negative career path. They will never be allowed to teach at a major college or university, edit any important journal, or speak at AEA meetings. It’s unlikely they’ll be feted by their fellow economist, or if they are it will be as part of a “non-rule following” splinter group of economists. Economics cannot heal itself. That leaves the job to non-economists. Historians, for example. And we all know the views of mainstream economists about historians.
The University of Chicago has always been the rich man’s megaphone. Does the name Rockefeller ring a bell?
They have been lying about this stuff for years just to protect capitalism from communism. Now that communism is dead – it is time to admit the fraud and move on. But then again, the propaganda is so effective at eliminating Union influence, the kings of capitalism will never let it die.
Take a financial literacy class instead. There is a reason Econ is in the liberal arts department and not in the business school. Social studies is where they teach you what to think, not how to think.