When asked who was responsible for the GFC at a recent Sydney Writers’ Festival session, the Canadian writer John Ralston Saul assigned blame in the following order: the departments of economics, the business schools, the consultancy industry. These institutions, he argued, had done most to propagate a flawed economic theory and its attendant neoliberal policy prescriptions and prohibitions. And Ralston Saul is far from alone in his belief that something is rotten in the state of economics.
newmatilda.com‘s Ben Eltham is another for whom economics is on the nose. In a paper titled "Counter-offence, or, Against Economics" delivered at a recent Sydney conference (that I helped to organise), Eltham called for a new economics "that corresponds more closely with the reality it purports to describe, which takes into account real human behaviour and falsifiable empirical observations". He criticised the unrealistic assumptions that underpin orthodox economic modeling and called for economists occupying senior positions in key institutions to be replaced with "people trained in more diverse disciplines: philosophy, sociology, ecology, meteorology, systems theory, medicine and the law".
Neoclassical — aka "orthodox" or "mainstream" — economics dominates the teaching and practice of economics around the world. It developed in the late 19th century, superseding the classical political economy of Adam Smith, David Ricardo and John Stuart Mill. It was briefly displaced by Keynesian economics in the 1950s and 1960s before returning to a position of dominance from the 1970s on. Broadly stated, while classical political economy investigated the determinants of value, distribution and growth under emergent capitalism, the neoclassicals narrowed the focus to concentrate on exchange relations, and moved towards more abstract, mathematical reasoning.
The neoclassical nirvana is the state of "General Equilibrium" where the consumption choices of utility-maximising consumers are transmitted to profit-maximising firms via fluctuating prices. The prices provide the information that ensures supply neatly matches demand and all markets clear. The system, according to neoclassical theory, is efficient, non-coercive and self-regulating if left free from interference. But the theory incorporates some problematic assumptions, namely: perfect consumer rationality, perfect information in the market, and perfect competition among firms.
While the above may be a caricature it serves to illustrate a couple of key points. First, the assumptions underpinning neoclassical economics leave it open to the charge that the theory bears little resemblance to the economic reality of modern capitalism. Second, in an effort to make the real world conform to its model, neoclassical theory underpins a political program — neoliberalism — that strives to remove impediments to the efficient functioning of markets and tends to result in policies (lower taxes, less regulation, privatisation, attacks on unions) that happily coincide with the interests of economic elites.
Neoclassical economists continue to rule the roost in Australia but their reign has not gone unchallenged. There are actually many traditions within economics, from classical and Marxian political economy, to neoclassical, evolutionary, Keynesian, institutional, ecological and feminist economics, to name a few. So-called "heterodox" economists working in these, and other traditions, are scattered throughout Australian universities. The annual conference of the Society of Heterodox Economists provides a rare point of collective focus for this otherwise disparate group.
The long struggle to establish Political Economy within the Faculty of Economics and Business at the University of Sydney is probably the best-known example of the backlash against neoclassical dominance in Australia. The story of Political Economy at Sydney — recounted in the book Political Economy Now! — illustrates both the potential for a radically different economics curriculum and the enduring power of orthodoxy.
What began as an alliance between dissident academics and student activists in the 1970s to broaden the economics curriculum, ended with the creation of a department that now constitutes the largest grouping of political economists in Australia. Over 600 students enrolled in the core introductory unit in 2010, and the department’s alumni include prominent journalists, politicians, union leaders and public intellectuals.
But there’s a catch. In the final chapter of an often bitter struggle for legitimacy, Political Economy moved to the School of Social Inquiry in the Faculty of Arts in 2008, fearing for its survival within the Faculty of Economics and Business after years of marginalisation. With surging enrolments and increased staff, the move, on balance, has been a good thing. But together with the abolition of Economic History in 2002, the relocation of Political Economy represented a win for those who sought to ‘purify’ the Faculty of Economics and Business of critical economic perspectives.
Similar struggles at the international level have encountered the same entrenched resistance to change. When French students at the elite École Normale Supérieure published a petition in 2000 calling for a pluralist economics curriculum, undogmatic teaching methods, and an end to the use of mathematics as an end in itself, it looked as if real change might be possible. The demands of the "post-autistic economics" movement, as it was called, were echoed by students at UK and US universities and the French government commissioned a report into the teaching of economics. But the encouraging findings of the report were ignored, and to date the high hopes raised by the movement have not been translated into concrete change.
So, why do these battles within the academy matter? Well, only the most one-eyed observer would dispute the fact that the GFC has dealt a major blow to a theory that characterises markets as efficient and self-regulating. Financial crises are endemic to capitalism and orthodox economics is a poor guide to understanding and remedying these periodic breakdowns that cause so much suffering. In addition, three decades of free-market policies have entrenched economic inequality within and between nations with serious implications for social cohesion and international cooperation. Finally, and most importantly, the world faces a suite of ecological crises, including climate change, which neoclassical economics and its assumption of the infinite substitutability of resources, is ill-equipped to tackle.
Kevin Rudd declared neoliberalism dead in his much-discussed essay in The Monthly. But in a host of areas, from education to welfare, climate change to trade, his government remains a prisoner to its logic and assumptions. And this situation is likely to endure as long as economics departments and business schools continue to operate as seminaries reproducing a priestly caste of neoclassical economists, backed up by their lay preacher counterparts in business, government and the media. It may be ill-advised to recommend another inquiry to the Rudd Government but the Prime Minister could do worse than follow the French example and appoint a John Quiggin, Frank Stilwell or Peter Kriesler to investigate the current state of economics teaching in our schools and universities.
Given the scale of the challenges confronting us this could be an exciting era for economics. But to take advantage of it the discipline has to change. We need an economics that draws on the richness of its own diverse traditions and becomes increasingly interdisciplinary in character. We need an economics that is more "humble servant of the public good" and less "Delphic oracle".
And we need an economics that accepts that there is no such thing as "value-free" social science, and that the economy is deeply embedded in society and the natural world. Without these changes, the rot in economics will continue and its weakness will affect us all.