In her book Econned, Yves Smith describes how the arrogance of economists has led to a very biased view of the world:
“…they assume that only they are qualified to opine about matters economic. That in turn produces two considerable biases. First, if an argument about economics comes from a non-economist and does not happen to fall in line with the orthodoxy, it must be wrong. It will be rejected even if it contains useful information. Secondly, the scientific mantle gives economists the trump card in policy discussions, even though, as we have seen (elsewhere in her book – BD) those aspirations are not born out in practice.
“When an elite succeeds in monopolising discussion on a given topic, an additional danger is that members of the privileged caste can become overconfident. The economics discipline has had, in fact, attacks of hubris.” (Yves Smith, Econned Palgrave Macmillan, 2010 p62-63).
As Yves Smith makes clear, the status and power of economics and economists is connected to its claim to be a social science. So let’s be clear…..it is no such thing.
What is currently taught as economics cannot possibly be described either as a science or even, for that matter, as a study of society. I make that assertion because the track record of economists in prediction is so poor that it is laughable for them to claim scientific status. This failure of predictive power has been pointed out over and again – particularly after the failure of the bulk of the economics profession to predict the collapse of 2007/8. http://www.prophetsprofit.com.au/dismal.htm
But this is just what you would expect from a body of ideas that erects a castle of ideas on a set of absurd and limiting assumptions – like markets in which everyone has perfect information. As has been said over and again most economists famously did not see the crash coming – but then why would they when their entire corpus of theory works from an approach in which it is assumed that markets, when left to themselves, will tend towards a static equilibrium and that all the key actors are behaving “rationally”.
Economics isn’t a science – it isn’t social either
Not only is economics as currently taught not a science, it isn’t social either. Margaret Thatcher famously claimed that “there is no such thing as society” and mainstream economics works from exactly the same assumption – for mainstream economists society is simply the aggregation, the adding together, of millions of individual economic actors and actions. All of these actors are assumed to be “rational” – a word which economists also use in a way that reflects their own prejudices – a purely calculating and narrowly self interested mentality focused on short and long run material gratification, whose relationship to other economic actors is intrinsically competitive. Thus ‘rational economic man’ has no emotion, is part of no social psychological processes involving mutual influence, common hopes, beliefs and fears, no mutual support, no group or common class interests. Instead ‘rational economic man’ is a calculating machine, focused on maximising his satisfactions or “utility”.
As a model of what human beings are generally like this is crazy – it is more than a simplification, it is a distortion. It is a view that is blind to the different layers of our psyche, to our complexity and to the oft conflicted way in which we behave. Indeed it rules out the very sides of human behaviour that are pro-social and co-operative. Yves Smith points out how neo-classical economists struggle to explain altruistic behaviour in this worldview and how
“Another vexing problem is when consumers spend money to improve their self control. Diet support groups like Weight Watchers or clinics to help people quit smoking don’t fit at all well with utility theory. Effectively, the individual has two sets of preferences that are in conflict (in these cases, pleasure now versus health later). But the neo-classical model holds that economic actors have consistent and stable tastes.” (p98 of Econned)
What micro-economic theory tells us about economists
There is, however, another way of seeing utility theory. If it tells us little about what people in general are like it certainly does tell us something about what the economic theorists were and are like – and what many economists become like during the course of their training. Put in another way – there is evidence for that view that ‘rational economic man’ is a projection of the mind-set of economists themselves. As it says in the Talmud, “we do not see things as they are, we see things as we are”.
For example, a study of economic and non economics students in 1993 by Frank, Gilovich and Regan found that most people learn to be more co-operative as they get older – but that learning economics slows this process of social maturity.
“On the one hand, cooperative tendencies increase over time, with age. This is true for everyone, economist or not. Children are much more selfish than adults, for instance. Among university students, upper classmen exhibit more pro-social behavior than lower classmen. Controlling for this, though, authors show that the pattern of falling defection rates, or increasing cooperation rates, ‘holds more strongly for noneconomics majors than for economics majors.’ This means, while students in other disciplines learn to be cooperative over college years, students majoring in economics learn the same fact much more slowly.”
Further to that they found that micro-economics teaching over as 4 months had a noticeable effect:
“They picked three classes at Cornell University. Two of these were introduction to microeconomics. The third was introduction to astronomy. In the first microeconomics class (class A), the professor was a game theorist with interests in mainstream economics, and he focused on prisoner’s dilemma and how cooperation might hinder survival. In the second microeconomics class (class B), the professor’s interests were in development economics and he was a specialist in Maoist China.
To the students in all these introductory classes, the authors posed simple ethical dilemmas, including questions such as “If you found an envelope with $100 with the owner’s address written on it, would you return it?” The questions were asked twice, first in September, in the beginning of the fall semester and once again during the final week of classes in December, not even a full four months apart.
Comparing results against the astronomy control group, students in economics class A became much more cynical and gave less ethical responses at the end of the semester. Students in class B grew to be more unethical, yet not by so much compared to students in class A. The results clearly show that no matter what their initial ethical tendencies were, students who were exposed to a mere four-months of “rational” reasoning became less cooperative.”
Departments of Economics as Departments of Anti-Social Theory
Does this matter? It certainly does! At the time of writing the main policy advisers to governments in a state of economic crisis are people working with and from this mind set. To these people the fact that the suicide rate and the rate of mental health breakdowns and sheer volume of human misery is rising in Greece has no place in their policy thinking. The idea that, if there is to be a comprehensive breakdown, there is an urgent need to come together as communities to protect each other and the weak and vulnerable is utterly absent in this thinking. What is in their thinking is that “greed is good” and that this is a fantastic opportunity to short markets and make a load of money by whipping along the processes of destruction.
The fact that generation upon generation of students have been educated in this anti-social thinking has surely created a deeply destructive culture and social psychology under which ordinary people are now suffering every time we hear what the “financial markets” want. it helps to explain the mentality behind what Naomi Klein calls “disaster capitalism” – making money out of and by and through disasters.
The financial markets are people – so what kind of people are they? A recent study by the University of St Gallen asked 28 professional traders in financial instruments and a group of psychopaths in a Swiss gaol to undertake a computer simulation to test how much each group was prepared to co-operate, how egotistical they were and what kind of risks they were prepared to take. The result exceeded the expectation of Thomas Noll, a Forensic Scientist and Director of a Swiss gaol near Zurick. “Naturally we cannot describe the traders as mentally ill, but they behave in a more egotistical way and take greater risks than a group of psychopaths that took the same test”.
The traders did not actually make more profit than the comparison group – but what Noll found particularly shocking was that instead of working methodically and soberly in order to make the highest profit “the thing that mattered above all else to the traders was to get more than those that they were playing against and they used a lot of energy to damage these others”. Noll described this as if one had a neighbour that had the same kind of car and one comes out better by using a baseball bat on it. (my translation from “Aktienhaendler aehneln Psychopathen” in Der Spiegel 39/26.9.2011 or at http://www.spiegel.de/wirtschaft/unternehmen/0,1518,788232,00.html )
What is science anyway?
But, you might ask, could economics be ‘social’ and ‘scientific’ if it were to abandon the mainstream assumptions? Certainly, for economics to become more useful to ordinary people it will have to change in a post-autistic way but I doubt that it ever could become “scientific”. Of course, it depends what you mean by the word “scientific”.
“Scientific” is a hurrah word which carries connotations of ways of explaining the world which are testable, which arrive at results that are predictable and that you can firmly rely on…well, you can rely on them to a high degree of certainty, if not with complete conviction. (I write at a time when scientists are claiming that research experiments seem to be throwing doubt on the previously firm belief that nothing could travel faster than the speed of light). The reason that you can rely on them is that tests and experiments can be repeated and you get the same results.
But for most practical purposes, except for experiments on a really small scale (like the one comparing psychopaths and traders), you cannot set up experiments to test economic ideas and repeat them again under identical conditions. To try to understand how economic relationships work all we have is the past and whatever data about events is left to us, but as things move forward nothing is ever exactly the same as in the past. We know from chaos theory that small differences in starting conditions will, over time, make a big difference to the evolution of complex systems of interrelationships. This has been called the Butterfly effect.
One of those differences is that our theories and ideas of what is going on will also influence events in unexpected ways. Thus theorists of the financial markets thought that they had tied down with precise equations exactly how “rational economic man” will act by tracking past data. But if everyone is super confident about how things work and acts accordingly then that fact in and of itself alters the conditions in which the markets work. There’s nothing so destabilising as a certainty that the markets will work in a particular way – it creates an over-confidence and that creates a bubble.
Bubble psychology – when ‘rational economic’ man goes insane
For mainstream economists bubbles are a problem. Bubbles happen when groups of people anticipate rising asset prices and so buy these assets in order to make a capital gain when the asset that they have purchased continues to rise in price. It is a case, often found in group psychology, of self fulfilling prophecy. You act on the expectation that something will happen and so bring it about. A major part of dynamic of the bubble is that the euphoria of rising asset prices infects large parts of the market. Yet “rational economic man” is assumed not to be influenced by group psychology – he is supposed to be an individualist. Moreover rational economic man is supposed to be rational – not to get euphoric and carried away. However, the group psychology of a bubble is characterised by euphoric over confidence – it involves emotion. To describe it as the manic part of a manic depressive economic cycle is not far off. There are genuine parallels to the emotional cycles of bi-polar individuals.
In the theory rational economic man is not supposed to be like this. When the former head of the Federal Reserve referred to “irrational exuberance” in the financial markets he was saying that the participants of the markets were not acting like “rational economic man” – in other words that something was happening that was not covered in the assumptions of the mainstream corpus of theory. He was letting slip that the theory was not describing what was actually happening.
This matters a lot – if what happens in the economy is the adding up of decisions by rational actors you might be tempted to believe in a reassuring picture in which economic actors are weighing things up and are not likely to do and go wrong. Indeed you can let these actors take decisions for themselves and get out of the way. But if key economic actors behave like manic depressive patients with psychopathic tendencies then you need supervision and therapy – and you certainly need to intervene when you find that these actors are hiding their activities off balance sheet, setting up ‘special purpose vehicles’ for their risky activities and locating them in offshore tax havens and secrecy jurisdictions.
Knowing the future
This returns us to another reason why economics can never be a science, even under different conditions – because none of us know what the future is going to be and nor can we possibly know. We can’t even know all of what is going on here and now, or all of what happened in the past, let alone what will happen next. There is only so much time to take in and interpret information about past and current events and we have, at best, access to understanding of only a tiny fragment of what is past, and passing and to come.
And this is at the core of all management and personal dilemmas and decisions when it comes to allocating and distributing ‘resources’. The lack of information, or assymetrical information between different actors, is not a “special case” to be tacked onto a corpus of theory whose preferred starting point is actors who have all the information (and understanding) that they need to take their decisions.
Au contraire, the scarcity of information is at the core of the economic process – it is precisely here that we should be theorising. For the process of decision making about ‘resources’ involves committing them for purposes and in ways that may prove mistaken – mistaken because things go wrong and losses occur, losses that are then incurred by real human beings. So confidence, the expectation of gain and the euphoria when it goes right, as well as the fear of loss and the dejection and demoralisation when it goes wrong, are real human emotions associated with the ‘cloud of unknowing’ in which we all exist, and in which economic activities exist. And they are intrinsic to the economic process.
Following the herd
So too is the herd response to the uncertainty – a true case of “animal spirits” as Keynes put it. If you don’t know what to do – then you follow what everyone else does. Up to a point this makes perfect sense. If everyone else is confident then it makes sense, in the here and now, to be confident too. If everyone else is in a state of fear and shock then they are not going to be spending, they are likely to be hanging onto cash, and so it doesn’t make sense for you to risk your capital either – there will not be a market for anything other than the basics. A depression, in short, is a real economic phenomenon – but it is also a state of mass psychology, a state of collective depression and caution a propos taking decisions about using resources.
Of course, economists theorise in these circumstances – but their theory is typically a form of reassurance that they can tame the frightening demons of current and future unknowns.
As far as possible their theories then turn unknowns into quantifiable forms – into risks which are probabilities that known events will occur, which can then be used by rational calculating machines (either the brains of traders or their computers) operating in the markets to guide their decisions. Also, of course, although the theory is supposed to tell us that everything is moving towards equilibrium – and full employment equilibrium at that (if only pesky trade unions and the state did not irritate the economists so much by interfering in the price mechanism) nevertheless the really sexy thing that economists can do for us is to provide us with forecasts – predictions of the future with numbers.
A taxonomy of unknowns
But of course, in the real world, instead of the world of economic assumptions, things rarely take the form of risks. For the record let’s go through the full catalogue of the kinds of things that we don’t know – all of which apply to economic realities. No matter how powerful the computing, and however brilliant the young men and women who call themselves “quants” are, they will never deal with these things:
Known unknowns – things/situations that you know you don’t know; Unknown unknowns – things/situations that you don’t know you don’t know; Taboos – things/situations that your peer group/the law/the culture think you should not try to get to know – it is probably not called for to be an expert on climate science when you work for Exxon; Errors – things that you think you know which are wrong/are not the case; delusions – errors in which you (and perhaps your group) have an emotional investment which are thus difficult to shift – like the usefulness of mainstream economics; paranoias – hypotheses about the nature of unknowns that impute motives by others that are to be feared – particularly powerful when competition is intense; denials – things which are too painful to know so you ignore information that confirms them – like information tending to confirm peak oil and gas or the limits to economic growth; unknown knowns – things that you know but are unaware of knowing – like the ideas in this essay were to me before I came to write them all down; disorientation – unknowing in a (changed/changing or new) field of interrelationships or interconnections – often when it is in movement from one stable state to a new stable state – the state of the financial markets when Lehman Bros went bust and at the time of writing; madness – disorientation plus anger and/or distress – the statistics of mental health problems among financial traders are, in fact, quite high; informational assymetry – unknowns for some people that are known to others (vested interests blocking information flow); costly information – situations where getting to know costs so much that partial or innaccurate knowing or even ignorance may be chosen instead – when the Wall Street Journal wants you to pay for an article and you make do with what you already know; deception – hiding knowns from others or fostering errors or delusions – the public relations industry is one of the biggest actors in the modern economy; perspective – partial knowns perceived one sidedly, from a particular viewpoint – like the effect of poverty and austerity programmes, when it is read about in the statistics of policy makers, rather than lived in real life. (For a good exploration of what we don’t know from many different angles see in particular The Virtues of Ignorance. Complexity, Sustainability and the Limits of Knowledge, edited by Bill Vitek and Wes Jackson University of Kentucky Press 2008).
In the face of all of this the idea that we might have a body of theory that will give us accurate reproducible predictions about reality is cloud cuckoo. Which is not to say, however, that it is impossible to say meaningful and useful things about the reality that we live in. We clearly can. Ideas can be useful, they can be a guide, they can provide orientation, and can help – particularly when we use them critically.
And we do need to do that because what is called economics can also be positively unhelpful and confusing too – so we need to create a movement that feels well informed enough about economics thinking to be able to challenge it – particularly as regards the self serving and flawed way that mainstream economists typically dismiss issues of social justice and ecological survival.
Self interest and the community interest
It ought to be a banal observation that all economic decisions have both individual and social consequences – and the interests of the individual and of society do not necessarily correspond. We have an interest in a healthy community, a health society and a healthy environment. We also have our personal and individual interests. In one we are active and thinking as citizens and members of communities. In the other we think as consumers and entrepreneurs. Of course, it is obvious that the two might clash and that is why we have laws, regulations, public services and so on.
One of the greatest disservices that economics has done for humanity is to fundamentally muddle this distinction in their idolisation of markets and market activity.
Adam Smith, who was, for a time, a Professor of Moral Philosophy, would be turning in his grave if he knew how his limited idea, that self interested market behaviour often indirectly yields socially beneficial results, morphed into “greed is good” which has now degraded yet further into, in effect, “anything goes”. There’s a famous idea from early economics called “Gresham’s Law” that “bad money drives out good” – whereby, if coinage with a lower precious metal content is issued then people use the debased coinage and hold onto older coins with a higher gold or silver content. In a parallel way it seems that ideas, including economic ideas, like “free markets”, which have a range of possible interpretations, gradually degrade into memes used to signify the most simplistic and self serving meanings which accord with the interests of the most powerful people in society.
Were economics really a science it would struggle hard to fix its definitions, to define the contexts in which they do apply and when they don’t – and continually test them against the real world. Instead sacred concepts like “free markets” are unscientific, but very useful ideologically, because they are incredibly imprecise. As authors like Ha-Joon Chang explains “The free markets doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice” .(from 23 Things they don’t tell you about capitalism Alan Lane Press 2010)
There are a wide variety of degrees and types of restrictions in markets – so that the words “free market” can encompass a variety of meanings. But it has been very convenient for the predators that the “free market” concept has degraded to mean market ueber alles – the progressive dismanting of any legal restraints on market actors. No consumer protection, no environmental protection, no planning laws, no effective laws against fraud….This has now got to the point of a cover for rampant criminality – for which society is expected to pay the bill as the corruption at the highest levels of society has got out of control. (Or it would be criminality except that the state no longer protects its citizens when anything goes).
Where the state will bail out too-big-to-fail financial corporations, where the amount of regulatory supervision is virtually nil, where ‘mark to model’ can prevail so that no line is drawn under the losses and bankrupcies with their review function do not occur, where no one is called to account because the accounting standards themselves have become so corrupted – where all these things prevail what the individuals working in the finance industry can get away becomes larger and larger. They then become serious predators – and, as we have already seen, behave like sociopaths largely unchecked. At this point the self interest of traders and their managers is put above even the interests of the financial corporations that they work for – there is not only no hesitation about defrauding and predation against customers but against their own companies – and that goes all the way up – because, after all, the books can be finessed and the state will pay the gambling losses.
It is all a long way from where Adam Smith started out.
“POLITICAL economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first,to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.” Book IV, Introduction, The Wealth of Nations.
Well, I don’t much care about ‘enriching the sovereign’ but to provide plentiful revenue or subsistence for the people and to supply the state with the wherewithal for public services seems to be spot on. That’s not where we are now though – and in fact we have arrived at a situation where economics professors provide cover for a state of affairs also recognised by Adam Smith:
“All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” Book III, Chapter IV, The Wealth of Nations.
The ‘masters of mankind’ being the un-prosecuted criminal class which captures control of the state and uses it to consolidate their gains and property or, as Adam Smith also explains:
“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.” Book V, The Wealth of Nations.
There is plenty of evidence that we have to be very careful not to trust economists at face value. Most mainstream economists think in the herd just like everyone else. As such they are particularly useless and even harmful if we expect them to be acting as an objective source of information, independent of the crowd. For example, there were a few people who did see the crisis of 2007/8 coming and these exceptions tell us something about the general rule. Nouriel Roubini and Robert Shiller are often cited as examples – but quite a few less well known names saw the crisis too – an example would be Ann Pettifor who published her book The Coming First World Debt Crisis in 2006 while she was working with the New Economics Foundation. Indeed, I saw it coming myself and wrote about it in an article in 2006 which appeared in a psychotherapy journal that no economist would be likely to read:
So it was people on the fringe that could see it coming – while those in the economics mainstream couldn’t – or perhaps we should say that they wouldn’t. The tiny number of economists with a reputation in the mainstream who did speak out were under tremendous pressure. Robert Shiller recounts how, as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York, he had to soft pedal his concerns about the developing real estate bubble:
“In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so gently, and felt vulnerable expressing such quirky views. Deviating too far from the consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated” (quoted in Econned page 9).
This is economics then as it is really practiced – with a strong tendency to group-think, particularly if you have made it into the inner sanctum of policy making. It is, to use the words of psychologists Charles Tart, a reality constructed around a “consensus trance” –
According to Tart “human groups agree on which of their perceptions should be admitted to awareness (hence, consensus), then they train each other to see the world in that way and only in that way (hence trance).” This is a good way of thinking about what happens to people who have an economic education in which they are trained to see reality in a particular way then use that training in their dealings with others who share common assumptions about how the world is and a strong desire to stay in with each other and not to suffer the discomfort of rocking the boat.
“We tend to think of consensus consciousness like a clearing in the wilderness.” Tart says. “We don’t know what monsters are out there. We’ve made a place that’s comfortable and fortified, and we are very ambivalent about leaving this little clearing for even a moment.”
These consensus “clearings in the forest” include our concepts to organise all of the confusing mass of data out there about the economic system, what is happening to it as well as what we think will happen to it, which we need to know in order to plan lives, businesses and economies. Once we think we have mastered a set of ideas to get a grip on this very important reality, we are reluctant to let go – particularly if all our colleagues and peer group work from the same orientation system, the same concepts. But that does not mean that the consensus accurately reflects what is actually happening.
Keynes said much the same thing himself when he wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist” (Keynes, Essays in Persuasion, 1931).
Defunct economists like Paul A Samuelson, in fact, who once wrote: “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks”.
He did write its textbooks that informed the consensus trance that is economics and, several years after his death, we are still living with a toxic and misleading legacy.
Having already written this article I got a copy of the latest edition of Steve Keen’s book Debunking Economics which is a sort of anti-textbook putting a wrecking ball to the core ideas that you will find in any mainstream economic textbook. I wish I had read it as a student as it would have helped me to make life a misery for the lecturers who taught me at university – a misery that they would have deserved. I really recommend it to undergraduates who are sceptical (and bored) with what they are being taught. That said, and although I have not fully read all of this book yet, Keen does not appear to include the issues to be found in ecological economics. A similar thing can be said for some of the other anti textbooks that have recently appeared – though they are very useful indeed to help in the re-education that is so vitally needed. For example Econned by Yves Smith is very good indeed particularly about the horrors being perpetrated by the financial markets. There are other books out there that more explicitly theorise ecological and social justice issues. Of these Economics Unmasked by Phillip B Smith and Manfred Max-Neef” is splendid to help one understand the self interestedness of the subject ad its defence of the rich against the poor and the planet. David Orrell’s Economyths is also a good read and is subtitled “Ten ways that Economics Gets it Wrong”.
Featured image: “envy”. Author: Pieter Bruegel.
Brian Davey trained as an economist but, aside for a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in the health promotion, mental health and environmental fields. He helped develop Ecoworks, a community garden and environmental project for people with mental health problems. He is a member of the Feasta Energy and Climate Working Group and the Co-ordinator of Cap and Share UK. His life-long interest is why and how people and systems break down. He lives in Nottingham.