Economics students revolt against being force-fed with neoclassical mumbo jumbo
from Lars Syll
The world has changed, the syllabus hasn’t – is it time to do something about it?
Rethinking Economics is a network of young economics students, thinkers and writers who are organising to create fresh economic narratives to challenge and enrich the predominant neoclassical narrative.
We aim to demystify and diversify economics in the public eye; to educate ourselves and other students in a more reflective economics; to inspire divergent economists to engage with one another in debate; and to promote a politics of responsibility with academic economists. The Cambridge Society for Economic Pluralism (CSEP) is run by a dedicated group of students united by the belief that progress in the discipline of economics will be driven by an increasingly interdisciplinary approach and a pluralist platform in the 21st century. CSEP aims to enrich the understanding of economic thought within the Cambridge community and promote alternative views on conventional economic thought as well as current affairs in an innovative discussion format. We are The Post-Crash Economics Society and we are a group of economics students at The University of Manchester who believe that the content of the economics syllabus and the way it is taught could and should be seriously rethought.
We were inspired to start this society when we heard about a Bank of England Conference called ‘Are Economics Graduates Fit for Purpose?’ At this event leading economists from the public and private sphere came together to discuss whether economics undergraduates were being taught the right things in the light of the 2008 Financial Crisis. This chimed with some of our frustrations about the economics we were learning and so we decided to set up a society that would through doing research, organising events and running workshops seek to bring this discussion to Manchester. That was at the start of the 2012/13 academic year.
Economics after the crash
from David Ruccio
Last week in class, after explaining to students that graduate students in economics no longer study either the history of economic thought or economic history, they asked me if I thought, in the wake of the crash of 2007-08, the training of students in economics—at either the undergraduate or graduate levels—would change.
My answer was, “I don’t know. But, the last time ‘business as usual’ in economics was challenged, in the late 1960s and early 1970s, it was students in economics—at the University of Michigan and elsewhere—who were the ones to initiate the change.”
There are signs that it is happening again today—at Cambridge University, University College London, the London School of Economics, and now at the University of Manchester.
The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole. Economics education is dominated by neoclassical economics, which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences. Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an “equilibrium”. The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.
Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2.7 million and plummeting wages, economics syllabuses remain unchanged.
The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge, UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too. At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic “science”. . .
We propose that neoclassical theory be taught alongside and in conjunction with a broad variety of other schools of thought consistently throughout the undergraduate degree. In this way the discipline is opened up to critical discussion and evaluation. How well do different schools explain economic phenomena? Which assumptions should we build our models upon? Should we believe that markets are inherently self-stabilising or does another school of thought explain reality better? When economists are taught to think like this, all of society will benefit and more economists will see the next crisis coming. Critical pluralism opens up possibilities and the imagination.
The current state of affairs is not good enough. Our classmates tell us that they are embarrassed when their family and friends ask them to explain the causes of the current crisis and they can’t. One of our professors was told that he should follow the dominant research agenda or move to the business school or politics department. Another was told that if he stayed he would be “left to wither on the vine”. This situation is reflected in economics departments across the country – it is national problem. Economics academia can and should be better than this, and that’s why we are
Warning signs
from David Ruccio
The signs are ominous: more than four years into the supposed recovery and average incomes of the majority of the population remain far below their peak. in 2012 (the last year for which data are available at the World Top Incomes Database), the average income of the bottom 90 percent was $30,439, much lower than it was just before the crash ($34,816, in 2007) and lower still than it was at the beginning of the millenium ($35,800, in 2000). It’s no wonder, then, that the share of national income going to the bottom 90 percent continues to fall: from a peak of 56.89 percent in 2000 to 54.33 percent in 2007; now it’s down to 51.84 percent. With no signs that it’s going to turn around anytime soon.
The warning signs of rising inequality are now so stark even the Economist has focused on “labour’s share lost” and the difficult decisions it poses:
The tricky bit is understanding how—or whether—the bulk of the population will receive its purchasing power if not through wages. One possibility is broad redistribution. Society could set a basic income that rises with economy-wide productivity, and as workers’ potential earnings fall below that reservation level they cease working. An alternative (or maybe complementary) policy might be to encourage broader ownership of capital, either as part of standard labour compensation or in lieu of some other income subsidy.
It’s not a sure thing that labour’s share will keep dropping. If it does, however, society will face some very difficult decisions.
PIMCO’s William Gross is also worried about the plight of labor and how the “Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income” have been ignoring the problem.
Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make. In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You’ll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You’ll just have to write a little bit smaller check.
The fact is, the current recovery has been a one-sided affair—favoring the profits of large corporations and the incomes of a tiny minority of individuals and households at the top at the expense of everyone else. The question is, how much longer can it continue before it blows up in their—and our—faces?
Unequal austerity and its economics
from Peter Radford
Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.
This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.
I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re capitalist that is. If you’re a regular worker, then tough.
What happened?
Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.
Then it hit a snag. The stagflation of the late 1970′s didn’t fit well within its theoretical structures. Change was due. And, as usual, economists can always be relied upon to have alternative theories ready to roll out. A new theory was available on the shelf, one that offered a different path and one that fitted well with the right wing reaction to that stagnation.
This is the key to unlocking the door to a solution our own problem: it was a change in the political landscape that allowed the switch in economic theories to have an impact. Economics by itself doesn’t much matter. Its theories are simply armament for politicians. Those theories chug along happily with a team of economists ready to proselytize at any opportunity. No one particularity cares about those theories outside of academic economics until one is needed to give intellectual heft to a new political position.
In the case of the great switch back in the late 1970′s the change in politics was the re-emergence of a more activist right wing political temperament and the rise of activist corporate influence in the form of newly established think tanks and the establishment of lobbying in Washington.
This is why Gross is so wrong. The switch was entirely deliberate and manufactured. It wasn’t a happy accident. Big business wanted to break the post-war social contract. Right wingers did too. The alliance they created still forms the basis of what we nowadays call mainstream Republicanism. Back then it wasn’t so mainstream: it had to overthrow the Eisenhower version of Republicanism that to our contemporary eye would look slightly left of center. Eisenhower and Nixon – yes event Nixon – governed along similar lines. They preserved the post-war social contract and were, if anything, biased towards expanding rather than reducing social programs. It was the emergence of Reagan as heir to the right wing, and his ability to sell that right wing tilt as acceptable, that altered the political and cultural landscape, and which then was the channel through which right wing economics was able to do its pernicious work.
Right wing economics being what is commonly called neoclassical and the many variants of Austrian economics, with the neoclassical version in the vanguard. The ideological content of these kinds of economics is manifest: they are designed from the ground up to justify market based solutions to every problem and to reject both the need for, and the efficacy of, government interference in the economy. The key point being that these theories are indifferent to the plight of workers, embolden right wing political attempts to limit government, emphasis supply side considerations, and are easily bent to protect capital.
Hence what became known as “trickle down” economics, where a focus on allowing market based freedom to the few and big business was supposed to have beneficial knock-on effects for everyone else. Remember all the talk about “a rising tide lifting all boats”? Apparently most boats were fixed in the mud.
In the very long run there is no doubt, or ought not to be, that a decentralized economy produces better results than a centralized one. It can adapt better. It can innovate better. And it can thus grow better. What it cannot do, necessarily, is to allocate better. Yet, and this is the truly pernicious nature of modern orthodox economics, it is precisely it allocative power that modern theory lauds.
Why is this?
If you are trying to build an ideological defense of a particular worldview – in this case that markets ought to be left alone to get on with it – it is prudent to defend its weakest points mostly actively. This is the brilliance of neoclassical economics. Its entire edifice is built around ideas that make it appear as if markets will always outperform alternatives in the allocation of society’s resources. It does this by inventing and deploying specialized uses for common concepts like “efficiency”, and then restricting the set of assumptions used in the theory to ensure that it achieves its goals. Outside of academia most people don’t realize the extraordinary effort needed to distort the real world into conformance with neoclassical theory, they simply accept that, somehow, economists have “proved” the superiority of markets. They accept economics as being a sort of science, and that it has intellectual sincerity or objectivity.
It may be sincere, but it isn’t objective. It is the handmaiden of capital. Which is odd when you reflect on its emphasis on market magic. So severe are the lengths it has to go to retain its internal consistency, logic, and so on that it is a strange bedfellow for big business. Modern corporations are the living epitome of centralized economies with their top down decision making processes, tightly constrained internal resource allocations, and defiance of outsider or shareholder influence. Yet the executives of these cop rations prattle on in public about the huge benefits of markets, apparently unaware of the irony that markets – in the sense economists talk of them – are supposed to make their corporations unnecessary or at least minimally profitable.
Not that they care about the economics. What they care most deeply about is the politics. Which is a politics that looks at every problem through a lens that privileges capital at the expense of labor. To pile on further irony: that most large corporations have short lives – measured ind evades rather than centuries – is precisely because they are centralized and suffer from all the issues that centralization brings. Notably a poor record in adaptation.
So hegemonic, though, has right wing economics become, and so successful was the rightward shift in our political landscape, that all discussions about our current problems are conducted through that self-same lens. Take the deficit and the national debt. They are treated almost axiomatically as being problems to be solved only in one direction: made smaller. That this will hurt millions of people and diminish their futures drastically is never mentioned. Or, if it is, any comment about their plight is accompanied by a severe statement about the need for sacrifice. So the people who have been clobbered the most by the failure of right wing economics are being asked to sacrifice in order to shore up its protection for those who were not clobbered at all.
Which returns me to the beginning.
If our current policies, based on right wing economics as they are, are asking the neediest to make the largest sacrifices, then they will make inequality worse not better. Indeed practically all austerity policies have the largest impact on those who rely on the government as a defense against the predation of the market. This is despite the fact that our crisis began as a failure of the market not a failure of the government. We are correcting the wrong thing.
But before we can fix inequality we mist fix our politics, and only then choose a new economic theory. There’s plenty of economics waiting to be deployed to help. There always is.
A note on the irrationality of rational expectations
Update: Chris Dillow makes the same basic point using other data
Margaret Thatcher famously knew the price of a loaf of bread. Experience might have taught her the hard way that people do not react to abstract aggregates or averages – but to local prices. Think of the ‘Thatcher the milk snatcher‘ episode. Economic statisticians, who incorporate new ideas generally much faster than academic economists, have established a metric to estimate this ‘frequent out of pocket’ (froop) expenditures inflation, which incorporates the prices of items like bread, broccoli, and, of course, gasoline. And differences between households are important, too: consumer price inflation is, in the Netherlands, at the moment 1,6%. But when you are a non-smoking, non-drinking house owner it’s 0,6%. I’m not a representative consumer – and nobody is. Look here for an ONS article which spells this out – these ideas should be common knowledge among economists by now.
But according to Simon Wren-Lewis (and I’ll put this bluntly) people are daft when they look at the price of a pint of milk or a loaf of bread instead of, well, he’s not clear about this but he probably thinks that people should look at the consumer price index as that’s the metric of choice of, for instance, the ECB and many economists. Thomas Sargent, approvingly cited by Wren-Lewis and the mother of invention when it comes to the models Wren-Lewis is so proud of, always uses consumer price inflation and doesn’t even mention other metrics. That would not matter when consumer price inflation and froop inflation were (almost) equal. But they aren’t. Froop inflation is consistently higher than consumer price inflation (graph). While consumer price inflation is, post 2010, consistently higher than domestic demand inflation… (the metric consistent with is in fact most consistent with the goals of monetary policy). Rational expectations are however supposed to be model-consistent and the models (at least those inspired by Sargent) as well as the ECB focus exclusively on consumer price inflation and they do not take such considerations into account: people on the street have the same perception of inflation as the head of the central bank. Is it too much to ask from economists that they admit that actual, real world inflation perceptions and expectations might beexogenous to the in the end rather simplistic DSGE-models and different from the uninformed ad hoc estimates used to ‘callibrate’ these models? About such models and (Calvinist) pre-determination it is by the way interesting to read Thomas Sargent himself
