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Economics Debunked

Entry 1308, on 2011-06-23 at 13:54:28 (Rating 3, Comments)

I've always been suspicious of commerce and finance, both in their practical form (business) and in their academic form (economics). I've often thought that economics is a bit of a joke, a pseudoscience, or a field of study with no real credibility and which is more based on dogma and personal preference than facts.

But at other times I've thought that maybe that attitude is a bit unfair. Maybe I'm just being an "economics denialist" like the people I so often criticise who are global warming deniers or evolution deniers. One of the attributes of a good skeptic is to be able to recognise the possibility of delusion in yourself and to avoid becoming like the people who are clearly delusional but can't even see it.

But if economics is a real science then why do things so often go wrong, why is the human race such an under-achiever, and why isn't the world economy more controlled and more tuned to producing good outcomes? Some people would say it's because we don't follow modern economic theory closely enough. They would say that the global financial crisis for example, was caused by too much interference and regulation rather than not enough.

I have always doubted this conclusion. What credibility can we give a philosophy which has been forced on the world, failed obviously and catastrophically, and then whose only response is more of the same but in a more extreme form? It's clearly nonsense.

A recent podcast I listened to made me a feel a bit less alone on this issue. Three doubters of modern economic theory were interviewed: Ha Joon Chang, author of 23 Things They Don't Tell You About Capitalism; Robert Wade, former World Bank economist and professor of economics at the London School of Economics; and Steve Keen, the author of Debunking Economics: The Naked Emperor of the Social Sciences.

Their basic message is that economics has been taken over by neo-liberal theory. That is the theory that the best economy is one with zero intervention, that the markets will always produce the best result, and that free market capitalism is the best model. This idea maybe originates with Adam Smith but gained prominence thanks to economist Milton Friedman and so-called philosopher Ayn Rand. Prior to this theory becoming dominant most governments followed a more interventionist approach based on the economic theory of John Maynard Keynes. (By the way, I'm not an expert on this subject myself so I hope these gross generalisations aren't too far from the truth!)

So how do we really know that neo-liberal (or laissez-faire) economics is a failure? I would say there are three main reasons to doubt it, if not reject it totally. They are: logical, technical, and practical (words which I decided to use and will explain below).

So what are the logical reasons? Let's just look at the processes and motivations of free capitalism. It encourages the individual to maximise his own profits at whatever cost. The theory is that negative consequences of this activity will be compensated for by the market so there's no further need to correct them. But surely no one can really believe this because many of the negative consequences aren't economic in nature: they might be social or environmental for example. How can an economic system compensate for something outside its influence?

And this "free market" which people often mention doesn't exist. If we had a genuinely free market then slavery, child labour, gross abuse of the environment, and every other excess of the worst days of capitalism would be allowed. Few people - even neo-liberals - would want this situation, in which case they are really rejecting a truly free market. If the free market is a fiction then the market they do operate in results from regulation which very much contradicts their fundamental dogma.

There are various technical reasons which I have no details about, but the interviews specifically said that one of the most basic tenets of neo-liberalism is that individual results can be summed to give the result for the community as a whole. But this ignores emergent properties. So the basic theory and maths behind economics is fundamentally flawed.

And what about practical reasons? In a real science theory is always tested in real life before it can be taken seriously. I don't see a lot of evidence of this in economics. Look at almost any indicator you like and you will see that since the switch from Keynesian economics to neo-liberalism there has been a change for the worse (especially in debt). Except maybe if you happen to be a rich banker, financier or speculator. In that case the system might suit you really well!

Look at the latest failure of economics: the global financial crisis. The people who benefitted from the relatively non-interventionist environment which had been created were suddenly very happy to accept a hefty dose of Keynesian style interventionism in the form of enormous bail-outs. Yet now that they have been rescued they expect to return to the failed policies of the past - and most governments are allowing it. Surely everyone can see what a travesty this is. We need to control these morally corrupt individuals, and government regulation (whatever its faults) is the only way it can be done.

Keynes was right all along. How much more damage can be done by blindly following the currently fashionable economic theories that the pseudo-scientists of economics tell us are best? How much longer will it be before people see that worshipping the "free market" and "pure capitalism" only helps a small number of people at the very top of the heap? And is it not obvious that those people on the top in almost every case are corrupt and totally self-centered?

Obviously there are people who don't just blindly follow along with the currently held view: there are economists who do hold contrary views, there are capitalists who genuinely try to improve the world, and there are politicians who want to use regulation to get positive results. But they seem to be in the minority and therefore have little ability to make positive changes. People need to break free from the unthinking mindset that free market capitalism is best - then we can look for something better.

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