Have economists changed since the 2008 crash?
Economists are not innocent people. The 2007-08 financial crisis that almost sent the world economy into a great depression was, to a large extent, a consequence of the designs dreamt up by leading economists. This raises three concerns about the economics profession. The first is a basic moral failure resulting from a lack of integrity in some of its prominent representatives; the second is the idiotic collective fascination with the technicalities of the discipline, reinforced by an inclination for group-thinking; the third is a deeper, intellectual challenge that questions the very role economics ought to play in society.
In 1971, neoliberal icon Milton Friedman was paid by the Chicago Mercantile Exchange for a report that decisively tilted the balance in favour of opening a market that allowed betting on the variation of currency values – a kind of financial product that was illegal under the strict regulation imposed in the post-war era. Ever since, studies by economists have played a legitimating role in each phase of finance’s liberalization. This close connection was not without its ethical problems. Take the lesson learned from Charles Ferguson’s documentary Inside Job (2010). This notes that Larry Summers – former Harvard president, Treasury Secretary in the Clinton administration and an adviser to President Obama – untiringly defended financial liberalization throughout the 2000s, a period in which his ties with the industry brought him more than $20 million. In the wake of the financial crisis, a study of 19 eminent financial economic specialists showed that, in addition to their university posts, most had affiliations with the private sector that were not publicly disclosed.
On this front, some progress has been made. The American Economic Association has set up a new disclosure policy stating that authors submitting papers to academic journals should identify each interested party from whom they have received at least $10,000 in the past three years. Moreover, it calls for disclosure during media appearances. Professor Gerald Epstein, who was at the forefront of this battle, calls the change ‘a very big step forward’. He particularly stresses that disclosure in non-academic work could help ‘set norms of behavior that colleagues, the press, students and citizens can help make economists accountable to’.
Most economists today make do with a pernicious reduction of the world to its mathematical form
Another, more mildly positive, evolution concerns the content of economic curricula in universities. Academic thought influences political decisions; or, as JM Keynes memorably put it: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.’ In the realm of university teaching there has, during the past few decades, been a growing fascination with the technical sophistication of analyzing abstract dynamics of markets at the expense of thinking about economic history and institutions. This created an intellectual climate favorable to opening a Pandora’s box of financial ‘innovation’ during the neoliberal era. It supported the comforting view that by spreading the risk, complex products – like the subprime mortgages that were sold to low-income Americans and then bundled up to be sold to institutional investors like pensions funds – were reducing financial instability. Of course, as it should be clear now, it was the exact opposite.
In 2014, the International Student Initiative for Pluralism in Economics sounded the alarm: ‘A lack of intellectual diversity,’ they claimed, ‘does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability, to food security and climate change.’ They call for bringing the real world into the classroom through paying greater attention to economic history and developing a deeper dialogue with other social sciences. They also demand a greater diversity of theoretical perspectives by adding post-Keynesian, ecological, feminist, Marxist and other economic traditions to the commonly taught ‘neoclassical’ approach. Thanks to student pressure, some openings have been made. For example, CORE, a new open-access online syllabus funded by the Institute for New Economic Thinking, is introducing some elements of intellectual variety into the economics departments of tens of leading universities.
Still, has anything changed in terms of the substance of economic knowledge produced? On the bright side, Thomas Piketty’s acclaimed research on inequality has contributed to significantly changing the conversation about economic policy. However, at least for the moment, it has not impacted policy outcomes: wealth and income inequalities have generally increased during the past decade. According to the Financial Times, the effective rates of tax paid by the biggest transnational corporations has fallen by nine per cent since the financial crisis.
On the macroeconomic front, the picture is even bleaker. The same kind of modelling that misled economists 10 years ago is still in use. And, even if some insightful analysis has been written by non-traditional economic thinkers, the disastrous management of the Eurozone debt crisis in Europe and the late and disappointing recovery of the US economy show that policy remains unenlightened by this bright thinking. Generally speaking, economists are still beholden to outdated remedies, obsessing over monetary policy solutions – based on the rate of borrowing money – and totally overlooking the need for state-funded recovery programmes to improve the welfare of the population, tackle ecological challenges, provide decent jobs and stabilize the macro-economy.
Ironically, the 10-year anniversary of the great financial crisis coincides with the 200-year anniversary of Karl Marx’s birth. This is the occasion to recall that the subtitle of Marx’s Das Capital is ‘A critique of the political economy’. The term critique is not a gimmick but points to the very heart of Marx’s project. Marx rebutted the bourgeois economists of his day for ‘exclusively [giving] their attention to the quantitative aspect’ of economic problems: models and numbers, rather than morals and politics. Some classical writers such as Adam Smith or John Stuart Mill analysed the world with conceptual richness and moral and political subtlety; but, much more than in Marx’s day, most economists today make do with a pernicious reduction of the world to its mathematical form. They would do well to return to Smith, Mill and Marx’s writings, which recognized that economics is always tangled up with social and political questions.
This inability to tackle the qualitative dimension of socioeconomic challenges is more problematic than ever today. The logic of the market – with its assumption that growth must carry on indefinitely – is ill-suited to dealing with civilization-threatening ecological challenges. As the pioneer of ecological economics Herman Daly said: ‘We’ve entered into an era where economic growth has become uneconomic – it’s costing us more in terms of sacrificed ecosystem services than we’re gaining in terms of production benefits.’ His statement echoes Marx’s warning against the foolishness of thinking of economics as isolated from the real world. It is time for the discipline to find its place in the wider web of life.
The July-August 2018 issue of New Internationalist will be about ‘the next financial crisis’.