Economics is broken. Economics is fine. Who’s right?

Every economist loves a good argument, and there is a good one raging over on Prospect Magazine’s about whether the world needs an entirely new discipline of economics. Arguing for the destruction of the current version of economics is Howard Reed, whose long analysis of the field lays out several aspects he thinks are incurable ills. Some highlights:


When it comes to business, the animating paradigm—perfect competition—envisages every firm as in the grip of monomania, exclusively concerned with its own profit and nothing else. Of course, the mainstream model has developed detailed offshoots to deal with the fact that real life is sometimes more complicated—as when firms appoint managers who are more concerned with lining their own pockets (or going to the golf course) than enriching the shareholders.

But the basic model, in which there are so many competing, identical profit-fixated firms that they are all obliged to charge exactly the same fair price, retains its stranglehold. No matter that in almost any complex industrial market structure, some form of imperfect competition or even outright monopoly will be a better first approximation of reality, everything else is made sense of as a deviation from it. This is how the world is meant to work. So the instinct remains to nudge the world towards the vision (or hallucination) of extreme and uniquely efficient competition.

Most jobs are in services, where there is no equivalent to counting the cars rolling off the line; all that can be tallied objectively are the receipts that come in. For the growing army of freelance service professionals, “output” is defined by the wage they can charge in the market, and so marginal product theory collapses into marginal product tautology. Much more generally in today’s complex workplaces, what each extra worker contributes to output will be clear as mud. When tasks are specialised, there might be several individuals whose absence could bring production to a halt. Think of a small, hi-tech manufacturing firm, which couldn’t function without its one designer, its coder, or its engineer. Every one of these could claim that the marginal output they facilitated was the entire output of the firm. But it wouldn’t add up for them all to be paid at that rate. So how would things be settled? In large part by bargaining. This, however, is a scrappy process involving institutions and personality as well as economic muscle; and the arid propositions of neoclassicism shed no light here.

Again, there are practical consequences from the shortfalls of the theory. Like anyone else, labour market economists would rather talk about things where they’ve got something to say. And so, when confronted by the extraordinary widening of wage disparity in the Anglo-Saxon economies of the 1980s, they were reluctant to discuss the social and political currents that might have affected the relative confidence with which different groups bargained. Instead, the mainstream latched on to theories that put everything down to technology, postulating that the computers were somehow transforming the potential of well-to-do graduates but not the “low skilled.” No matter that inequality wasn’t rocketing in the same way in other parts of the world; it was almost as if it had ceased to be a political question.

For me, the most general problem with the neoclassical architecture is that it airbrushes out the negative consequences of a destructive behavioural mindset–selfish individualism. Indeed, it regards such behaviour not only as inevitable, but desirable. Whatever the purpose of its practitioners—many of whom are thoughtful people, with progressive views—this is the work that it does as ideology. Under the cloak of scientific rationalism, it smuggles in values that narrow the realm of the politically possible and entrench the powerful.

Power relations in the labour market go unexamined. Profit-maximisation in mainstream economics becomes not merely a description of what does happen in a capitalist economy, but a template for what should happen. As for the account of the individual, experiments on students have suggested that those who are exposed to the mental virus of mainstream economics emerge behaving more in line with its selfish predictions that those who have studied other topics. Proof, if it were needed, that it is not merely awry, but malign.


Diane Coyle, in response, dismisses pretty much every one of Reed’s critiques in her rebuttal. Her position is that (a) economics is (mostly) fine and (b) Reed’s analysis isn’t even right about what is wrong with the field. Some highlights:


It is both bizarre and frustrating to read over and over again the same absurd claims about economics. The caricature presumes that practitioners pass their careers in the discipline without ever being troubled by another thought after their first-year undergraduate course. Critiques of this kind are like looking at an introductory physics textbook and condemning physics for ignoring friction.

Reed’s recent version in Prospect features almost every one of the “Eighteen Signs you’re reading bad criticism of economics” that were so witheringly dealt with in this blog postby the Canadian economist Chris Auld. In his call to tear up the economics textbooks, Reed also fails to address any of the substantive points raised a recent Prospect article(“Dismal Ignorance of the Dismal Science”) by a distinguished group of applied economists at the Institute for Fiscal Studies.

Almost everybody agrees that macroeconomics—which looks at growth, inflation, interest rates and the economy as a whole—is in a troubled state. But this area is a minority field: contrary to popular belief the great majority of economists don’t study it. This is why the Economic and Social Science Research Council has funded the Rebuilding Macroeconomics Network, to encourage some fresh approaches.

But macroeconomics is inherently hard because there is very little data. There is only a handful of key variables, all linked to each other and changing only slowly, the outcome of multiple possible causes in a complex system, and with little opportunity for doing experiments. It will never be able to predict a crisis with a high degree of confidence.

Finally, some recent work has emphasised weaknesses in the empirical techniques used in economics. The usual method used by economists to identify cause and effect is not as good as we might hope—there is need for care and caution in empirical statistical work of any kind. The culture of economics sometimes means that too many economists are a little too cavalier about the inferences they draw. Another way you might put this is to agree that more professional humility is in order.

The professional bodies are addressing these challenges, including the lack of diversity in the discipline. The major journals now require researchers to provide data so their results can be replicated. The CORE Economics curriculum, a new global economic syllabus, is being adopted by a growing number of universities in the UK and worldwide, so the economics taught to first-year undergraduates encompasses history, theoretical disputes, power relations and strategic interaction. It would be nice if change happened faster, but it is time to put to rest an account of economics so far from the truth that it does not even deserve the label of caricature.


As for me, I’m with Doyle. I consistently read outstanding work in Economics. Sure, there are issues that need to be addressed — the biggest being the lack of diversity in the field, which is Doyle is quick to acknowledge. The field has its problems, yes, but my sense if that in general it contributes greatly to our understanding of our past and present world.


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