Whats Wrong With Economics?

What's Wrong With Economics?

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The question of whether mainstream (neoclassical) economics as a discipline is fit for purpose is well-trodden ground, particularly on the internet. However, popular debates often focus on either policies or on specific theories, instead of economist's approach as a whole. While both simplistic 'free market' ideas and unrealistic theories are surely worthy of criticism, in my opinion this approach does not get to the crux of the issue. Economists will simply argue (somewhat correctly) that free market ideas are just a perversion of neoclassical models, and that certain theories are not important or can be modified to incorporate the critic's objections (again, somewhat correctly).

However, I think the problems with economics are broader and more general than any theory or policy. Economic theory is flawed, not necessarily because it is simply 'wrong', but because it is based on quite a rigid core framework that can restrict economists and blind them to certain problems. In my opinion, neoclassical economics has useful insights and appropriate applications, but it is not the only worthwhile framework out there, and economist's toolkit is massively incomplete as long as they shy away from alternative economic theories, as well as relevant political and moral questions. In other words, the problems with economics cannot be dismissed as isolated problems with, say, areas of undergraduate economics, or attributed to a few Chicago School loose cannons. In this post, I will outline the problems I see with economics as currently practiced.

Economics lacks pluralism 

Unlike other social sciences, which are generally characterised by competing schools of thought, mainstream economics has dominant way of thinking: neoclassical economics. Neoclassical models generally start from an individual agent facing clear choices under scarcity: a firm maximising profit subject to costs; a consumer maximising utility (satisfaction) subject to a budget; even a politician aiming to get reelected by choosing policies which will most appease different interest groups. Economists often take parameters such as technology, preferences and so forth as a given, and then ask what happens if agents in the model optimise their choices, meeting through a market to interact (not always in equilibrium, as is commonly thought, though often this can be the case). This approach roughly characterises a lot of mainstream economics, from theories of the firm to the dominant macroeconomic Dynamic Stochastic General Equilibrium (DSGE) models to the canonical supply-demand.

Economists also have a stock of reasons that their approach is superior. First, they believe economics must explicitly model agents who make decisions, which is what differentiates it from, say, physics, where atoms have no autonomy. Second, economists believe that having these agents modeled on the "deep parameters" of human behaviour means that the agents' behaviour will not change when policy changes, an approach which stems from Robert Lucas' 'critique' of naive aggregate modeling. Third, economists believe their approach allows them to state their assumptions clearly so they know exactly what they're modeling and can understand and isolate causal links.

However, there are important counterpoints to these arguments. First, there is no reason to believe that the economy as a whole should necessarily be modeled from individual choices: people's choices may interact and depend on each other to such an extent that each individual is rendered irrelevant, and we can proceed from a structural standpoint. Second, there is no reason to believe that there are any "deep parameters" of human behaviour that will not change with policy (ask an anthropologist), and we cannot immunise ourselves from this problem by modeling things a certain way; rather, we simply need to be aware of the ever-evolving relationship between policy and the economy. Third, rather than merely allowing economists to state their assumptions clearly, the complexity of modelling from individual agents all too often means economists have to make a plethora of assumptions, implicit and explicit, which are not only unrealistic but come to form a straitjacket over their models.

There are alternative approaches to economics that are equally valid. Sraffian economics takes the classical view that societies must reproduce themselves - that is, outputs in one period must be sufficient for inputs in the next period - and uses it as a benchmark for analysis. Marxism, generally regarded by economists as 'discredited' (mostly due to misunderstandings over what is meant by the word 'value') models the business cycle as a function of the labour put into production. Evolutionary Economics and Econophysics model the economy using tools from biology and physics, respectively. Institutional Economics tends to take nothing as a given, and first looks at things like history, laws and culture to see what makes firms and economies tick. Models such as Steve Keen's, or the Modern Monetary Theory (MMT) school, take banks and debt as central, and as such are highly suitable for modelling financial crises. Economists sometimes take elements of these approaches into account, but it's pretty difficult to get a model with a completely different framework accepted in a major mainstream journal.

Despite the existence of alternatives, economist's insistence on using a certain approach means they can find it hard to accept any other way of thinking, which leads another problem: 

Economic theories persist despite empirical and logical problems

Given such uniformity of approach, one would expect economic theory to be remarkably consistent with available evidence, free of substantial controversy and to offer clear explanations of phenomena such as business cycles, income distribution and firm behaviour. But this is not so: economists have not  found a universal explanation or collection of explanations for, say, the business cycle, and also differ on how best to counter it. Economic theory is historically rife with controversies over its internal consistency and relevance, and often problems are conceded or even pointed out by influential theorists. Paradoxically, though a large degree of economic work nowadays is empirical, key theories are rarely (or never) truly falsified.

One such example is the IS/LM model, which remains a cornerstone of modern undergraduate macroeconomics, and is used by influential economists in policy discussions. This is despite the fact that the model's creator, John Hicks, criticised and disowned the model decades ago. He believed that the model - which was supposed to be an easily digestible interpretation of John Maynard Keynes' famous General Theory - did not include a role for irreducible uncertainty, which was fundamental to the concepts IS/LM was trying to espouse. The result was that it was not possible to interpret the time period of the model in a way that rendered it internally consistent. Now, the mere fact that it was the model's creator who disowned it doesn't mean he was right, but it should at least make us sit up and pay attention - after all, the creator of a model is surely best placed to understand it.  Despite this, the criticism is rarely mentioned (or even known) by IS/LM's modern adherents, or taught on courses.

There are many such examples of persistent, but flawed, economic theories: production functions and the Solow growth model are still commonly used, despite the Cambridge Capital Controversies, in which the creators of the models conceded key points about the validity of their approach. DSGE persists despite the fact that that dominant versions failed to help central banks foresee and ameliorate the 2008 financial crisis. Neoclassical theories of the firm persist despite the fact that studies of the firm show firms barely even understand economist's approach, let alone adhere to it. Game Theory is widely loved by economists, despite being falsified in experiments and having no useful application in the real world so far, something admitted by notable game theorist Ariel Rubenstein. Utility maximisation persists as an explanation of consumer behaviour, despite a myriad of evidence that contradicts it: most notably time inconsistency, which shows that people's decisions change so much over time that they cannot really be said to be acting on coherent preferences.

The standard economist's response to such criticism is "oh it's just a tool, a simplification, not reality". At worst, this roughly translates as "there is no event, argument or alternative that could make me abandon my theory completely". This mentality is effectively a crude version of Milton Friedman's Methodology of Positive Economics, where Friedman argued that economic theories should not be judged by their assumptions but by their predictions. Yet Friedman's essay lacked coherence, as he failed to offer any falsifiable predictions, and actually twisted his logic to dismiss early evidence contradicting neoclassical theories of the firm. Friedman's essay has met many refutations, one of which was by influential economist Paul Samuelson, who argued that a theory is really a collection of hypotheses, all of which are refutable and hence subject to continual revision, and - contrary to what Friedman implies - there is not a clear cut that can be made between the internal mechanics of a model and the 'predictions' it makes.

It would be completely wrong to suggest that economists never tackle interesting problems like behavioural biases or institutions: in fact, both of these problems are quite in vogue in mainstream economics. However, they almost always retain the methodology outlined above as a starting point, and try to annex a particular anomaly to their core framework: the 'frictions' approach described by Noah Smith. The result is that it's hard to find an economic model that does not retain a few unrealistic characteristics in areas that are not deemed to be under investigation, something economists will readily admit. But if we know the concepts or assumptions we are using are largely wrong, why continue to use them? Science progresses by changing its framework to make it as consistent with available evidence as possible, not by exploring any every documented departure from its framework as an isolated 'anomaly'. Economists seem to think the neoclassical approach is the default starting point for economic analysis, but I don't see how this role is deserved.

The irony here is that, though economics is often touted as the king of social sciences due to its mathematical and scientific approach, economists seem to take their theories - their 'way of thinking' - as a starting point through which they interpret reality, rather than as a truly falsifiable framework. The result is that the way economic models are used has more in common with something like Karl Marx's historical materialism than science. However, unlike marxists, economists are (erroneously) wont to see their approach as neutral, which is my final problem: 

Economic theory too often tries to be ahistorical, amoral and apolitical

Economists try place their analysis above ethical and political considerations, and purport to engage in purely technical, 'value free' debates. However, the fact is that economic models inevitably contain judgments: what should we study, and under which criteria should we evaluate it? It may be true that the statement 'the minimum wage increases unemployment' will be interpreted differently by people who have different values, but the fact that we are even studying the minimum wage, and its effect on unemployment, implies that the relationship between the two is important. Furthermore, it is a stretch to suggest that the value judgment is much of a leap from the analysis: someone who had been taught that the minimum wage unambiguously created unemployment would be likely to be against it (economists also generally favour things like 'efficiency' and 'competition', opinions which rely on value judgments).

Ignoring a particular ethical or political concern does not make it irrelevant; it simply reflects a judgment on the part of economists that the concern is not important. And this judgment may be mistaken - consider the work of the philosopher Michael Sandel, who has recently highlighted that economic theory assumes buying and selling a commodity is independent of the commodity itself. This is generally not borne out by real world examples, as buying or selling something can change how people perceive it, which can have far-reaching impacts on how markets function. Is systemically ignoring such considerations in one's models a value-free position, or just a blatant denial of reality?

The nature of economic models also lacks historical perspective. As Marx pointed out some time ago, economists usually take capitalism, and the institutions and social relations it entails, as a given for their analysis. For example, the common analysis of markets versus governments takes markets and the institutions required for them - such as property rights - as a given, and terms further institutions or laws an 'intervention' into the market system. This creates a false dichotomy where interventions past a certain arbitrary line are open to criticism and debate, while those that are within the bounds of what is 'necessary' for the basic market model are not. A similar problem emerges with the behaviour of economic agents. These agents are usually fairly materialistic, 'maximising' their profits or consumption, but questions about the desirability of this behaviour are not asked. Surely this silence can only serve as a mark of implicit approval and legitimisation.

A final area where economists are seemingly blind is politics. In fact, the political blindness of even the most well-intentioned economists can be surprising. I was discussing monetary policy with economists Miles Kimball and J.P. Koning, and they both endorsed a specific approach, advocating various measures to achieve their favoured outcome. However, these policies were completely unacceptable politically: one of them was suspending 1:1 conversion of bank deposits into cash; another was intermittently declaring random notes and coins worthless to stop people holding money. I think I speak for many when I say 'no thanks' to such ideas, yet their feasibility or acceptability wasn't even deemed an issue. Surely, though, the true test of whether an economic policy or system is desirable is whether people want it? After all, 'the economy' is really just an abstract idea; what ultimately lies beneath the models are people, and if they don't like your idea, chances are you're doing something wrong.


Ethics, history, politics and alternative theories can and should be a bigger part of being an economist. By trying to make economics an isolated sphere of study so that they don't have to deal with such considerations, economists do themselves no favours, as they only end up boxing out important and potentially productive debates. Economists may dismiss such concerns (particularly alternative theories), but as economics continues to lose its stature among students, employers and the general public, they're really only doing a disservice to themselves, and the discipline as a whole.


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