Wednesday, November 26, 2014

Post-Crash Economics

LONDON – In last month’s European Parliament election, euroskeptic and extremist parties won 25% of the popular vote, with the biggest gains chalked up in France, the United Kingdom, and Greece. These results were widely, and correctly, interpreted as showing the degree of disconnect between an arrogant European elite and ordinary citizens.

Less noticed, because less obviously political, are today’s intellectual rumblings, of which French economist Thomas Piketty’s Capital in the Twenty-First Century, a withering indictment of growing inequality, is the latest manifestation. We may be witnessing the beginning of the end of the neoliberal capitalist consensus that has prevailed throughout the West since the 1980s – and that many claim led to the economic disaster of 2008-2009.

Particularly important is the growing discontent of economics students with the university curriculum. Undergraduates’ discontent matters, because economics has long been the West’s political lodestar.

This discontent was born in the “post-autistic economics movement,” which started in Paris in 2000, and spread to the United States, Australia, and New Zealand. Its adherents’ main complaint was that the mainstream economics taught to students had become a branch of mathematics, disconnected from reality.

The revolt made little progress in the years of the “Great Moderation” of the 2000s, but was revived following the 2008 crisis. Two important links with the earlier network are US economist James Galbraith, the son of John Kenneth Galbraith, and British economist Ha-Joon Chang, author of the best-selling 23 Things They Don’t Tell You about Capitalism.

In a manifesto published in April, economics students at the University of Manchester advocated an approach “that begins with economic phenomena and then gives students a toolkit to evaluate how well different perspectives can explain it,” rather than with mathematical models based on unreal assumptions. Significantly, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, wrote the introduction.

The Manchester students argue that “the mainstream within the discipline (neoclassical theory) has excluded all dissenting opinion, and the crisis is arguably the ultimate price of this exclusion. Alternative approaches such as Post-Keynesian, Marxist, and Austrian economics (as well as many others) have been marginalized. The same can be said of the history of the discipline.” As a result, students have little awareness of neoclassical theory’s limits, much less alternatives to it.

The aim, according to the students, should be to “bridge disciplines within and outside of economics.” Economics should not be divorced from psychology, politics, history, philosophy, and so on. Students are especially keen to study issues like inequality, the role of ethics and fairness in economics (as opposed to the prevailing focus on profit maximization), and the economic consequences of climate change.

The idea is that such intellectual cross-fertilization would help students understand recent economic phenomena better and improve economic theory. From this point of view, everyone stands to benefit from curriculum reform.

The deeper message is that mainstream economics is in fact an ideology – the ideology of the free market. Its tools and assumptions define its topics. If we assume perfect rationality and complete markets, we are debarred from exploring the causes of large-scale economic failures. Unfortunately, such assumptions have a profound influence on policy.

The efficient-market hypothesis – the belief that financial markets price risks correctly on average – provided the intellectual argument for extensive deregulation of banking in the 1980s and 1990s. Similarly, the austerity policies that Europe used to fight the recession from 2010 on were based on the belief that there was no recession to fight.

These ideas were tailored to the views of the financial oligarchy. But the tools of economics, as currently taught, provide little scope for investigating the links between economists’ ideas and the structures of power.

Today’s “post-crash” students are right. So what is keeping the mainstream’s intellectual apparatus going?

For starters, economics teaching and research is deeply embedded in an institutional structure that, as with any ideological movement, rewards orthodoxy and penalizes heresy. The great classics of economics, from Smith to Ricardo to Veblen, go untaught. Research funding is allocated on the basis of publication in academic journals that espouse the neoclassical perspective. Publication in such journals is also the basis of promotion.

Moreover, it has become an article of faith that any move toward a more open or “pluralist” approach to economics portends regression to “pre-scientific” modes of thought, just as the results of the European Parliament election threaten to revive a more primitive mode of politics.

Yet institutions and ideologies cannot survive by mere incantation or reminders of past horrors. They have to address and account for the contemporary world of lived experience.

For now, the best that curriculum reform can do is to remind students that economics is not a science like physics, and that it has a much richer history than is to be found in the standard textbooks. In his book Economics of Good and Evil, the Czech economist Tomáš Sedláček shows that what we call “economics” is only a formalized fragment of a much wider range of thinking about economic life, stretching from the Sumerian epic of Gilgamesh to the meta-mathematics of today.

Indeed, mainstream economics is a pitifully thin distillation of historical wisdom on the topics that it addresses. It should be applied to whatever practical problems it can solve; but its tools and assumptions should always be in creative tension with other beliefs concerning human wellbeing and flourishing. What students are taught today certainly does not deserve its imperial status in social thought.

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    1. CommentedBarry McHugh

      It’s not necessarily fair or correct to direct the argument singularly at the structures of power. It could just as well be that the economic establishment is afraid of God and what he would ask us to do if we knew him. So by keeping the model largely academic, we avoid having to meet God and his sense of fairness head on. However, it’s not just power that does that, we all do, Priests, Nuns, Popes, you and I white collar guys, the lot. We do a bit, give a bit to appease God, then dump it and say, - I'm now dammed well going to look after myself -. So it’s wrong to blame power, its correct to blame all of us and our enormously half-hearted principles: what's wrong with us? We are only buying insurance against our conscious when we see ourselves helping out the less fortunate. Moreover, the post-autistic economics movement, I advise, should tread very carefully.

    2. CommentedAndré Rebentisch

      The reason behind using formalistic models lies in the economics of the university process that rewards formal, abstract modes of expression as a tool of discourse exclusion. The real value of that formalism as a school of thought emerges when you talk to lawyers and listen to the preconceptions of alleged neoliberal policy makers. Economic models are like philosophy. If you want to deal with actual economic problems better study geography.

    3. CommentedAlasdair MacLean

      Obviously part of the bandwagon, currently in vogue, attempting to change the world to a more equitable place and so need to change econ 101.
      It is also worrying when students start to publish manifestos. I thought that these days were long gone.
      Finally did they or do they say that a key measure should be GNH not GDP. Or are they not yet at the stage of showing what is their complete thought.

    4. Commentedslightly optimistic

      Audit dilemma continued.
      The Hague's decision on the Russian Federation's take over of Yukos, once Russia's largest oil company, is due to be reported mid-July. The transaction took place nearly a decade ago.
      "This is, by a hefty multiple, the largest investment arbitration case ever brought: the shareholders are looking for more than $100bn damages", reports the FT.
      State pressure on the auditors of Yukos apparently led them to withdraw audit reports for over ten years. This led to the company's bankruptcy and the lengthy imprisonment of officials.

    5. CommentedNeva Goodwin

      New thinking about education in economics is moving rapidly in parallel with a huge number of experiments with new ways of organizing economic activity. A recent conference in Boston, organized by the New Economy Coalition, brought together more than 100 organizations and businesses that are “working to build the movement for just and sustainable future.” There has been wide circulation of some of the results; especially relevant to Robert Skidelsky’s excellent “Post-Crash Economics” is a report on a panel called “How to Change the Teaching of Economics” which briefly reviews the barriers to change in the content of college level economics courses and then suggests strategies for overcoming these barriers. The Report is intended to be a living document, and invites teachers, students and others to share additional ideas and experience at

    6. CommentedNeva Goodwin

      New thinking about education in economics is moving rapidly in parallel with a huge number of experiments with new ways of organizing economic activity. A recent conference in Boston, organized by the New Economy Coalition, brought together more than 100 organizations and businesses that are “working to build the movement for just and sustainable future.” There has been wide circulation of some of the results; especially relevant to Robert Skidelsky’s excellent “Post-Crash Economics” is a report on a panel called “How to Change the Teaching of Economics” which briefly reviews the barriers to change in the content of college level economics courses and then suggests strategies for overcoming these barriers. The Report is intended to be a living document, and invites teachers, students and others to share additional ideas and experience at

    7. Commentedslightly optimistic

      A parliamentary investigation into the collapse of the UK banks was carried out in London. Disregard of the nation's vital checks and balances was found to be responsible. The auditors claimed that the government overruled their concerns, and clearly the government of a nation is influential - as one resolute firm found some years back it led to their ruin. So not unnaturally, the auditors caved in this instance. The banks later went bust and £billions of public money was spent in the rescue.
      No doubt this happened elsewhere - auditors aren't protected.
      Are students taught about this professional dilemma?

    8. CommentedRentz Hilyer

      Glad to see a reference to Supply Shock here. This book made a big impact on my world view. I agree that readers here would especially enjoy the section (ch. 4) that explains how the backlash against Henry George's land tax sent neoclassical economic thought down a road based on corruption and deceit that led to the decoupling of today’s mainstream economic growth theory from ecological principles. To this day, typical economics curriculums present EG as the primary goal of the economics profession.

    9. CommentedNathan Coppedge

      It would be interesting to see more economics models focus on the technology-infrastructure parallel, if they have not done so already. Permanent or relatively permanent (infrastructure) resources may not be commodities, but they offer a lot of bang for the buck. If economics is not by-and-large a product of infrastructure, then I would suggest seriously considering virtual economics as a functionalist platform serving democratic or democratic-elite values. Like a lot of things in politics and economics, it may sound stupid, but in some ways, it has something to say.

    10. CommentedMichael Lewis

      Neoclassical economics is a political reaction to the single-tax on land proposal of Henry George in late 19th Century United States.

      For more economic history... and the future, see "Supply Shock: Economic Growth at the Crossroads and the Steady State Solution," by Brian Czech.

    11. CommentedWilliam Wallace

      While I'd love to see economics approached properly as a social science, with focus on data first and theory later, it sounds like some of what is being advocated is the replacement of one set of a priori objectives for another (justice, equality, etc.)
      I'd rather see the field "go descriptive" for a decade or two before prescribing again; we've seen enough of that kind of pseudoscience already from the field.

    12. CommentedProcyon Mukherjee

      The tragedy of Economics as a social science lies in the admissibility of the self-induced dissonance that stems much from the use of models that do not replicate reality while it is influenced by the make-believe world of finance that tends to distort reality to meet short term selfish objectives that could have far-reaching consequences in the long term.

      Much of the world's talent finally moves to this world and their influence on Economics and other social sciences is far from being a balanced one.

    13. CommentedAchilleas C.

      Another much simpler solution would be to abolish Economics as a standalone undergraduate degree in the UK and teach economics along with a combination of the other social sciences.

    14. Commentedslightly optimistic

      A demonstration of exasperation with how national politics at present can lead to financial instability came last month from the former chairman of the US Federal Reserve. But this is only one example of long-term and serious indiscipline within the global economy.
      Paul Volcker referred to the Nixon shock in 1971 that destroyed the world's financial discipline, and no doubt led to the euro troubles and the near collapse of economies elsewhere around the world - the mayhem led to the G20 taking responsibility for financial stability.
      Will Australia's G20 dare to address the fundamentals?

    15. CommentedKen Clark

      This article follows a common pattern found in critiques of "mainstream" or "orthodox" economics. There are three steps: (1) economists all believe X; (2) X is clearly nonsense; (3) therefore economics is nonsense and needs to be reformed. Like most such critiques it breaks down at step (1). The idea that mainstream economics is a free market ideology ignores the vast swathes of the discipline that investigate what happens when markets fail to deliver socially desirable outcomes. In the academic literature this is the most dynamic and interesting current research agenda while most practising, non-academic, economists are engaged in precisely this kind of endeavour. Would a discipline in the thrall of the oligarchs have produced the New a economics of the Minimum Wage, current advances in behavioural economics or any of the huge literature on, say, involuntary unemployment where government intervention leads to a better equilibrium? Lord Skidelsky mentions capital in the 21st Century but neglects to remind us that Piketty has been feted within the economics profession, published in the leading mainstream journals and tipped as a future Nobel prize winner.
      As for blaming economics as a discipline for both the crash and austerity, Lord Skidelsky fails to acknowledge the many economists who argued and continue to argue against the offending policies. Is there a consensus amongst UK macroeconomists on austerity? Certainly not, but it is not the discipline's fault whom policy makers choose to ask for economic advice and which advice they choose to follow.
      There are undoubtedly developments in the economics discipline which could be better reflected in the undergraduate curriculum. In a dynamic, developing subject, this will always be the case but dismissing the mainstream as narrow and ideologically driven is wide of the mark and undermines the case for any reform that might legitimately be required.

        CommentedCharles Stewart

        This criticism of Ken Clark seems unfair: if you accuse Skidelsky of arguing from "(1) economists all believe X; (2) X is clearly nonsense", you need to give an X for which he asserts both of those.

        The criticism in the first place is not that mainstream economics lacks depth, but that it lacks breadth (lack of interest in problems that don't fit GE model, lack of interest in problems that don't give an opportunity to show off technical sophistication). In the second place, is there no ideology involved in an economist like Krugman being a pioneer of New Trade Theory among his peers, while putting forward the Davos-friendly simplified free-trade agenda as a litmus test for being a respectable economist?

    16. Commentedphilip meguire

      If the nationalists and populists come to power, they will have no more time for Skidelsky than they do for the rest of profession. Be careful what you wish for.
      It is impossible to learn business and policy reality, and standard and heterodox economics, within the ambit of the English/Commonwealth 3 year degree. This is doubly true given how poorly prepared many average uni students are nowadays. A major problem in New Zealand universities, where I have taught for 20 years, is that only 4 years of post high school instruction is offered. That is not enough time in which to obtain a broad and serious education.
      Piketty's book does not understand the Solow-Swan model of the elementary dynamics of a industrial economies, as taught to university students everywhere. If Piketty were right, the share of labour would decline over time, and household net worth would grow faster than household income. Both assertions are falsified by post WWII USA history, if transfer payments are seen as largely made up of delayed and contingent wages.
      I agree that the first degree in economics should include more economic history and history of ideas, and more political philosophy and ethics.
      Little can be done about inequalities in wealth, beyond mitigating inequalities in incomes, without threatening the the health of the entire economic order. Inequalities of income can be mitigated via a flat tax combined with an annual amount paid to every legal resident of the country. It must be emphasised that the sort of confiscatory marginal rates Piketty advocates will starve the public purse over the long run.

    17. CommentedTim Chambers

      I majored in economics in college and didn't learn anything useful from it. I suspected it was mostly ideology then (late 70s), particularly Friedmanism. If Milton Friedman and Monetarism have not been put to rest post-crash by the ineffective monetary stimulous of Quantitative Easing, it should be but won't because its adherents are the only beneficiaries and they are still in unmerited positions of power.

      For all their talk of the evils of government intervention in the economy, we would not have the form corporate Capitalism we have today without government intervention. Read Polanyi. What made corporate Capitalism possible were policy choices by governments - imperialism. colonialism, militarism, the gold standard... - a collection of evils whose unwinding continues to bedevil us worldwide.

      My college offered no courses that dealt with such critiques, because we were being indoctrinated in an ideology, not educated to think and make rational choices for ourselves.

        Commentedphilip meguire

        Monetarism is dead. QE should not be evaluated by how much growth its has stimulated (which is not much), but how much free-fall disaster it prevented (which we will never know for sure).
        The modern corporation emerged in the USA 1890-1914, for two reasons. First was a growing hostility in legislatures and courtrooms to the large business trusts that immediately preceded the modern corporation. Second was the continuous valuation of a corporation's stock in the stock market. This made buying a piece of a business vastly easier, and enabled the eventual rise of well diversified managed funds.

    18. CommentedEarl Staelin

      Excellent, but what is left out is identification of the most serious problem with the U.S. financial system, and that is that government has given up its power under the Constitution, Art. I, section 8 (5), to create our money through direct issuance of currency, and turned it over to private banks, and eventually to the Federal Reserve System and the private banks who own it. This private system then creates our money and lends it to our government at interest---an enormous, unnecessary expense that gives Wall Street a large measure of control over our government, and creates an every-growing deficit. If students understood this, they would refuse to take courses in the field until the curriculum is reformed to fill this enormous gap. Students would then include study of the writings of Ben Franklin, 19th century economist Alexander Del Mar, 20th century economist Irving Fisher of Yale, and present day economist Michael Hudson of the U. of Missouri at Kansas City, among others, on our financial system and how to change it in order to restore a healthy economy that is protected against recession.

    19. Commentedradek tanski

      "The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business. He is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the market economy." Von Mises

      I suppose that was the past. Now we have the new age economics of live and let live.

    20. Commentedslightly optimistic

      One criticism that Ha-Joon Chang made about the current form of capitalism is that economics is becoming a value-free science. The subject used to be called political economy.
      This could explain why international rules are often broken, we have such instability in Iraq and Ukraine, and some developed countries ignore even national checks and balances on finance in order to beggar others.
      It remains to be seen if the G20, under Australia's chairmanship, will dare to address the fundamentals. I agree with the comment below: "A simple reshuffling of university curricula will not change the discourse."

    21. CommentedDenis Burakov

      Dear Mr. Skidelski,

      I share some of your concerns about the mathematization of the field of economics, which has undoubtedly changed beyond recognition in the course of past decades. Indeed, we are no longer talking about classical economic theory as professed by D. Ricardo and others; neither do we seek to look deeper into human relations through the prism of economics. Instead, we model an economic life of fictional utility-maximizers who pursue their self-interests and keep our economies running. So now we are talking economics.

      While this all seems true, I do not see how a curriculum reform can "remind students that economics is not a science like physics, and that it has a much richer history than is to be found in the standard textbooks." I personally think that there is no turning back. Classical and neo-classical economic theory sure can be taught along with other social science courses, but let's admit it: economics of today is all about quantitative modeling and complex mathematical techniques. A simple reshuffling of university curricula will not change the discourse, let alone provide students with new ideas how to solve all exigent economic issues.