Wednesday, 26 March 2014

Sack the Economists!

from Geoff Davies
December 7, 2013,
Blogger Link

Non-mainstream economists are all-too aware of the failure of mainstream economists to anticipate, let alone avoid, the Global Financial Crisis and the ensuing Great Recession.  The mainstream profession is also failing to fix the problem, and is actually making it worse.
It is hard to get alternative views heard, and the mainstream carries on almost totally unperturbed, despite being centrally responsible for a global disaster.  This is of course extremely frustrating.
After reading yet another cri de coeur from yet another frustrated economist, I thought perhaps we need to spell out the message in all bluntness: we need to sack the economists (the mainstreamers).  We also need to derail their baleful ideology.  That means we need to disband the departments of neoclassical economics, so the poison is not passed on to any more hapless generations.
When I say “we”, I really mean “we, the people”.  The job can’t be done by a small band of isolated reformers.  That means people need to be informed and persuaded.  They need to be spoken to in terms they understand;  not everyone, but opinion leaders and interested laypeople, of whom there are many.
Thus was I moved to write the short ebook: Sack the Economists and Disband Their Departments.
The title may seem to be a bit confronting at first, but the book is a concisely argued case, not a rant.  The bluntness is justified by  the fundamental flaws in mainstream economic ideas.  There are not just one or two flaws, there are many.  Neither are they just obscure theoretical flaws.
For example, private debt is ignored in mainstream macroeconomic models and thinking.  It is ignored because, supposedly, “one person’s debt is another person’s asset”.  But that would only be true if loans comprise 100% savings.  They don’t of course, somewhere between 90% and 100% of a new bank loan is new money created out of nothing.  That means loans affect the money supply, the purchasing power available to the economy.  As debt rises and falls, so the economy booms and busts.  Steve Keen has been leading the way explaining and demonstrating this, for example in Debunking Economics.  This seems to be the most immediate reason why the mainstream utterly failed to foresee the 2007-8 Global Financial Crisis.
At an even more mundane level, the near-universal use of Gross Domestic Product as a measure of economic success, and by implication of quality of life, does not even qualify as basic accounting.  This is because the GDP measures “activity” involving money, but makes no distinction between useful, useless and harmful activity: the cost of cleaning up pollution is added to the GDP.  This would be like a shop keeper entering all his transactions (income and costs alike) in the credit column of his ledger, adding them up, and claiming his business is booming.
What is needed of course is a balance sheet.  It would also be helpful to separate economic, social and environmental factors.  All of these things are available, but they languish because politicians love the GDP and mainstream economists fail, collectively, to point out the falsity of using GDP as a measure of welfare.
The so-called efficient markets hypothesis is a joke.  If all financial market players made independent assessments of relevant information and their mean assessments were accurate, then there could be no market crashes.  It is well known that many market players follow trends, not fundamentals, so their assessments will not be independent.  If players assessments become correlated, in other words if they behave as a stampeding herd, then their mean assessment can be seriously in error, and subject to sudden correction.  That of course is what happens in a market crash, and every crash invalidates the hypothesis.  (Can I have my pseudo-Nobel Prize now, please?)
The central absurdity of mainstream economics is of course the neoclassical theory, and its prediction that free markets will bring about the General Equilibrium.  It is hard for a scientist like myself to conceive that this theoretical abstraction could have survived for a century or more, let alone become the dominant paradigm.  It is based on absurd assumptions, and there are many manifestations of disequilibrium in real economies that contradict its main conclusion.
Financial market crashes are obvious manifestations of disequilibrium, but so, for example, are extreme and increasing inequalities in wealth (an instability in the distribution of wealth), and the exponential growth to dominance by a few firms in many market segments (commonly due to economies of scale and the coloniser effect, both of which are excluded from the theory).
The neoclassical assumptions should disqualify it from serious consideration anyway.  We are all assumed to have complete knowledge, to be able to predict the future, to be immune to fashion, to social and psychological pressures, and so on and on.  If you drop these assumptions you predict a very different kind of system:  a far-from-equilibrium, self-organising system that probably qualifies as a complex system.  The neoclassical theory can never be even a rough first approximation to such a system.  Rather, it is completely misleading.
As well as silly assumptions, there are also important things missing from mainstream thinking.  For example, why is the pivotal role of ownership not highlighted as a dominant determinant of the flow of wealth, and responsibility?  There are many possible kinds of ownership, but our system is dominated by only a few, and they tend to favour the wealthy.  Why is social credit almost universally ignored.  This is the term often used Henry George’s followers – a modern systems term might be emergent community wealth, the wealth that accrues from the proximity of businesses, people, infrastructure, above and beyond the individual investments.  It is this wealth, that belongs to no individual entity, that is allowed to be captured by land speculators, thus facilitating one of many economic injustices.  Then there is the monetary system, perhaps the most important and most neglected economic factor of all.
Sack the Economists lists seven readily identifiable mechanisms that transfer wealth to the rich, from the rest of us.  Neoliberals rail against “wealth transfers” that attempt to re-balance the distribution of wealth, but are oblivious to copious transfers in the other direction.  This is an example of rhetoric that can be turned back on neoliberals.  Other examples given in the book are social engineering, political correctness and class warfare.
Mainstream economics is incomplete, grossly misleading and destructive.  It reflects the gross ignorance and long-term intellectual isolation of its practitioners.  It uses a lot of fancy mathematics, but this does not mean it is science.  The mathematics can’t disguise the fact that mainstream economics is not science – it is pseudo-science.
I think we need to proclaim these simple facts as widely as possible, using a few simple examples of the kind I have just mentioned.  I think it’s a waste of breath trying to argue with the true believers, theirs is not a rational discipline.  Don’t debate arcane details, there are so many bits of nonsense that you’ll tie yourself up forever and just play into their hands.  Don’t just ask for equal time with the neoclassical theory, it is a bad joke that can’t be justified in any curriculum, except as an example of deviant, non-scientific thought.  Seek to displace the neoclassical theory.
I am an outsider to economics, though one who has been exploring its thickets for fifteen years, so perhaps you’ll indulge me quoting some real economists in my support.
This book raises many interesting questions, most importantly, why does anyone take economists seriously when it comes to discussing the economy? -Dean Baker, Co-Director, Center for Economic and Policy Research, Washington D.C.
Geoff Davies has a very good idea. Economics has locked itself into an intellectual cul-de-sac.  Even its failure to anticipate the global economic crisis was not enough to force it out.  So let’s sack the economists and let real scientists take over this vital but currently dangerous discipline.Steve Keen, Economist and author of the popular book Debunking Economics
With delightful wit and insightful analogies, geophysicist Geoff Davies dissects the inconsistencies — and the inanities — of mainstream economics. … In the end, Sack the Economists helps us understand, plutocracy never works — and neither does an economics that refuses to discomfort our plutocrats.Sam Pizzigati, Institute for Policy Studies, Washington, D.C., and author of The Rich Don’t Always Win. Source Reference of Article Real-World Economics Review Blog

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