Economics, as a field of academic inquiry, has of late been the subject of much ire. Messrs journalists and practitioners of neighboring social sciences have, since the great financial crisis of 2008, cast all manner of aspersions on the discipline's claim unto ‘scientificity’—on, in particular, its capacity to illuminate the workings of the modern market economy. While the letter of such broadsides are necessarily variform, the spirit is of a nature strikingly uniform. Invective is leveled at the alleged incapacity of the discipline to account for the most central of economic and social phenomena—a natural consequence, it is said, of its suite of highly idealized preconceptions of how the social world operates.
Contemporary economists are, so it goes, possessed of a ‘Newtonian metaphor’—they believe, that is, that markets left to their own devices will inexorably converge to a ‘Pareto efficient’ equilibrium—ditto for dogma positing the incorrigible solipsism of all economic agents, the competitiveness of all markets, and the intellectual superfluity of economic inequality, among others. Consider, for example, an August 2019 Guardian column by journalist Andrew Simms. Simms bemoans the ‘idea of perfect markets under perfect competition’, apparently the sine qua non of the contemporary economics profession, that credulously entreats us to ‘believe in a world where everybody knows everything, there are an infinite number of companies, no barriers to setting up a business, where any product can stand in for any other...and, crucially, there are no externalities...from production or consumption’. In another such drumbeat, Binyamin Appelbaum of the New York Times broods on the contempt in which the profession allegedly holds distributional questions, positing that economists invariably conceive of inequality fatalistically—as a deadpan ‘natural consequence of capitalism’—disregarding entirely questions of institutions and policy.
And so does the lambaste advance—so interminably as to make possible the population of a small library. Yet such an effort would be in vain—for, it turns out, this incipient genre of polemic is in equal measure anachronistic as it is importunate. For that ‘economics discipline’ which it so raptly invokes is, as we will see, but a pale shadow of the economics discipline of present. Much of it, that is, trades in the abject canards of an economics profession long since advanced—but innocuously so, for reasons to which we now turn.
Samuelson and the undergraduate canon
The screeds above-mentioned, far from revealing the ills afflicting the economics discipline as such, instead reveal, if unwittingly, the inconsistencies that beset a certain rendition of that discipline—namely, that rendition presented to undergraduates, the world over, in standard introductory ‘Econ101’. The nature of this problem is best encapsulated by UCL economist and Rethinking Economics patron, Wendy Carlin's, exhortation that undergraduate economics ought to be taught ‘as if the last three decades had happened’—which is just to say that the undergraduate canon elides much of the advancement made by the profession since the fin de siècle economics of the 20th century. ‘What we teach students in our intro classes’, continues Carlin, ‘bears little resemblance to how we do economics ourselves’.
The benchmark competitive paradigm—premised on assumptions of a frictionless world as perfect information, complete contracts, perfect competition, and, hence, the self-equilibrating character of the market economy—was memorialized in the 1948 textbook, Economics, by American economist Paul Samuelson. In the period since, major advancement has been made over the parsimonious precepts therein laid. Consider the following areas.
1) Information/contracts: contracts are no longer thought to be complete and, resultantly, enforceable at zero cost. Both contract theory and game theory study informational asymmetries between economic agents (e.g. between an employer and an employee, a lender and a borrower) and the consequences in terms of the costliness of contract enforcement.
2) Institutions: economists' conceptions of institutions have expanded from the narrow scope of markets, private property and government. Labor economists now study such things as social norms, unions and alternative work arrangements, industrial economists study the structure and behavior of firms and monetary economists study the operation of various financial institutions.
3) Inequality: no longer unanimously received as the ‘intellectual tendency most harmful to sound economics’—as indeed it was when Robert Lucas made his deathless pronouncement. Contra the ‘representative agent’ models of old—which purposely abstracted from inequalities of all kinds—Ben Moll of the LSE, for example, has pioneered the construction of so-called ‘heterogeneous agent models’; models, that is, able to account for the macroeconomic consequences of heterogeneity across household balance sheets (e.g. distribution of portfolio composition between illiquid and liquid assets), marginal propensities to consume, access to liquidity, wealth, incomes and, finally, unemployment risk, among other such factors. As for the study of the origins of inequality (in both wealth and income), economists now study a broad range of subjects, from labor market policy to non-market institutions to social norms.
4) Credit and money: it was once an article of faith within the economics profession that the primary driver of the business cycle was ‘real’ (i.e. technology) shocks, and that credit and money were merely nominal variables with no real causal power. Now, however, such monetary economists as Atif Mian study the channels whereby expansions in the credit supply drive aggregate fluctuations.
In these, and other, areas, the economics profession has made considerable advancement. And yet, as Carlin laments, many of these innovations have yet to appear on the undergraduate curriculum, much of which remains possessed of the Samuelsonian anachronisms of old. Further, given that Econ101 constitutes the extent of most peoples' economics training, it is unsurprising that economics should be subject to the sort of ersatz traducations recounted above.
What, then, becomes the purpose of Rethinking Economics—given this narrowing of the space for plausible criticism of the extant economics discipline?
The first-order concern is, naturally enough, the bridging of the disparity between undergraduate economics and the contemporary profession. The former, for example, ought to teach on the macroeconomic implications of household heterogeneities, on the relation between the financial system and the real economy, and on the nature and variety of incomplete contracts.
The second-order concern is that of pluralism. The first-order concern is necessary, but not sufficient, for the illuminating study of the market economy. What is oft-called ‘neoclassical economic’, the school of economic thought most widely taught and which constitutes the mainstream of the contemporary profession, is but one lens through which to apprehend economic life—one which tends to take the individual as its point of analytical departure, the market as an autonomous entity unto itself, devoid of any social content, and scarcity as the central economic question. This is as opposed to, say, institutional economics, for which the market is but another social institution, everywhere and always embedded in society. Institutional economists are thus able to register such phenomena as the socially pernicious character of excessive marketisation and the ‘varieties of capitalism’ that obtain across different capitalist polities, in a way that neoclassical economists cannot. As another example, while neoclassical economics is centered on the question of scarcity, Post-Keynesian economists begin from the uncertainty that arises from the capitalist credit system, and has thus proven adept at explaining the interlinkages between the monetary system and the real economy (indeed, Atif Mian's work is premised on that of two prominent post-Keynesians).
To conclude, then, despite the spurious character of much of the critique ordained by the commentariat, there nonetheless remains a very important space for critique of undergraduate economics, and thus for Rethinking Economics.