This pandemic has exposed the uselessness of orthodox economics

Post Covid-19, our priority should be to build resilient systems explicitly designed to withstand worst-case scenarios opines Jonathan Aldred in The Guardian 

 

‘Framing the future in terms of probabilities gives us the illusion of knowledge and control, which is extraordinarily tempting, but it’s all hubris.’ Photograph: Daniel Sorabji/AFP via Getty Images


Even before the pandemic came along, the world economy faced a set of deepening crises: a climate emergency, extreme inequality and huge disruption to the world of work, with robots and AI systems replacing humans.

Conventional economic theories have had little to offer. On the contrary, they have acted like a cage around our thinking, vetoing a range of progressive policy ideas as unaffordable, counter-productive, incompatible with free markets, and so on. Worse than that, economics has led us, in a subtle, insidious way, to internalise a set of values and ways of seeing the world that prevents us even imagining various forms of radical change.

Since economic orthodoxy is so completely embedded in our thinking, escape from it demands more than a short-term spending splurge to prevent immediate economic collapse, vital though that is. We must dig deeper to uncover the economic roots of the mess we’re in. Putting it more positively, what do we want from post-coronavirus economics?

Mainstream economics has taught us that the only rational way to deal with an uncertain future is to quantify it, by assigning a probability to every possibility. But even with the best expertise in the world, our knowledge often falls far short. Frequently we struggle to predict which outcomes are more likely. Worse still, there may be outcomes we haven’t even considered, futures that no one had imagined, as the pandemic has so vividly shown.

Framing the future in terms of probabilities gives us the illusion of knowledge and control, which is extraordinarily tempting, but it’s all hubris. In the run-up to the 2007 financial crisis, bankers were proud of their models. Then that August, the Goldman Sachs chief financial officer admitted the bank had spotted huge price moves in some financial markets, several times in one week. Yet according to its models, each of these moves was supposed to be less likely than winning the UK national lottery jackpot 21 times in a row. World events sometimes demand humility.

There are clear lessons here for how to address the climate emergency: rather than focusing on the average climate impacts predicted by mathematical models that depend on probabilistic knowledge that is highly unreliable, we must think seriously about worst-case scenarios, and take steps to avoid them. Yet economic orthodoxy pushes us away from precautionary action. If mainstream economics has a single overarching objective or principle, it is efficiency.

Efficiency means getting the most “bang for your buck”, the most benefit for every pound spent. Any other course of action is wasteful, surely? But eliminating waste implies eliminating excess capacity, and we now see the consequences of that in health systems worldwide. Our obsession with efficiency, if it means failing to plan for a pandemic or a climate emergency, will cost lives.

Our priority should be resilience, not efficiency. We need to build resilient systems and economies that are explicitly designed to withstand worst-case scenarios – and have a fighting chance of coping with unforeseen disasters too.

Ultimately the problem with economic orthodoxy lies in how it frames our values and priorities. Decisions must always be about trade-offs – the weighing up of costs against benefits, ideally measured through prices in markets. If we take our ignorance about the future seriously, this cost-benefit calculus should not even get started. Because costs outweighing benefits is the oldest excuse for not taking precautions – and is a recipe for disaster when the benefits, or the costs of inaction, are vastly undervalued.

Cost-benefit thinking also leads us to assume that all values can be expressed in monetary terms. Many politicians and business leaders fixate on statements such as “a 2°C rise in average global temperature will reduce GDP by up to 2%”, as though a fall in GDP measures the true costs of the climate emergency.

In practice, this thinking means that the value of everything is measured by how much people offer to pay for it. Since the rich can always pay more than the poor, priorities get skewed towards the desires of the rich, away from the needs of the poor. So more money is spent on R&D for anti-wrinkle creams than for malaria treatments. Big Pharma has been relatively uninterested in developing vaccines, because a vaccination programme only works if the poor get vaccinated too, which limits the price manufacturers can charge.

We might seem to be beyond that now: the world has woken up, and rich countries will spend “whatever it takes” to tackle the pandemic. But Covid 19 vaccine research – and countless other fields of medical research with the potential to save as many lives in the long-term – needs continuous, reliable funding over many years. Once the market sees better profit elsewhere, funding will be cut, and the researchers will retire or move on, their experience lost.

Economic orthodoxy supports the narrative that this pandemic is a unique disaster no one could have prepared for, and with no wider lessons for economics and politics. This story suits some of the world’s billionaires, but it’s not true. There is an alternative: the pandemic provides further evidence that to tackle the climate emergency, inequality and any emerging crises, we must re-think our economics from the bottom up.

How three students caused a global crisis in economics - A review of The Econocracy

Aditya Chakrabortty in The Guardian

In the autumn of 2011, as the world’s financial system lurched from crash to crisis, the authors of this book began, as undergraduates, to study economics. While their lectures took place at the University of Manchester the eurozone was in flames. The students’ first term would last longer than the Greek government. Banks across the west were still on life support. And David Cameron was imposing on Britons year on year of swingeing spending cuts.

Yet the bushfires those teenagers saw raging each night on the news got barely a mention in the seminars they sat through, they say: the biggest economic catastrophe of our times “wasn’t mentioned in our lectures and what we were learning didn’t seem to have any relevance to understanding it”, they write in The Econocracy. “We were memorising and regurgitating abstract economic models for multiple-choice exams.”

Part of this book describes what happened next: how the economic crisis turned into a crisis of economics. It deserves a good account, since the activities of these Manchester students rank among the most startling protest movements of the decade.

After a year of being force-fed irrelevancies, say the students, they formed the Post-Crash Economics Society, with a sympathetic lecturer giving them evening classes on the events and perspectives they weren’t being taught. They lobbied teachers for new modules, and when that didn’t work, they mobilised hundreds of undergraduates to express their disappointment in the influential National Student Survey. The economics department ended up with the lowest score of any at the university: the professors had been told by their pupils that they could do better.

The protests spread to other economics faculties – in Glasgow, Istanbul, Kolkata. Working at speed, students around the world published a joint letter to their professors calling for nothing less than a reformation of their discipline.

Economics has been challenged by would-be reformers before, but never on this scale. What made the difference was the crash of 2008. Students could now argue that their lecturers hadn’t called the biggest economic event of their lifetimes – so their commandments weren’t worth the stone they were carved on. They could also point to the way in which the economic model in the real world was broken and ask why the models they were using had barely changed.

The protests found an attentive audience among fellow undergraduates – the sort who in previous years would have kept their heads down and waited for the “milk round” to deliver an accountancy traineeship, but were now facing the prospect of hiring freezes, moving back home and paying off their giant student debt with poor wages.

I covered this uprising from the outset, and later served as an unpaid trustee for the network now called Rethinking Economics. To me, it has two key features in common with other social movements that sprang up in the aftermath of the banking crash. Like the Occupy protests, it was ultimately about democracy: who gets to have a say, and who gets silenced. It also shared with the student fees protests of 2010 deep discomfort at the state of modern British universities. What are supposed to be forums for speculative thought more often resemble costly finishing schools for the sons of Chinese communist party cadres and the daughters of wealthy Russians.

Much of the post-crash dissent has disintegrated into trace elements. A line can be drawn from Occupy to Bernie Sanders and Black Lives Matter; some of those undergraduates who were kettled by the police in 2010 are now signed-up Corbynistas. But the economics movement remains remarkably intact. Rethinking Economics has grown to 43 student campaigns across 15 countries, from America to China. Some of its alumni went into the civil service, where they have established an Exploring Economics network to push for alternative approaches to economics in policy making. There are evening classes, and then there is this book, which formalises and expands the case first made five years ago.

 Joe Earle, centre, with the Post-Crash Economics Society at Manchester University. Photograph: Jon Super

The Econocracy makes three big arguments. First, economics has shoved its way into all aspects of our public life. Flick through any newspaper and you’ll find it is not enough for mental illness to cause suffering, or for people to enjoy paintings: both must have a specific cost or benefit to GDP. It is as if Gradgrind had set up a boutique consultancy, offering mandatory but spurious quantification for any passing cause.

Second, the economics being pushed is narrow and of recent invention. It sees the economy “as a distinct system that follows a particular, often mechanical logic” and believes this “can be managed using a scientific criteria”. It would not be recognised by Keynes or Marx or Adam Smith.

In the 1930s, economists began describing the economy as a unitary entity. For decades, Treasury officials produced forecasts in English. That changed only in 1961, when they moved to formal equations and reams of numbers. By the end of the 1970s, 99 organisations were generating projections for the UK economy. Forecasting had become a numerical alchemy: turning base human assumptions and frailty into the marketable gold of rigorous-seeming science.
By making their discipline all-pervasive, and pretending it is the physics of social science, economists have turned much of our democracy into a no-go zone for the public. This is the authors’ ultimate charge: “We live in a nation divided between a minority who feel they own the language of economics and a majority who don’t.”

This status quo works well for the powerful and wealthy and it will be fiercely defended. As Ed Miliband and Jeremy Corbyn have found, suggest policies that challenge the narrow orthodoxy and you will be branded an economic illiterate – even if they add up. Academics who follow different schools of economic thought are often exiled from the big faculties and journals.
The most devastating evidence in this book concerns what goes into making an economist. The authors analysed 174 economics modules for seven Russell Group universities, making this the most comprehensive curriculum review I know of. Focusing on the exams that undergraduates were asked to prepare for, they found a heavy reliance on multiple choice. The vast bulk of the questions asked students either to describe a model or theory, or to show how economic events could be explained by them. Rarely were they asked to assess the models themselves. In essence, they were being tested on whether they had memorised the catechism and could recite it under invigilation.

Critical thinking is not necessary to win a top economics degree. Of the core economics papers, only 8% of marks awarded asked for any critical evaluation or independent judgment. At one university, the authors write, 97% of all compulsory modules “entailed no form of critical or independent thinking whatsoever”.

The high priests of economics still hold power, but they no longer have legitimacy

Remember that these students shell out £9,000 a year for what is an elevated form of rote learning. Remember, too, that some of these graduates will go on to work in the City, handle multimillion pound budgets at FTSE businesses, head Whitehall departments, and set policy for the rest of us. Yet, as the authors write: “The people who are entrusted to run our economy are in almost no way taught to think about it critically.”

They aren’t the only ones worried. Soon after Earle and co started at university, the Bank of England held a day-long conference titled Are Economics Graduates Fit for Purpose?. Interviewing Andy Haldane, chief economist at the Bank of England, in 2014, I asked: what was the answer? There was an audible gulp, and a pause that lasted most of a minute. Finally, an answer limped out: “Not yet.”

The Manchester undergraduates were told by an academic that alternative approaches were as much use as a tobacco-smoke enema. Which is to say, he was as likely to take Friedrich Hayek or Joseph Schumpeter seriously as he was to blow smoke up someone’s arse.

The students’ entrepreneurialism is evident in this book. Packed with original research, it comes with pages of endorsements, evidently harvested by the students themselves, from Vince Cable to Noam Chomsky. Yet the text is rarely angry. Its tone is of a strained politeness, as if the authors were talking politics with a putative father-in-law.

More thoughtful academics have accepted the need for change – but strictly on their own terms, within the limits only they decide. That professional defensiveness has done them no favours. When Michael Gove compared economists to the scientists who worked for Nazi Germany and declared the “people of this country have had enough of experts”, he was shamelessly courting a certain type of Brexiter. But that he felt able to say it at all says a lot about how low the standing of economists has sunk.

The high priests of economics still hold power, but they no longer have legitimacy. In proving so resistant to serious reform, they have sent the message to a sceptical public that they are unreformable. Which makes The Econocracy a case study for the question we should all be asking since the crash: how, after all that, have the elites – in Westminster, in the City, in economics – stayed in charge?

The Econocracy is published by Manchester University.