Many critics of mainstream economics believe that economists are in the pocket of big business: that they are paid screamers who say what their corporate payers want them to say.
With 50 years of experience as economists – including 30 years as an academic economist myself, though decidedly non-traditional – I can say emphatically that this belief is wrong.
Business economists and consultants will be say what their employers want them to say. But in general, mainstream academic economists say what they say because they sincerely believe it’s true, not because they’re paid to knowingly state lies. And not only that, they do altruistic: they sincerely believe that if everyone believed in their vision of capitalism and that their advice was always followed, then the world would be a better place.
This is why they are so dangerous.
It’s not because their intentions are bad, but not at all. This is because the vision they fervently believe accurately describes the real world – and how it can be improved – is totally wrong.
My favorite mainstream economics analogy is Aristotle’s model of the Universe, in which the Earth was at its center and the Sun, Moon, planets and stars revolved around the Earth on perfect concentric crystalline spheres. . Aristotle’s vision had to be modified, in particular by placing the planets on circles that rotated on their spheres (called “epicycles”), because the planets regularly reversed their direction in the sky. But with epicycles and other tweaks, Aristotle’s central vision gave rise to Ptolemaic astronomy, which could predict, with reasonable accuracy, where the planets would be decades into the future. However, as we now know, these models were completely wrong about the structure of the Universe.
Today, we ridicule the “Flat Earthers” who continue to believe, despite overwhelming evidence, that the Earth is the center of the Universe. But for 1,500 years, this was “mainstream astronomy”, and people who believed – correctly – that the Earth revolved around the Sun were treated as heretics.
This is the state of the economy today. There is overwhelming evidence that the mainstream view of economics is wrong. But mainstream – or “neoclassical” – economists strongly believe in their view and ridicule heretics like me (Keen 2011) who point out its obvious flaws.
The last clear evidence that their view of the economy is wrong was the global financial crisis of 2008. According to mainstream theory, 2008 was going to be a big year for the economy. In May 2007, the OECDThe Chief Economist of declared that: “the current economic situation is in many respects better than what we have known for years. … Our central forecast remains indeed quite benign. … In line with recent trends, sustained growth in OECD economies would be supported by strong job creation and falling unemployment. (Cotis 2007, p. 6)
At the same time, the Bank for International Settlements— whose research office was headed by an economics heretic, Canadian economist Bill White — warned of an impending crisis, caused by a collapse in credit-based demand: rising financial imbalances and thus of a potential boom-bust cycle, with implications of significant economic costs over time… indicators of medium-term risks in the form of recession, financial instability and unwanted disinflation. (White 2007, p. 70-71)
According to mainstream economists like Ben Bernanke, White’s concerns were unfounded because, in mainstream economics, banks are only “middlemen” between savers and borrowers. “Absent implausible differences in marginal propensities to spend between groups,” Bernanke said, “pure redistributions should not have significant macroeconomic effects.” (Bernanke 2000)
White and I prayed to disagree because, in the real world, banks are not mere “middlemen” but creators of money, as the Bank of England asserted in 2014 (McLeay , Radia and Thomas 2014). When this borrowed money is spent, it adds to aggregate expenses and income. Negative credit – when debt is canceled or repaid – does the opposite. Thus, we both predicted that a shift from credit positive to credit negative would cause a crisis.
We heretics were right, and the mainstream was spectacularly wrong: Instead of 2008 being a year of “sustained growth…and falling unemployment,” it was the start of capitalism’s greatest crisis since the Great Depression. .
A neutral observer might expect this huge discrepancy between what mainstream economists had predicted and what actually happened to lead to serious soul-searching on the part of economists. And yet, the theories that dominate the mainstream today are the same ones that dominated it before the crisis — in fact, those mainstream ideas are even more entrenched now than they were 15 years ago.
Why has the dominant view of the economy remained unchanged? This is largely because this vision is of a perfect world – a utopia. In the neoclassical vision of capitalism, there is no power, no coercion: everyone does what they want, subject only to the constraints of their own resources. Moreover, everyone gets what they deserve – they get their “marginal product”, to use economic jargon. The coercive power of the state is something that necessarily makes matters worse – we’d better leave everything to the unbiased ‘market mechanism’. It is, fundamentally, a vision of a self-governing system that would work just fine, if only all the pesky non-market elements of modern society – governments, unions, monopolies, regulations – could be abolished.
Humans seem strongly predisposed to dream of a perfect world, which for religious people is Heaven. For neoclassical economists, human society could become a paradise on earth, if only we followed their advice. Small aberrations on this march to Valhalla, such as the global financial crisis, are unable to shake their faith that this Valhalla is attainable in this lifetime.
It wouldn’t be a problem if their view of capitalism was actually correct, but in reality it is fundamentally wrong. Since their model is wrong, their attempts to make capitalism better end up making it much worse. But they remain so committed to their vision that they ignore these aberrations and carry on regardless. In their unwavering belief that they are doing good, they continue to do enormous harm.
In my next column, I will give a very timely example: the misguided advice of a group of mainstream economists that if Russia were to impose an energy embargo on Germany, which would reduce the available energy supply of Germany by 10%, the result would only be “a GDP drop of the order of 0.5% to 3%” (Bachmann et al. 2022a, 2022b). In fact, for reasons that they reject, the fall in GDP would be closer to 10%.
Bachmann, Rüdiger, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel and Moritz Schularick. 2022a. ‘Wäre, wenn…? Die wirtschaftlichen Auswirkungen eines Importstopps russischer Energie auf Deutschland; What if? The macroeconomic and distributional effects for Germany of a halt in energy imports from Russia”, ifo Schnelldienst75.
———. 2022b. “What if Germany was cut off from Russian energy?” In Vox EU.
Bernanke, Ben S. 2000. Essays on the Great Depression (Princeton University Press: Princeton).
Cotis, Jean-Philippe. 2007. “Editorial: Continuing the Rebalancing”. in OECD (ed.), OECD Economic Outlook (OECD: Paris).
Cheers, Steve. 2011. Demystifying Economics: The Naked Emperor Dethroned? (Zed Books: London).
McLeay, Michael, Amar Radia and Ryland Thomas. 2014. “Money Creation in the Modern Economy”, Bank of England Quarterly Bulletin2014 Q1: 14-27.
White, William R. 2007. “77th Annual Report of the Bank for International Settlements, 1 April 2006–31 March 2007”. In. Basel, Switzerland: Bank for International Settlements.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.