Neoclassical economics is without scholarly integrity. It does not belong in universities. It certainly should not be the dominant source of policy advice to governments.
Most scholarly disciplines, be they history, physics or ecology, have a conception of appropriate standards by which the evidential basis of an argument is presented and the reasoning leading to conclusions is explained. The goal is to shed light on the workings of the world, and a criterion for a successful study is that observations or records are consistent with the study’s conclusions.
Neoclassical economics, the strand of economics that has dominated world policies for several decades, fails these criteria. Its conclusions are regularly contradicted by developments in the real world. A dominant criterion for a successful study is that its logic is internally consistent; it thus confuses mathematics with the science it claims to be. It is variously claimed that assumptions on which a theory is based don’t matter, or that the better the theory the more unrealistic the assumptions, or that all theories are wrong. It imagines its theories are useful approximations to reality, and fails to appreciate that more reasonable assumptions can lead to radically different conclusions, so its theories may be deeply misleading.
Neoclassical economics originated late in the 19th century and claimed to build on the ‘classical’ economics of Adam Smith, David Ricardo and others. Whereas Smith thought markets could in some circumstances result in satisfactory outcomes for all participants, he also required that markets are embedded in and restrained by society and morality. He was really railing against the corrupt alliance of merchants and the government in setting up colonial trading monopolies. He warned that wherever merchants might congregate, one should suspect a conspiracy to defraud customers.
Neoclassical economists created a mathematical theory that purported to show that ‘free’ markets will always bring an economy to a general equilibrium in which all supplies balance all demands. Furthermore, this general equilibrium was shown to be an optimum, in the sense that outputs would be maximised for given inputs of land, labour and capital.
When rich people heard about this theory they started paying neoclassical economists lots of money to keep saying that free markets are best. It means rich people should keep making money as fast as they can. It means government is bad, because it gets in the way of rich people. Adam rolled over.
However certain assumptions were required to get the mathematics to yield this brave new world vision. There can be no economies of scale (beyond a point of diminishing returns), there should be no social interactions, and everyone should be rational calculators. People are reduced to transacting atoms, to rational economic man, to what I call calculating reptiles.
The flow of time has to be suspended. It was regarded as a triumph when it was shown that if we can all assign probabilities to all future contingencies then the general equilibrium is still possible. So it is assumed we each have this power, and a computer the size of the universe to implement it. Physicists and applied mathematicians might recognise that this amounts to telescoping the unknown future into the known present; it is analogous to transforming your system of equations from hyperbolic to elliptic. It gets rid of the path-dependence of solutions. History doesn’t matter and the future is assured.
If any of these stringent assumptions is changed to something more reasonable, equilibrium is no longer possible. Not just hard to find, impossible. For example, Henry Ford and Jeff Bezos have understood that economies of scale can allow you to undercut your rivals, gain more market share, increase your economies of scale and further undercut your rivals in a runaway, unstable process until you gain near-monopoly in your market segment. The technological homogeneity of the internet puts this tendency on steroids. If a potent new software or strategy comes along, you empire is at risk of being overthrown. There is no equilibrium.
If there is no general equilibrium, then nothing can be said about optimality, because optimality emerges from the general equilibrium. It means there is no basis for claiming free markets are efficient.
The accumulation of absurd assumptions in neoclassical economics can be recognised as a desperate attempt to exclude instability and thus to preserve the old conclusion. Neoclassical economists became infatuated with equilibrium, contorted their theories to maintain it, and lost all connection with reality.
A regular defence, offered for example by another faux-Nobelist, Paul Krugman, is that their theories are helpful to maintaining systematic thinking. That requires the theory to bear some useful approximation to reality. In a widely-cited paper, Milton Friedman in 1953 apparently tried to argue that no theory can fully represent reality (correct), so all theories are approximate (correct) and that the biggest pay-offs of insight come from rough, general approximations (sometimes correct). His statements are so garbled and contradictory, however, it is hard to tell if that is really what he was trying to say. So some people take him to have said assumptions don’t matter, etc. Unfortunately, as their own theories demonstrate, hopelessly unrealistic assumptions will get you a hopelessly unrealistic theory.
Why were neoclassical economists taken by surprise by the Global Financial Crisis of 2008? They said it was a black swan event, something no one could have anticipated. Except that some well-known people did anticipate it, on the basis that there was far more debt than people were likely to be able to repay. People did fail to repay, there was a cascade of defaults and the global financial system seized up.
The problem, you see, is that neoclassical economists exclude money and debt from their theories. Why? Well, aside from the ill-informed excuses they advance, if you allow for debt then the present becomes linked to the future (when the debt is supposed to be repaid), and the future involves risk, such as the possibility of cascading defaults. Our modern token money is itself a form of debt. So arguably the most potent forces in a modern economy, money and debt, are left out of their theories. So they did not see the GFC coming, and their predictions of prosperity just around the corner regularly fail.
Another bit of inconvenient reality: cascading defaults can trigger a financial market crash, and a market crash is an obvious manifestation of instability. There was no equilibrium. There are many sources of instability in an economy when you look: technological innovation, economies of scale, money and debt, social interactions, ‘irrational’ herd behaviour among others. Economies are always far from equilibrium, which makes them complex self-organising systems, like organic systems, with radically different behaviours: as different as wild horses from a rocking horse.
As I noted in Part I, the illusion of an agile, self-correcting economy, and society, allows economists to expect, and then to conclude, that the gross global disruption of serious global warming will merely shave a few percent off the global GDP.
There is a fringe of dissenting economists, and the odd scientist like me, who have been pointing out for many years that neoclassical economics is misleading nonsense. The dissident economists are excluded from the best jobs, the best journals and positions of influence by what James Galbraith calls a ‘Politburo for correct economic thinking’.
Scholars in other disciplines need to be alerted to the presence of this imposter in their midst. Neoclassical economics is pseudo-science, assertions dressed up in mathematics to look like science. It fails basic scholarly criteria, like changing your theory when it completely fails to accord with reality. It is profoundly confused about what good scholarship and good science involve. Its professional criterion for a successful career is conformity to its groupthink.
Dr. Geoff Davies is a retired geophysicist who has explored economics for over two decades. He is the author of Dynamic Earth, Sack the Economists and Economy, Society, Nature
Dr. Geoff Davies is an author, commentator and scientist. He is the author of A New Australia: Discarding Delusions and Organising for the Wellbeing of All (2023, https://betternaturebooks.net/my-books/regenoz/). He blogs at Thrival Economics https://thrivaleconomics.blog/.
Comments
3 responses to “Neoclassical economics II: pseudo-scholarship”
Good article!
Neoclassical economics is without scholarly integrity. It does not belong in universities! NO it does not not!
The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income. The government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines.
These important concepts that have been abandoned on purpose and how is this deception accomplished
The first and most brutal way was simply to stop teaching the history of economic thought.
In schools say 60 years ago, every graduate economics student had to study the history of economic thought. You’d get Adam Smith, Ricardo and John Stuart Mill, Marx and Veblen. Their analysis had a common denominator: a focus on unearned income, which they called rent. Classical economics distinguished between productive and unproductive activity, and hence between wealth and overhead.
That instruction has now vanished!
The first thing rentiers – the financial class and monopolists, a.k.a. the 1% – did was to say, ‘We’ve got to stop teaching the history of economic thought so that people don’t even have a memory that there is any such a thing as economic rent as unearned income or the various policies proposed to minimize it.
We have to take the slogan of the socialist reformers – a free market – and redefine it as a free market is one free from government – that is, from ‘socialism’ – not free from landlords, bankers and monopolists.’
They turned the vocabulary upside down to mean the opposite. But in order to promote this deceptive vocabulary they had to erase all memory of the fact that these words originally meant the opposite.
Reform used to mean something social democratic. It meant getting rid of special privileges, getting rid of monopolies and protecting labor and consumers. It meant controlling the prices that monopolies could charge, and regulating the economy to prevent fraud or exploitation – and most of all, to prevent unearned income or tax it away.
In today’s neoliberal vocabulary, ‘reform’ means getting rid of socialism. Reform means stripping away protection or labor and even of industry. It means deregulating the economy, getting rid of any kind of price controls, consumer protection or environmental protection. It means creating a lawless economy where the 1% are in control, without public checks and balances. So reform today means getting rid of all of the reforms that were promoted in the 19th and early-20th century. The Nobel Economics Prize reflects this neoliberal (that is, faux-liberal) travesty of free markets.
Geoff Davies: I am reading a book by Kate Raworth called Doughnut Economics : 7 ways to think like a 21st century economist. This book puts forward not only very similar critique of classical economics, but cites a number of the quite well-known economists including Keynes who raised many of the problems you mention. She has a blog upon which you may find her book and other information, including a good diagram of her doughnut https://www.kateraworth.com/doughnut/
Of course real-life economies are in a dynamic disequilibrium. The stationary system of classical economics which reaches equilibrium prices and output is highly unrealistic and spurious from the point of view of predicting outcomes or true social benefits of any policy change. But dynamic models are very hard to build and understand. Hence we continue with false gods and their high priests – Friedman etc
However, all of us need to find ways to think about practical economics, because so many important decisions by government need proper ways to think about and discuss this inexact science, which is really a body of soft ideas, intermixed with ideologies. But one soft idea is not as good as another!
Economics needs to set out proper criteria for benign public decisions: criteria which involve considering the distribution of wealth and income; sustainability of underlying ecological systems, and many considerations of justice, fairness and equity which make life better in a collective, not just individual sense. In the absence of these, economics is the servant of the elite.
Thanks David. Yes I’m familiar with Kate Raworth’s book, it’s very good. I actually wrote my Economy, Science, Nature in part to build on her good work on re-orienting our thinking.
Having studied the rather messy Earth for four decades I don’t think we need shrink from studying messy societies. With dynamic models you proceed carefully trying to find key behaviours and their sources. Steve Keen’s work is an excellent example. I include a few simple examples in my book.