Economics is in Deep Doo Doo

The Middle Ages overflowed with the numbers of dancing angels on the head of a pin … and our era is possessed by the idea of counting marginal optimization. In this light, however, the medieval discussion on how many angels could fit on the head of pin appears more realistic only because, as opposed to the secret terminology of theoretical economics, the head of a pin is real and the concept of an angel is accessible to everyone. Nevertheless, both ways of theorizing are not empirically measurable and outside of their own discourse they are nonsensical and inapplicable. They make sense only when locked in the given discourse–in their own world. (Sedlacek 2011, 315)

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Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigor is everything and practical relevance is nothing [Blaug 1997:3]. (Lars Pålsson Syll 2016, On the use and misuse of theories in mainstream economics)

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Determinism, the idea that everything that happens must happen as it does and could not have happened any other way, and atomism, the idea that the world is made up of entities whose qualities are independent of their relations with other entities, are fundament [sic] components of classical mechanics. Atomism is also central to the concept of mind developed in John Locke’s An Essay Concerning Human Understanding, published (1690) three years after Newton’s Principia. Locke’s general conception of the human mind became commonplace among 18th-century philosophers, so when Adam Smith came to write the foundational text for economics, The Wealth of Nations (1776), he had the example not only of Newton’s material atomism, but also of Locke’s extension of it to an altogether different area of inquiry. If atomism could form the basis of a theory of ideas, then why not apply it as well to a theory of human beings?

Of course Smith did not limit his vision of economic reality to what could be seen through the metaphysical lens of classical mechanics. But a century later the founders of Neoclassical economics did exactly that and even boasted that they were doing so. Their justification of course – and it was a plausible one at the time – was the enormous success that exclusive devotion to this approach had yielded in physics. In time, especially from the 1960s onwards, undivided allegiance to this determinist-atomistic narrative became, with few exceptions, a basic requirement for making a career in economics.

 

History, however, has shown that there was a great irony in economics’ decision to become zealously fixated on taking this particular approach toward economic reality. In the same decades that Neoclassical economics was being created, physics was moving rapidly away from its insistence upon the determinist-atomistic narrative and towards narrative pluralism. (Fullbrook 2016, 1) (….) But economics – except among a now widening fringe heavily supported by the young – remains locked in the same narrative dogmatism from which physics escaped a century and a half ago. Meanwhile economic evolution has continued. And as the gap between economic reality and the Neoclassical portrayal of it grows ever wider, Neoclassical voices become shriller and their arguments, when placed within the context of the realworld, ever more farcical. Understandably in self-defence, but shamelessly and ultimately at great cost to humanity, economics in its traditional centres moves ever further away from the ethos of science and becomes ever more ruthlessly devoted to scientism…. Scientism is always a farce, but in this case it is one leading humanity towards devastation. We, economists and non-economists, urgently need to understand this intellectual cult threatening us all. ~ Narrative Fixation in Economics (Fullbrook 2016, 1-2)

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For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth. (Romer 2016)

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There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning. ~ Warren Buffett, Chairman and CEO of Berkshire Hathaway, quoted in the New York Times, 26 November 2006.

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Economics is a social science…. Psychologists, sociologists, anthropologists, geographers and historians also analyse the phenomena considered by economists. The assumption that it is possible to separate out economic behaviour and objectives from other forms of human behaviour and objectives is an heroic simplification and, like all such simplifications, it is fundamentally false…. The apparatus of neoclassical economics builds on shaky foundations. It violates norms of human behaviour. It is inconsistent with how humans actually behave. It does not even allow us to understand fully such important economic phenomena as bubbles and financial crises. Therefore, we should confront the heterodox ideas and traditions represented in this book. The economics that humanity will need will surely display the vigour of the mongrel, not the neuroses of the pure-bred. It will build on a better understanding of what humans desire and how they behave. It will abandon the assumptions that the study of humanity is a lost branch of physics, humans are desiccated calculating machines, a separate sphere of economic behaviour exists and economic outcomes have nothing to do with power. Consider the obvious: the political and social institutions that economists mostly ignore also have economic purposes. They are part of the economic world, just as the economic world is part of them. ~ Rethinking Economics: An Introduction to Pluralist Economics (Taylor and Francis 2017, xiii).

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A society where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implodes. A society that promotes unfettered selfishness as the one and only virtue, erodes the cement that keeps us together, and in the end we are only left with people in the ice cold water of egoism and greed. (Lars Pålsson Syll 2016, On the use and misuse of theories in mainstream economics.)

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Since the late nineteenth century, economics has based its efforts on the general equilibrium theory of Léon Walras and others. This dominant paradigm, however, has two fundamental flaws: First, within the theoretical models that characterize it, it has never been possible to prove that an equilibrium (which rarely exists in real economic systems) would be attained. Second, it utilizes Homo economicus, a fictitious being, who bears little resemblance to real humans, to define preferences, behavior, and abilities. Because these assumptions deviate so drastically from reality, there is doubt as to whether incremental changes can ever render it effective. Indeed, it has become increasingly clear that Adam Smith’s Invisible Hand cannot be resurrected without an important change of perspective. ~ David S. Wilson and Alan Kirman, Complexity and Evolution: Toward a New Synthesis for Economics.

 

The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool. ~ Amartya Sen, Thomas W. Lamont University Professor, and Professor of Economics and Philosophy, in Rational Fools.

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It [mainstream economics] values mathematical models based on if-pigs-could-fly assumptions more than it values empirical research; so it pays little attention to real economies, having little to say about money and debt, for example! Predictably, the dismal science failed to predict the crisis. When the UK’s Queen Elizabeth asked why no one saw the crisis coming, the economists’ embarrassment was palpable. (Andrew Sayer, Why We Can’t Afford the Rich, 2015, 23)

 

Many of our problems come from the nature of the economic system itself. If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception…. The economic system is filled with trickery and everyone needs to know about it.”~ Akerlof & Shiller, Phishing for Phools.

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Many of the quotes above are from economists, experts in their field, some Nobel Prize-winning economists. One thing is clear; the Great Recession shook the very foundations of economics to its core. Only the blind leading the blind can pretend today that something isn’t amiss within the field of economics. The quotations above only represent a small sampling of the discontent rising to the surface within the field of economics today. There is actually a revolt underway in the younger generation of economic graduate students who lived through the Great Recession and the near melt down of the world’s economy yet witnessed their teachers being confounded by the Queen’s question (see Labini below). And if we value our children’s and our grandchildren’s economic future we can no longer afford to simply leave economics to the experts—the Econocracy—for as these young graduate students tell us, we do so at our own peril. Amartya Sen in his essay Rational Fools: A Critique of the Behavioral Foundations of Economic Theory takes us on an intellectual journey back in time to the thoughts and reflections of one of the founders of the field of economics:

In his Mathematical Psychics, published in 1881, Edgeworth asserted that ‘the first principle of Economics is that every agent is actuated only by self-interest’. This view has been a persistent one in economic models, and the nature of economic theory seems to have been much influenced by this basic premise…. I should mention that Edgeworth himself was quite aware that this so-called first principle of Economics was not a particularly realistic one. Indeed, he felt that ‘the concrete nineteenth century man is for the most part an impure egoist, a mixed utilitarian’. This raises the interesting question as to why Edgeworth spent so much of his time and talent in developing a line of inquiry the first principle of which he believed to be false. The issue is not why abstractions should be employed in pursuing economic questions—the nature of the inquiry makes this inevitable—but why would one choose an assumption which he himself believed not merely inaccurate in detail but fundamentally mistaken? (Sen 1982, 84-85)

Modern economics as it is taught in our universities today elevates self-interest as the foundation principle of present day profit motived economic striving. This exclusive “greed is good” ideology (justified with social mathematics) is doomed unless the profit motive can be augmented with service motive. Economics has become blinded by mathematical hubris. Its models no longer predict or have anything to do with empirical reality or what is happening in the real economy. It’s summed up in the Queen’s question:

Lehman Brothers collapsed in September 2008 and started the great recession. By chance, Queen Elizabeth visited the London School of Economics to inaugurate a new building in November 2008, and here she asked her famous question: “why did no one see the economic crisis coming?” Of course the neoclassical economists of the London School of Economics not only did not foresee the crisis, but they had been advocating the very neoliberal policies that led to it. (Donald Giles, Foreword) We are faced with an economic crisis that has brought the world economy to its knees…. First and foremost, however, this is a cultural crisis on a global scale. The grand utopias that dominated our recent and immediate past seem to have vanished. Equality, brotherhood, freedom seem to be words that today have nothing to do with our reality, where inequalities have never been so great, freedom is being reduced gradually in favor of security and solidarity is overwhelmed by arrogance and indifference. Furthermore, because of insurmountable inequalities, the possibility of a change for the better of any individual’s situation is currently in a regressive stage in many countries, and also what has regressed is the role of higher education as the driving force of social mobility. Science can provide crucial tools that could be instrumental both in comprehending the problems of our time and in outlining perspectives that might constitute a solid and viable alternative to the rampant jungle law — a misconstrued Social Darwinism — that is currently very widespread. (Labini 2016, xiii-xiv)

When MBA students are taught that “greed is good” and that any regulation of the market is bad we turn out business men and women that allow bad actors to proliferate Phishing for Phools schemes in virtually every market. For example, consider the online employment platforms, so-called “professional networking” sites, are one of worst actors in this domain. Their primary tactic uses asymmetric information in a manipulative manner to disadvantage the job seeker (who is usually not the paying customer, unless they upgrade to a premium account) and to give their paying customers, whom we will see below some of whom are bad actors, an informational advantage over job seekers. When major players provide global social media platforms that allow phishing in employment related transactions and communications they are effectively assisting in the creation of a dual economy built upon the exploitation of asymmetric information aimed at extracting wealth out of the pockets of family wage earners and thereby further driving economic inequality. Peter Temin in his article The American Dual Economy: Race, Globalization and the Politics of Exclusion writes,

The United States economy has come apart, with the rich getting richer and workers’ incomes not advancing at all. ~ Institute for New Economic Thinking

He further writes regarding the vanishing middle class,

Growing inequality is threatening the American middle class, and the middle class is vanishing before our eyes…. The middle class was critical to the success of the United States in the twentieth century…. If America is to remain strong in the twenty-first century, something has to be done…. [T]he rich of the twenty-first century are trying to kill the goose that laid all those golden eggs in the twentieth century. The question is how can we alter the bad trajectory we are on. ~ Peter Temin 2017, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Professor of Economics Emeritus at MIT.

Not all business models within the market are created equally; over time models change and new ones emerge, some not so benign, hence it is wise to disarticulate supply chains a little more critically to truly understand their nature and socio-economic impacts. An important economic work that shows how this might be done is Nobel Prize-winning economists George A. Akerlof and Robert J. Shiller’s Phishing for Phools: The Economics of Manipulation and Deception. Akerlof and Shiller provide numerous case examples of how the market place harms us as well as helps us. They show that as long as there are profits to be made some bad actors will systematically exploit our psychological and informational weaknesses through manipulation and deception. They reveal how the pie-in-the-sky oversimplification of critical assumptions about market equilibrium are utterly divorced from reality using case studies that show how economic models build manipulation and deception into the system unless we take steps to expose and fight them.

Using techniques more akin to behavioral economics than neoclassical economics they prove that when neoclassical economics pretends that such economic pathologies of manipulation and deception are rare and mere “externalities” it is ignoring reality: the ability of free markets to engender phishing for phools of many different varieties is not an externality, but rather is inherent in the workings of competitive markets. And the same profit motive that gives us a healthy benign economy if everyone is fully rational – another critical assumption itself proven false by behavioral economics as everyone does not behave rationally; and more importantly one that neglects the moral, ethical, and spiritual motivations that are important in the market place – is the same profit motive that gives us the economic pathologies of phishing for phools. (Akerlof et. al. 2015 166; see also Mind Over Money)

[F]ree markets do not just deliver this cornucopia that people want. They also create an economic [dis]equilibrium that is highly suitable for economic enterprises that manipulate or distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body. (Akerlof and Shiller 2015, x)

When using biology as metaphor homeostasis is a far better metaphor and closer to individual and social reality. A stable society depends upon a stable middle class for this is the backbone of any society or civilization and the source of genius yet unborn and to come. Perhaps it is time to augment the profit motive with the service motive?

It is time to tell the naked truth and clean up the dirty secrets and rigged markets (including political dirty money).

(to be continued)

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