The almost universal acceptance of neoclassical economic theory, at least in Britain and the United States, has resulted in much destruction of professional management practice. The so simplistic dogma leads to a set of mindless clichés which have not only severely damaged enterprise management practice, but, also the wider management of the real economy, as has been seen over the past two years.
Simon Caulkin, late business editor of The Observer, refers to the seemingly growing consensus against the still current orthodoxy (See ‘New economics, new management’ on http://www.simoncaulkin.com). He lists five Nobel laureates among those declaring that market fundamentalism is dead, and quotes Ha-Joon Chang, John Quiggin and Dan Ariely who have all produced serious, populist critiques of the current orthodoxy.
Thirty five years ago, academic Guy Routh wrote ‘Economics … ignores facts as irrelevant, bases its constructs on axioms arrived at a priori, or ‘plucked from the air’, from which deductions are made and an imaginary edifice created … verification is both impossible and regarded as unnecessary. In effect, then, orthodox economics becomes a matter of faith and, ipso facto, immune to criticism’. He quoted more than a score of the leading economists of all time who supported his broad contention.
The orthodox wisdom may be dead as a credible body of theory, but still politicians show little sign of understanding how it is so utterly discredited. The British coalition’s blind commitment to investment cuts, rather than economic stimulation, is one example, based on the cliché that big government and the public sector are bad, low taxes and private sector good. Similarly, the avoidance of challenging News Corporation’s takeover of BskyB is based simply on the cliché that regulation is bad, freedom good. The fact that the government minister concerned took advice in making his decision is beside the point, since the orthodoxy dominates his advisors as much as the minister himself. As Keynes put it, the madmen in authority are still distilling their frenzy from the academic scribble of the past.
But a head of steam is building up. Today’s announcement of Bob Diamond’s £6.5m bonus for work which the Chairman of the Financial Services Authority described as “socially useless”, will help to motivate change. Alternative ways forward are being discussed and developed. The errors, omissions, distortions and falsehoods of economic theory will surely be buried some day, for the benefit of almost everyone.
It is the aim of this blog to make some contribution, however small, to achieving that change.
Fighting for Fairness by Remaking the Real Economy 
The idea that economics is a science is at the base of all this. Its a sort of science envy suffered by many in the social ‘sciences’. Perhaps better we admit that the study of social phenomena is not in any way damaged by moving it closer to the humanities. People studying literature or history do perfectly well without pretending that they do something like physics. After all, if economics was merely opinion or ideology, policy makers would find it harder to disguise their own choices.
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So the scientific pretence is what policy makers indulge in with regard to economics so as to disguise the subjective choices they are really making – ‘the markets’ demand it! Economists themselves don’t pretend so much, as have tried their damnedest to make their study more ‘scientific’ and quantitative. They’ve done so since late 19th century, when they started modelling with calculus and accepting all the nonsensical assumptions that method required. Now it is seen to have failed. With something as straightforwardly quantitative as the cut or stimulate response to our current situation, economics has no answer. Or rather a hundred answers. Ditching the quantitative models and the resulting clichés and dogma, might result in a more mature academic study, based on a more realistic and relevant battery of research methods, and, in due course, better policy making.
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I notice how the criticism of economics has shifted from hammering neo-classical economics to hammering economics in general. It is true that refinements in mathematical techniques have allowed economists to engage in theoretical modelling which does indeed appear to make unrealistic assumptions, but does so in order to tease out ways of analysing behaviour. Ever more sophisticated statistical methods allows such theories to be tested with real data. Maybe surprisingly it often turns out that behaviour is pretty close to that which might be expected from the models.
The neo-classical models of consumer and producer behaviour turn out to be broadly in line with what consumers largely do. People do generally look at price and subject to quality and reliability considerations buy the cheapest product they can find. Firms generally seek to make as much profit as they can subject to considerations of customer base and quality of supply among other things. The abstraction from reality that produces optimal behaviour under strict assumptions, is simply an abstraction – all theorists do this of whatever discipline, most notably Marx himself. The idea is to get to the essence of the issue. So although NC theory can oversimplify, there is much that does get to the essence of economic behaviour. Then it’s [possible to use those models to conduct econometric analysis using real data.
However, and finally, Economics as a discipline does not equal NC economics. Keynes operated in the same tradition but came up with different ideas for curing slumps which emphasised counter-cyclical government intervention such as the Brown government engaged in. The ConDem government has ignored this interventionist strategy and has taken a wholly monetarist approach which will fail. That can be blamed on one lot of economists who have a fundamentalist belief in market success, but not on those (I suspect the majority who know that markets can fail. There is much in modern economics that recognises structure and politics. Modelling behaviour will still be abstract theory, but that’s part of academic inquiry. Economics is not alone in doing that.
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The mathematical modelling of neo-classical economics is the focus of criticism here. Other areas of economics, such as national income accounting, are beyond this critique. Of course, people generally look at price, quality and reliability when they purchase – that surely is just common sense, hardly a vindication of economic modelling. (They look at a lot else as well, as revealed by marketing research.) It’s the abstractions from modelling that do huge damage. For example, the abstraction suggests that markets, if left alone, will produce the most efficient allocation of resources and full employment. But though markets are largely unregulated, we’re surrounded by unemployed people and terrific waste.
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