neoclassical Archives

Why Left Economics is Marginalized

After the 2009 recession, Nobel Prize winner Paul Krugman wrote a New York Times article entitled “How did economists get it so wrong?” wondering why economics has such a blind spot for failure and crisis. Krugman correctly pointed out that “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” However, by lumping the whole economics profession into one group, Krugman perpetuates the fallacy that economics is one uniform bloc and that some economists whose work is largely ignored had indeed predicted the financial crisis. These economists were largely dismissed for not falling into what Krugman calls the “economics profession.”

So let’s acknowledge there are many types of economics, and seek to understand and apply them, before there’s another crisis.

Left economics understands power

Let’s take labor as an example. Many leftist economic thinkers view production as a social relation. The ability to gain employment is an outcome of societal structures like racism and sexism, and the distribution of earnings from production is inherently a question of power, not merely the product of a benign and objective “market” process. Labor markets are deeply intertwined with broader institutions (like the prison system), social norms (such as the gendered distribution of domestic care) and other systems (such as racist ideology) that affect employment and compensation. There is increasing evidence that the left’s view of labor is closer to reality, with research showing that many labor markets have monopsonistic qualities, which in simple terms means employees have difficulty leaving their jobs due to geography, non-compete agreements and other factors.

In contrast, mainstream economics positions labor as an input in the production process, which can be quantified and optimized, eg. maximized for productivity or minimized for cost. Wages, in widely taught models, are equal to the value of a worker’s labor. These unrealistic assumptions don’t reflect what we actually observe in the world, and this theoretical schism has important political and policy implications. For some, a job and a good wage are rights, for others, businesses should do what’s best for profits and investors. Combative policy debates like the need for stronger unions vs. anti-union right-to-work laws are rooted in this divide.

The role of government

The left believes the government has a role to play in the economy beyond simply correcting “market failures.” Prominent leftist economists like Stephanie Kelton and Mariana Mazzucato, argue for a government role in economic equity and shared prosperity through policies like guaranteed public employment and investment in innovation. The government shouldn’t merely mitigate product market failures but should use its power to end poverty.

On the other hand, mainstream economics teaches that government crowds out private investment (research shows this isn’t true), raising the wage would reduce employment (wrong) and that putting money in the hands of capital leads to more economic growth (also no). As we have seen post-Trump-cuts, tax cuts lead to the further enrichment of the already deeply unequal, equilibrium.

Limitations to left economics: public awareness and lack of resources

History and historically entrenched power determine both final outcomes but also the range of outcomes that are deemed acceptable. Structural inequalities have been ushered in by policies ranging from predatory international development (“free trade”) to domestic financial deregulation, meanwhile poverty caused by these policies is blamed on the poor.

Policy is masked by theory or beliefs (eg. about free trade), but the theory seems to be created to support opportunistic outcomes for those who hold power to decide them. The purely rational agent-based theories that undergird deregulation have been strongly advocated for by particular (mostly conservative) groups such as the Koch Network which have spent loads of money to have specific theoretical foundations taught in schools, preached in churches and legitimized by think tanks.

There have been others who question the centrality of the rational agent, the holy grail of the free market, believe in public rather than corporate welfare, and the need for government to not only regulate but to make markets and provide opportunity. This “alternative” history exists but is less present – it’s alternative-ness defined by sheer public awareness, lack of which, perhaps, stems from a lack of capital.

Financial capital is an important factor in what becomes mainstream. I went through a whole undergraduate economics program at a top university without hearing the words “union” or “redistribution,” which now feels ludicrous. Then I went to The New School for Social Research for graduate school, which has been called the University in Exile, for exiled scholars of critical theory and classical economics. In the New School economics department, we study Marxist economics, Keynesian and post-Keynesian economics, Bayesian statistics, ecological and feminist economics, among others topics. There are only a few other economics programs in the US that teach that there are different schools of thought in economics. But after finishing at the New School and thinking about doing a PhD there, I understood this problem on a personal level.

There’s barely any funding for PhDs and most have to pay their tuition, which is pretty unheard of for an economics doctorate. Why? Two reasons – 1. Because while those who treat economics like science go on to be bankers and consultants, those who study economics as a social science might not make the kind of money to fund an endowment. And 2. Perhaps because of this lack of future payout, The New School is just one of many institutions that doesn’t deem heterodox economics valuable enough to warrant the funding that goes to other programs, in this case, like Parsons.

Unfortunately, a combination of these factors leaves mainstream economics schools well funded by opportunistic benefactors, whether they’re alumni or a lobbying group, while heterodox programs struggle or fail to support their students and their research.

The horizon for economics of the left

Using elements of different schools of thought, and defining the left of the economics world, is difficult. Race, class, and power, elements that define the left, are sticky, ugly, and stressful, and don’t provide easily quantifiable building blocks like mainstream economics does. Without unifying building blocks, we’re prone to continuing to produce graduates from fancy schools who go into the world believing that economics is a hard science and that the world can be understood with existing models in which human behavior can be easily predicted.

Ultimately the mainstream and the left in economics are not so different from the mainstream and the left politically, and there is room for a stronger consensus on non-mainstream economics that would bolster the left politically. It’s worth exploring and strengthening these connections because at the heart of our economic and political divides is a fundamental difference in opinion regarding how society at large should be organized. And whether we continue to promote wealth creation within a capitalistic system, or a distributive system that holds justice as a pinnacle, will determine the extent to which we can achieve a healthy, civilized society.

Fortunately, the political left in many ways is upholding, if not the theory and empirics, the traditions and values of non-mainstream economics. Calls from the left to confront a half-century of neoliberal economic policy are more sustained and perhaps successful than other times in recent history, with some policies like the federal job guarantee making it to the mainstream. After 2008 the 99 percent, supported by mainstreamed research about inequality, began to organize.

There’s hope for change stemming from a new generation of economists, in particular, the thousands of young and aspiring economists researching and writing for groups like Rethinking Economics, the Young Scholars Initiative (YSI), Developing Economics, the Minskys (now Economic Questions), the Modern Money Network, and more. But ideas and policies are path dependent, and it will take a real progressive movement, supplemented by demands by students in schools, to bring left economics to the forefront.

By Amanda Novello.

A version of this post originally appeared on Data for Progress’ Econo-missed Q+A column, in response to a question about the marginalization of leftist voices in economics.

Amanda Novello (@NovelloAmanda) is a policy associate with the Bernard L. Schwartz Rediscovering Government Initiative at The Century Foundation. She was previously a researcher and Assistant Director at the Schwartz Center for Economic Policy Analysis at The New School for Social Research.

Neoliberalism in Action

Book Review: Democracy in Chains: The Deep History of The Radical Right’s Stealth Plan for America

How did a network of libertarian influencers mobilize ideas and resources to restructure American society to reflect their radical “free market” perspectives? In her recent book, Democracy in Chains: The Deep History of The Radical Right’s Stealth Plan for America, historian Nancy MacLean strives to provide an answer to this question.

MacLean views the radical right as a group of “true believers” in freedom, an idea they associate with market freedom, aiming to remove public services and replace them with privatized schools and prisons that respond the market, not voters within a democracy. In doing so, MacLean argues that the radical right will eventually reduce freedom for the majority while privileging the propertied minority. The more power the propertied minority has, the less democratic society becomes. The ultimate target of the radical right, which has gained control of the modern Republican Party, is to change American society to privilege capitalism over democracy even more than it does now.

For libertarian economist James Buchanan, the market mechanism was the most efficient method of allocating resources, which he views as a form of democracy. Educated at the University of Chicago under Frank Knight and Milton Friedman, Buchanan played a significant role in the “stealth plan” of changing the rules of American society, not just people who make the rules. MacLean argues that Buchanan was radicalized at Chicago, where he earned a PhD in economics and learned the “science to support his existing “antigovernment feelings” (p. 36). Buchanan spent most of his teaching and research career in Virginia where he co-authored The Calculus of Consent: The Logical Foundations of Constitutional Democracy with Gordon Tullock.

In extending the market rationality to American politics, Buchanan and Tullock argued that politicians only pursued their own self-interest rather than any broad interests of society. Given that public institutions are led by officials that only pursue their own interests, public governance should be based on the principles of the market. They called this public choice theory, a framework that focused on non-economic decision making and served as a basis for awarding Buchanan the Nobel Prize in Economic Science in 1986. The Cato Institute, a libertarian think tank that was funded by billionaire Charles Koch, viewed The Calculus of Consent as a form of protection for capitalism against government, while MacLean argues that “[i]t might more aptly be depicted as protecting capitalism from democracy” (p. 81).

As a Nobel Laureate, Buchanan created an influential research program at George Mason University, which gained the attention of the Koch Network, which funded and later controlled Buchanan’s program, aiming to leveraged the legitimacy of economic theory to produce a society that was governed by the market, not by democracy. The “stealth plan” of this radical right was to mobilize ideas and resources to change the rules of American society to reflect its free-market perspective, not just who rules. To do so, they had to change the way the rules were rationalized. Buchanan’s public choice theory offered a way to re-conceptualize American law and politics.

On the surface, MacLean’s book offers a critique of libertarianism, although, it could perhaps better be understood as a critique of public choice theory—or neoclassical economics more generally—as a way of thinking and rationalizing society, which became dominant through powerful libertarian social and economic networks. By examining these nuanced power dynamics, MacLean offers a brilliant look at neoliberalism in action. She reveals the real-life experience of neoliberalism by showing us how and why the radical right extended the principles of the market rationality to areas outside conventional limits of the economy.

In her discussion of law and economics, a field of law that draws on the principles of economics, MacLean frames the entire field—rather than elements of it—as an attempt to undermine the broader public interest, while privileging the corporate language of profit, which uses cost-benefit analyses to make decisions. While MacLean makes a very persuasive argument, she overlooks the idea that cost-benefit analyses can be useful, depending on the context and purpose for which they are used.

Beyond this and other minor issues with MacLean’s book, such as her conspiratorial tone, Democracy in Chains offers an excellent look at the American political process and how seemingly marginal ideas, can become powerful enough to radically alter it.

About the Author: Johnny Fulfer received a B.S. in Economics and a B.S. in History from Eastern Oregon University. He is currently pursuing an M.A. in History at the University of South Florida and has an interest in political economy, the history of economic thought, intellectual and cultural history, and the history of the human sciences and their relation to the power in society.

What Money Can’t Buy: The Moral Questions of Market Solutions

Against the backdrop of a society that rarely questions the perceived superiority of “market-based” solutions, Michael Sandel skillfully explores the intersection between markets and morality. In a six-part video series, Sandel teaches viewers a very important lesson: in practice, there is no consensus on what a free market is, and what outcomes are optimal.

The video series “What Money Can’t Buy,” produced by the Institute for New Economic Thinking, takes viewers on a journey which compels them to critically engage with a series of questions that challenge the common perception that untethered markets provide optimal solutions to all problems. While the questions cover a variety of topics, ranging from selling organs to discrimination based on looks, the common thread is to highlight this: in economic terms, what could be seen as an optimal outcome is often not a desirable outcome for society.

By watching the series, one thing becomes evident: there is no clear line that marks where markets should begin or end. Furthermore, each individual has a different understanding of what counts as an optimal outcome. As we come to terms with the lack of clear answers, the perception that unregulated markets always objectively provide a better outcome is shattered.

Economics textbooks teach students that households and firms act as if they are guided by an invisible hand that leads them to desirable market outcomes. As everyone seeks to maximize their own utility, free markets allow individuals and firms to engage in mutually beneficial exchanges, with supply and demand determining ideal price and output levels. Thus, one should simply let markets work their magic — no outside intervention necessary.

However, not even Adam Smith, to whom the “invisible hand” observation is attributed, believed that unregulated markets can lead to the best outcomes for society. As Harvard professor Amartya Sen points out, Smith was aware of the limitation of free markets. He knew resources would be drained and society’s ills would go unaccounted for in the absence of government.

Today, it is largely accepted that governments do need to play some role in setting and enforcing rules that enable markets to operate. For example, it is not controversial that property right and contract enforcement are government actions that enable markets to function, and would not be considered an intervention.

What is less acknowledged by those who oppose regulation under the guise of protecting free markets, is that the boundaries between what is considered a necessary rule and what is labeled as intervention have consistently changed throughout time, along with what our societies have deemed acceptable or not. The idea of what should and should not be sold on the market has constantly evolved.

Cambridge economist Ha-Joon Chang points this out using a simple example: child labor. In our present society, not allowing young children to work is something that seems natural. Yet, in early industrial days, this was a heated debate. Opponents called the ban an intervention in free markets and the infringement on the child’s right to sell its labor.

“What Money Can’t Buy” showcases interviews with a number of prominent academics from across the ideological spectrum, such as Joseph Stiglitz, Larry Summers, Minouche Shafik, and Greg Mankiw, as well as discussions amongst a group of students. Each episode features Sandel asking participants a sequence of questions around a specific theme, leaving it up to each of the respondents draw their own lines on what should or should not be a market good.

The interviews present a variety of responses and arguments both in favor and against allowing markets to operate in various areas of our lives, and whether allowing markets in those areas would lead to better or worse outcomes for society. There is no consensus on what counts as basic regulation, or when a market is no longer “free”.

There are no right or wrong answers to any of the questions. However, this does not mean that the responses offered by participants are not challenged. Sandel consistently asks for further elaboration on the answers, and explanations for the reasoning behind those responses. What makes the series truly thought provoking is the way in which Sandel then asks respondents if they are comfortable applying the same pro-market argument to a somewhat similar, but instinctively more morally questionable situation.

Throughout the series, it becomes clear that often the arguments in favor of having a market for something, such as kidneys, operate in a vacuum which does not take into account the large inequities and power dynamics of our society. For example, Mankiw defends the need to have a market for kidneys by claiming it would lead to more donors, and more lives saved, thus improving outcomes for society overall. Yet, as Stiglitz points out, in our unequal society, would those selling their kidneys do so as a voluntary transaction, or be coerced by their economic despair? Furthermore, selling kidneys in a market would mean the price would be too high for many people to pay, thus effectively letting poorer people die to save those who are wealthy.

What Money Can’t Buy does not provide any concrete answers to the questions discussed, and does not decide for its viewers what is right, or wrong. That is not its goal. Instead, Sandel encourages viewers to engage with the questions and critically think about the role markets play in our lives, how they are structured, and who they inherently favor. As the series makes clear, there is no objective way to define a free market or what counts as intervention, and thus it encourages us to think about morality and what type of society we wish to live in and incorporate those principles in the way markets influence our lives.

Watch the series here.

Rethinking Economic Growth: A Review of “The Growth Delusion” by David Pilling

By Raghunath Nageswaran.

If economic exchange determined by the market forces of demand and supply provided the right incentives for production, how should the exercise of measuring the economy and its performance be undertaken? When did the project of measuring the economy take off and why? Does Gross Domestic Product (GDP), the summary indicator of economic activity, reflect the significant facts of our economic life? And if it doesn’t, what can be done to ensure that it does, going forward?

David Pilling offers some thoughtful and interesting answers to such questions in his book The Growth Delusion: The Wealth and Well-Being of Nations. The book is not a tirade against economic growth; it is not an anti-growth or a de-growth manifesto. Pilling makes his intention to broaden the conversation on growth very clear by including the words “wealth” and “well-being” in the title, concepts that go beyond the narrow definition of economic growth as an expansion in the flow of goods and services measured in monetary terms.

That GDP growth has become a proxy not just for the economic success of a country as measured in material terms, but also for the well-being of its people is a stark reminder about our fixation with an indicator that was devised to measure physical production during the interwar period. The notion of “economy” as an entity to be managed and captured in quantitative/monetary terms by experts came into vogue less than a century ago during the Great Depression years after Simon Kuznets presented his survey of the economic performance of the United States in the report National Income, 1929-32. This effort marked the birth of systematic national income accounting. But Pilling reminds us that:

Kuznets was striving for a measure that would reflect welfare rather than what he considered a crude summation of all activity. He wanted to exclude illegal activities, socially harmful industries, and most government spending. On many of these issues he lost.

This must serve as a useful counterpoint while arguing with uncritical enthusiasts of GDP, who baulk at the idea of using a different set of measures for capturing social welfare in its truest sense—people possessing the agency and capabilities to do things they have reason to value, as Prof. Amartya Sen has persuasively argued in his writings. GDP is not reflective of such a holistic idea of welfare because that would entail an assessment of the distributional impact of growth on various sections of the society, which the GDP isn’t equipped to measure or capture.

One must remember that the measurement of GDP is not a value-free exercise. A whole range of value judgements and assumptions are involved in the demarcation of the production boundary, therefore it shouldn’t be regarded as an innocent measure of economic activity. It is a deeply moral and political affair. The starkest example is the exclusion of household activity undertaken mostly by women, which is considered “unproductive” by conventional national accounting norms. Several scholars have developed and applied tools that measure the amounts of unpaid work done by women using time-use data and by imputing values to an entire gamut of chores, from dish-washing through breast-feeding to child-rearing.

Regarding the efficacy of economic growth as a means of furthering human welfare, there is a view among well-meaning sceptics that developed economies must get over their obsession with unfettered growth enabled by the endless cycle of production and consumption. In the book Doughnut Economics, economist Kate Raworth uses the term “growth agnosticism” to drive home the point that developed countries should ensure that their people continue to thrive irrespective of the trends in economic growth.

While this is the outlook for the developed world, there seems to be a resounding faith in the indispensability of economic growth as a nostrum for developing countries. It rests on the belief that only faster growth can lift people out of poverty and generate more resources for creating a redistributive design. This is a contestable argument, given the inequality enhancing nature of economic growth we have seen in different parts of the world in the last three decades. It would be instructive to go beyond standard narratives to acknowledge the fact that growth doesn’t automatically translate into better living conditions for people, especially when the fruits of growth are mediated by the various fault-lines in the society, not to mention the very framework within which economic growth of a predatory variety takes place.

There are interesting and practicable proposals for ensuring that GDP is reflective of the “trade-offs” involved in our single-minded pursuit of economic growth in part three of the book. It is in this section that Pilling turns the spotlight on “the wealth and well-being of nations.” The chapter titled Wealth is a culmination of Pilling’s effort to indict us for our collective disregard for natural ecosystems from which we draw all our resources and inputs to undertake various economic activities. He draws our attention to the crassness and instrumentalism that characterize our ambition of maximizing current incomes. He says:

Recording today’s national income offers no help whatsoever when making intergenerational decisions. The signal it sends is to maximize growth today no matter what the impact tomorrow. At the extreme, one generation might use up all a nation’s forest cover and all its oil reserves in the interests of double-digit growth and in the expectation that future generations will somehow sort things out. Today a government pushing such policies would point to rapid growth as a justification for its actions.

This short-sighted approach to resource use and management has its origins in the theory that defines efficiency in most primitive terms: make the most of existing resources by allocating those to the profitable areas of production, which is determined by the existing pattern of income distribution. We need to recognize that the humane way of managing natural resources is to augment them and not depleting them for current consumption purposes. That way, both efficiency and equity concerns can be addressed as we allow resources to regenerate themselves and leave behind enough resources for posterity. Pilling’s conversation with the sagacious environmental economist Partha Dasgupta is by far the most illuminating section of this book. After positing that we need to take a balance-sheet view of economic progress to get a big-picture view of the state of our resources, Pilling shares nuggets of wisdom offered by Dasgupta. Dasgupta takes the broadest possible view of wealth/assets and says that:

Contemporary models of economic growth and development regard nature to be fixed, an indestructible factor of production. The problem with that assumption is that it is wrong. Nature is a mosaic of degradable assets. Agricultural land, forests, wetlands, the atmosphere—more generally, ecosystems—are assets that are self-regenerative, but can suffer from deterioration or depletion through human use.

The enduring impact of Jeremy Bentham’s utilitarianism can be evidenced by the fact that individual utility, expressed in terms of market price, is still considered to be the best proxy for the subjective well-being of human beings, and it forms the bedrock of the measurement of social welfare in many theoretical exercises. The utilitarian way of looking at happiness and well-being has been the dominant principle for justifying all kinds of economic decisions and actions. While the standard interpretation of utilitarianism is the maximization of overall welfare, achieved when competing economic individuals are left alone to make “rational” decisions, a more creative and humane interpretation of the principle can focus on cooperation instead of competition and solidarity as against selfishness to maximize welfare.

It is certainly nobody’s argument that alternative measures such as Bhutan’s Gross Happiness Index (GHI) and composite indices such as the Human Development Index (HDI) are necessarily fail-safe. As Pilling says in the opening paragraph of the last chapter, “if the beauty of GDP is aggregation, that is also its biggest flaw. No single number can capture all that is worth knowing in life”. The way forward is to use a dashboard of indicators that will reflect the variegated aspects of human life and the state of resources in the economy.

It is also imperative to seriously rethink the nature, composition, and distribution of economic growth in order to make growth, and its GDP measure, humane. Economic thinkers belonging to the “classical school” of economic thought believed that the question of distribution of surplus couldn’t be separated from production, as the contribution of different economic classes to social production was dictated by the prior distribution of endowments among them. To turn the focus back to ‘distribution’ we can draw inspiration and insights from the classical school.

The Growth Delusion is a highly readable and insightful book. It covers a lot of ground and the examples offered are wide-ranging. Pilling’s journalistic fervour and sharp wit make the narrative engaging. As the old Chinese proverb goes, a thousand mile journey begins with a single step. This book promises to be one such step in a long journey towards our realization that growth is a useful tool but an intolerable tyranny.

Raghunath Nageswaran has an M.A. in Economics from Madras Christian College, Chennai (India). He is a student of Indian democracy and political economy.

The Neoliberal Tale

“The tide of Totalitarianism which we have to counter is an international phenomenon and the liberal renaissance which is needed to meet it and of which first signs can be discerned here and there will have little chance of success unless its forces can join and succeed in making the people of all the countries of the Western World aware of what is at stake.” (Friedrich Hayek)

In the past year we’ve seen a number of mentions to the maladies that neoliberalism and globalization have brought upon Western societies (e.g., see here, here, and here). It is well known that during the past decades the levels of inequality and wealth concentration have continued to increase in capitalist economies, leading to the arrival of “outsiders” to the established political powers such as Trump in the US and Macron in France, a turn to the right all over Latin America, and Brexit.

Neoliberalism, one of the main elements to blame, is better known for the policies that defined the world economy since the 1970s. Faithful devotees like Ronald Reagan and Margaret Thatcher, in the US and UK respectively, exported a number of their neoliberal policies to low and middle income countries through the Washington Consensus under the pretense that it would bring about development.

Neoliberal policies did not exactly turn out the way their creators envisioned. They wanted to reformulate the old liberal ideas of the 19^th century in a deeper and coherent social philosophy – something that was actually never accomplished. This article will review some of the origins of neoliberalism.

The first time the term “neoliberalism” appeared, according to Horn and Mirowski (2009), was at the Colloque Walter Lippmann in Paris, in 1938. The Colloque was organized to debate the ideas presented in Lippmann’s recent book The Good Society in which he proposed an outline for government intervention in the economy, establishing the boundaries between laissez-faire – a mark of the old liberalism – and state interventionism.

Lippmann set the foundations for a renovation of the liberal philosophy and the Colloque was a first opportunity to discuss the classical liberal ideas and to first draw a line in what the new liberal movement would or should differ from the old liberalism. It was a landmark that, in subsequent years, sparked several attempts to establish institutions that would reshape liberalism, such as the Free Market Study at the University of Chicago and Friedrich Hayek’s Mont Pelerin Society (MPS).

This event announced major difficulties among the peers of liberalism. Reservations and disagreements among free market advocates were not uncommon. A notable mention is Henry Simons, of the Chicago School, whose position against monopolies and how they should be addressed was a point of disagreement with fellow libertarians such as Hayek, Lionel Robbins – both at the London School of Economics (LSE) at the time – and Ludwig von Mises.

Simons’s view that the government should nationalize and dismantle monopolies would nowadays be viewed as a leftist attack on corporations but it fits perfectly under the classical liberal basis that Simons and Frank Knight, also from the University of Chicago, were following. Under their interpretation, any concentration of power that undermines the price system and therefore threatens market – and political, individual – freedoms should be countered, even if it meant using the government for that purpose.

It becomes clear that the reformulation of liberal ideas into what we know today as neoliberalism was not a smooth and certain project. In fact, market advocates struggled to make themselves heard in a world guarded by state interventionism that dominated the Great Depression and post-war period. Keynes’s publication of The General Theory in 1936 and the wake of the Keynesian revolution, swiped economic departments all over and further undermined the libertarian view.

By the end of the 1930s and of Lippmann’s Colloque, however, the perception that neoliberalism would only thrive if there were a concerted collective effort by its representatives changed Hayek’s perception over his engagement in the normative discourse. In 1946-47, the establishment of the Chicago School and the MPS, were both results of a transnational effort to shape public policy and fit liberal ideas under a broader social philosophy. The main protagonists beyond Hayek were Simons, Aaron Director, and the liberal-conservative Harold Luhnow, then director of the William Volker Fund and responsible for devoting funds to the projects.

The condition for success, as remarked in the epigraph, was to “join and succeed in making the people of all the countries of the Western World aware of what is at stake.” What was at stake? Social and political freedom. Hayek and many early neoliberals understood that any social philosophy or praxis crippling market mechanisms would invariably lead to a “slippery slope” towards totalitarianism.

It is important to note, though, that the causation runs from market to social and political freedom and not the other way around. As Burgin (2012) indicates, while market freedom is a precondition to a free democratic society, the latter may threaten market freedom. Free market should not be subjected to popular vote, it should not be ruled over by any “populist” government (a common swear-word today), and there needs to exist mechanisms to protect that from happening.

Once we have that in mind, it is not so bugging the association that Hayek, Milton Friedman, and the Chicago School once had with authoritarian governments such as Pinochet’s in Chile, one of the most violent dictatorships in Latin American history.

Several liberal economists that occupied important public positions in the Chilean dictatorship had been trained at the Chicago School. The famously known “Chicago Boys” first experimented in Chile what later would be applied in the US and UK and then exported to the rest of the developing world through the Washington Consensus.

In brief, the adoption of some form of authoritarian control over popular sovereignty was deemed acceptable in order to guarantee market sovereignty.

Nevertheless, in the discussions within the early neoliberal groups the boundaries of disciplinary economics were trespassed, and the formulation of neoliberalism – and the Chicago School and MPS – was not grounded on any scientific analytical basis but simply on political affiliation.

The multidisciplinary character, dispersion, and incertitude are some of the reasons why it is hard to give a straightforward definition of what the term “neoliberalism” really means. In order to understand it, we have to mind the set of “dualisms” (capitalism vs. socialism; Keynesianism vs. liberalism; freedom vs. collectivism, and so on) that marked the period. Its defenders (academics, entrepreneurs, journalists, etc.) did not know what their own agenda was – they only knew what they were supposed to oppose. Neoliberalism was born out of a “negative” effort.

It wasn’t until many years later that the division between normative and positive economics came to surface with Friedman and his book Capitalism and Freedom, published in 1962. The increasing participation of economists in the MPS, and a more active public policy advocacy by Milton Friedman brought an end to Hayek’s intention to construct a new multidisciplinary social philosophy.

Economically, Friedman embraced laissez-faire; methodologically, he embraced empirical analysis and positive policy recommendations, getting ever further away from abstract notions of value and moral discussions that his earlier MPS fellows, such as Hayek, were worried about. Neoliberalism lost its path on the way to its triumph; it became a “science” that offered legitimacy to a new credo, a new “illusion”.

As the shadows of neoliberalism became more intertwined with the current neoclassical economics and Friedman’s monetarism, it not only lost its name but also gave birth to a corporate type of laissez-faire; one in which social relations are downgraded to market mechanisms; politics, education, health, employment, it all could fit under the market process in which individuals maximize their own utility. There’s nothing that the government can do that the market cannot do better and more efficiently. Monopolies, if anything, are to be blamed on government actions, while labor unions are disruptive to the economy’s wellbeing. Neoliberalism became a set of policies to be followed: privatization, deregulation, trade liberalization, tax cuts, etc. on a crusade to commoditize every single essential service – or every aspect of life itself.

Hayek believed that these ideas could spread and change the world. And they certainly did. What is worth noting is that there is no fatalistic understanding that neoliberalism was unavoidably a result of historical factors.

The rise of neoliberalism was not spontaneous but rather orchestrated and planned; it was a collective transnational movement to counteract the mainstream of the time; it was originated out of delusion in a period marked by wars, authoritarianism and economic crisis; it was grounded on political affiliations and supported by the dominant ruling class that funded its endeavors and transformed public opinion. These are the roots of what is now the mainstream economic thought.

Economics as a Science?

By Johnny Fulfer.

Is economics a science?

Could it be? Should it be? The debate is as alive today as it was in the early twentieth century. This article reviews some of the key arguments in the discussion and provides a helpful backdrop against which to rethink the purpose of economics today.

In 1906, Irving Fisher argued that economics is no less scientific than physics or biology. All three aim to discover “scientific laws,” he explained. Even though they may not always be represented in reality, scientific laws are considered fundamental truths in nature. Newton’s first law of motion, for instance, cannot be observed. Only if certain circumstances were met, a body would move uniformly in a straight line. The same holds true for economic science, Fisher concluded.

But not everyone agreed. The discipline was charged with unsound methods.

Specifically, economists were accused of using the deductive method without the necessary level of precision. Jacob Hollander addressed the charges in a 1916 essay. Scientific inquiry involves uniformity and sequence, Hollander maintained. Progression in science relies on the formation of hypotheses, which may at some point become ‘laws.’ Observation and inference are the first steps toward the creation of hypotheses. The final step in the scientific process is verification, which is required before we move from theory to law. Without verification, he argued, “speculation is an intellectual gymnastic, not a scientific process.”

Hollander’s work reveals one of the questions at the heart of this debate: Is verification required, and even possible, given the complexities of economic phenomena? Scholars have the disposition to rely on the works of previous thinkers, Hollander argued, without endeavoring to move beyond familiar perspectives.

This question lives on today.

In a 2013 opinion piece for the New York Times, Stanford economist Raj Chetty argues that science is no more than testing hypotheses with precision. Large macroeconomic questions—such as the cause of recessions or the origin of economic growth—“remain elusive.” This is no different than large questions faced by the medical field, such as the pursuit to cure cancer, he explains. The primary limitation of economics, Chetty argues, is that economists have a limited ability to run controlled experiments for theoretical macroeconomic conclusions. The high monetary cost and ethical standards make these types of controlled experiments impractical. And even if we could run a controlled experiment, it may not matter in the long run, for social changes.

In a 2016 essay, Duncan Foley added to the conversation. He argued that the distinctions between the social and natural sciences are not clear. Both come from the same scientific revolution, and both are influenced by values. The notion that scholars in the natural sciences “pursue truth” is a flawed assumption, Foley argues. Scholars in the natural and social sciences choose which problems to solve and the methodology they use.

This choice involves values since a scholar must value one research project more than another.

Examining the scientific nature of economics, John F. Henry explains that neoclassical economic theory holds a position of influence in society because of its universal and abstract nature. Henry maintains that we should reexamine this assumption of universality. If economics is based on subjective values, how can it be considered universal? Should economists continue making ‘progress toward a more scientific structure of knowledge? This leads us to ask how we define progress. There is no end to this debate.

It seems unproductive to continue asking such questions. Rather than debating whether economics is or is not a science, perhaps we should shift the discussion toward questions that ask why economics needs to be a science in the first place. Where does this desire to be ‘scientific’ come from, and why is it so important for economics to be considered scientific? Perhaps the real issue is the determination to make economics a science.

The Borrowed Science of Neoclassical Economics

Another “Econ 101” story we hear in microeconomics classes is that, as consumers, individuals are always involved in a rational, hedonistic competition trying to maximize their own utility. The utility principle was brought to the forefront of the economics profession with the Marginal Revolution of the 1870s. The Marginal Revolution, the story goes, was a response to the rise in prominence of the theories of Karl Marx. While this might be true, it is only part of the story. The rest has been conveniently left out of the intro courses because it reveals that the foundations of neoclassical economics were essentially plagiarized from the natural sciences.

Modern orthodox economists frequently theorize and propose their models wrapped in algebraic expressions and econometrics symbols that make their theories incomprehensible to anyone without a significant training in mathematics. These complicated mathematical models rely on sets of assumptions about human behavior, institutional frameworks, and the way society works as whole; i.e. theoretical underpinnings developed through history. Yet, more frequently than not, their assumptions go to such great lengths that the models turn out utterly detached from reality.

This approach was promoted during the 1870s, in an effort to emulate the success of the natural sciences in explaining the world around us, and so transform Political Economy into the “exact” science of Economics. The new discipline, born with a scientific aura, would provide a legitimate doctrine to rationalize the existing system and state of affairs as universal, natural, and harmonious. It is understandable that economists wanted their field to be more like the natural sciences. At the time, great advances in physics, biology, chemistry, and astronomy had unraveled many mysteries of the universe. Those discoveries had yielded rapid development around the world. The Second Industrial Revolution was well underway, causing a transition from rudimentary techniques of production to the extensive uses of machines. Physics and mathematics were validated to a great extent with the construction of large bridges, transcontinental railroads, and the telephone.There exists extensive evidence to establish that this success of the natural sciences and the scientific method had a big influence on the mathematization of what had been the field of Political Economy. Early neoclassical theorists misappropriated the mathematical formalism of physics, boldly copied their models, and mostly admitted so. Particularly guilty of this method were W.S. Jevons and Léon Walras; credited with having arrived at the principle of marginal utility independently.

Jevons’ Theory of Political Economy shows this very clearly. He explicitly says he wants to “treat Economy as a Calculus of Pleasure and Pain, the form which the science, as it seems to, must ultimately take.” Here Jevons has abandoned the term “Political Economy,” and instead he is talking about the science of “Economy;” a science that would become “as exact as many of the physical sciences; as exact, for instance, as Meteorology is likely to be for a very long time to come.” Moreover, the concern of this new exact science would be limited to “the mode of employing their [referring to the population] labour which will maximise [sic] the utility of the produce,” and taking as “given” institutions like the property of land.

Walras showed many of the same intentions, claiming that “pure theory of economics is a science which resembles the physic-mathematical sciences in every respect.” Walras wanted that the pure theory of economics would deal with the relation between men and things (what he called “industry”) in a scientific way, while relations among men (termed, “institutions”) would be the object of study of social economics employing non-scientific techniques. This way, Walras removed property rights and class conflicts from the set of issues with which economics should be concerned. He abstracted the pure Economics theory from reality, and created an imaginary, utopian world: “an ideal market . . . [with] ideal prices which stand in an exact relation to an ideal demand and supply.”

American economist Irving Fisher furthered the work of Jevons and Walras in even less subtle ways. By the end of the 19th century, Fisher was openly copying physics models, term by term and symbol by symbol! Fisher’s Mathematical Investigations shows how he takes physics concepts and translates them to economics jargon:

Figure 1. Correspondence between the terms taken from mechanics and their economics counterpart in Mathematical Investigations

Source: Fisher, I. Mathematical investigations in the theory of value and prices, and appreciation and interest (p. 85).

Of course, none of this would be problematic if the adapted physics theories could be applied as Jevons and Walras proposed. But humans are not particles! In order for their scientific approach to work, Jevons and Walras had to assume a utility theory of value, which implied that people’s individual preferences were perfectly quantifiable, and that the amount of pleasure they obtained from the consumption of a certain good could always be measured. With these tools, Jevons and Walras assumed people to make rational decisions with the intention to maximize their utility.

This way, the Marginal Revolution transformed Political Economy into the pure science of Economics. Their methods, however, reveal that this formalization was more of a scam than an actual process of discoveries through scientific methods. Those who followed, however, took it to be a solid foundation. The founders of neoclassical economics used it to build theories that portray the existing order as rational, natural, and just. The social setting of the individual, institutions, and social relations of production continued to be exempt from examination, in the name of impartiality and objectivity. Economic “laws” continued to be devised—not discovered. The economy came to be portrayed as a system that operates autonomously and independently of human will, and comes to harmonious fruition under a free-market capitalist system of production. These conclusions, however, are built into the assumptions.

The urgency with which these theories were invented can be understood against the backdrop of Marx’s rise in popularity. Marx explained capitalism in the way a mechanic would open the hood of a car and explain the function of each part. His theories talked of conflicts of classes and exploitation as the inevitable consequence of private property, and the reduction of labor to another factor of production. With the intention to develop a counterargument, neoclassical thinkers decided to exempt those exact elements from their examination, and their models would show a capitalist society where there exists no exploitation, but rather a harmony of interests among classes and where the income created is divided according to the marginal productivity of each factor of production. No wonder neoclassical economists, like Robert Lucas, consider issues of distribution as “harmful” and “poisonous” to the economics profession; even in the face of staggering inequality. Maybe Piero Sraffa was right when he suggested that we should toss out these faulty theories.

Written by Oscar Valdes-Viera
Illustration by Heske van Doornen

Economics: An Illustrated Timeline

Do you keep getting confused about the different schools of thought in economics? Do you always forget what Walras was about, and when Marx was around?

This timeline has your back. It provides an overview of historic events, schools of thought, and the people involved.

About the author: Heske van Doornen holds an MSc in Economic Theory and Policy from the Levy Economics Institute and a BA in Economics from Bard College.

Sources: The Economics Book, Economie!, www.preceden.com, www.econlib.org, www.whistlinginthewind.org, www.hetwebsite.net