The economics profession does not need a ‘reformation’

‘Heterodox’ economists make some valuable points, but they should dispense with the daft generalisations

There’s some tentative evidence of a more pluralist approach from the Bank of England (Rex)

Economics, we’re told, requires a reformation, just as Christianity needed Martin Luther’s revolutionary door-nailing challenge half a millennium ago. An “unhealthy intellectual monopoly” in mainstream economics, rather like corrupt medieval Catholicism, must be torn down.

Self-described “heterodox” economists have been making the case for years now; for decades in some cases. But is it right? The problem with such revolutionary demands, it has always seemed to me, is that they generally tend to be annoyingly and unhelpfully inexact in their definition of “economics” and “orthodox economists”.

Who are they talking about? Academics? Civil servants? The staff at multinational organisations such as the IMF and the OECD? Wall Street and City of London analysts? Think tank number-crunchers? Lobbyists? Consultants? They are not all the same. All perform different functions and practice economics in different ways. If a chef sends you to the market to buy him a red snapper he won’t be pleased if you bring him back a sardine, even if they both come under the rubric of “fish”.

Reading the list of “33 Theses” affixed to the door of the London School of Economics (a wry echo of Luther’s apocryphal Wittenberg bit of DIY in 1517) by the Rethinking Economics group earlier this month, two things stand out.

First, it’s a vigorous assault on what James Kwak has called “economism” – the idea that supply and demand curves are the only analytic tool one ever needs and that issues such as imperfect competition, missing information, psychological biases and institutional complexities, and myriad other wrinkles in the free market ideal, can be safely and confidently brushed to one side. This nonsense is generally promoted by right-wing think tanks funded by rich libertarians who want to pay less tax.

Second, the thesis-nailers are attacking a particular branch of macroeconomic theorising and forecasting, which tends to make simplifying assumptions for the purpose of creating tractable models. These assumptions include a single “equilibrium” for the economy and “rational expectations” among a homogeneous collection of economic actors.

On both counts the critique has some justification, especially the first. Economism really is distressingly common in public debate. Yet the problem comes in conflating these kinds of approaches with the work all the entire profession. As a group of distinguished and eminent academic microeconomists (people who generally conduct empirical analyses of labour markets, tax policy and consumer behaviour) associated with the Institute for Fiscal Studies and University College London have written, it’s simply untrue to imply that they and hundreds of thousands of their mainstream colleagues are guilty of the sins of economism outlined in the 33 Theses.

And many mainstream macroeconomic theorists and forecasters (who, it should be stressed, only account for a minority of academic economists) are well aware of the pitfalls of the basic “neoclassical” modelling assumptions.

The intellectual monopoly charge made by the heterodox group is grossly overblown, as is the claim that there exists a quasi-religious intolerance of dissent among most mainstream practitioners.

Academic economics is far from perfect, of course. The top-journal publication process, with inordinate delays between submission and acceptance and often unreasonably doctrinaire grounds for rejection, feels unfit for purpose. And given the importance of publication in such journals for a young scholar’s career advancement, this is a genuine problem.

It’s not totally outlandish for the heterodox to claim that a conservative caucus within the academy sometimes uses its power here to stifle contrary perspectives and methodologies, or, at least, to maintain a rather regressive grip on the economics faculties of the most prestigious and wealthy universities.

There have been specific problems with the undergraduate teaching too, where too little of what’s in textbooks has been relevant to the subjects students are actually interested in. Though it’s a shame those who want a pedagogical reformation generally fail to acknowledge the first-rate new CORE textbook, put together by a team of practising mainstream academic economists led by Sam Bowles and Wendy Carlin. A student who absorbs the CORE would struggle to recognise the caricature of the profession outlined in the 33 Theses.

There are deficiencies and blindspots among policymaking economists too. But, again, the thesis-nailers are out of date, in as much as they claim that issues such as inequality, financial bubbles and environmental sustainability are ignored. Researchers at the OECD and the IMF have, in recent years, produced some influential work on the economic perils of excessive inequality. There’s some tentative evidence of a more pluralist approach from the Bank of England too (as anyone who has read the speeches of the Bank’s chief economist, Andy Haldane, will know) though much more needs to be done.

It’s worth pondering why any of this matters. Rival schools of thought and intense methodological disagreements are common in many subjects. Yet calls for a reformation in mathematical research, say, or the teaching of English literature, rarely generate much of a stir outside the academy’s corridors and seminar rooms.

A big part of the explanation is the umbilical link between economics and policymaking. Economics is politically influential in a way that other social sciences are not. But, again, it’s essential to be precise here in what the problem is. As the IFS/UCL economists point out, we surely want policymakers to make judgements about benefits reforms and spending plans based on rigorous evidence on the likely impact. We should want high quality empirical and theoretical research on international trade relationships to influence politicians and political debate when it comes to momentous decisions such as, for instance, the UK leaving the EU’s single market.

Specific problems, it is true, attend macroeconomic policymaking (the setting of monetary and fiscal policy) which inevitably requires some forecasting. Our current level of knowledge over how to measure economic “slack” in an economy, the behaviour of the labour market and the roots of our national productivity malaise leaves a lot to be desired. And policymaking economists should probably be more open-minded here to fresh ideas.

Yet that does not (despite the impression given by an unfortunate amount of mainstream political news coverage over the past decade) apply to fiscal policy, where, as Simon Wren-Lewis of Oxford University ceaselessly stresses, the consensus among serious mainstream academic macroeconomists is that state spending cuts when economies are mired in recession and when interest rates are zero, generally does more harm than good.

Fiscal mistakes have generally been made where politics and ideological zealotry have overridden impartial and mainstream economic advice, not when politicians have bowed before some kind of malevolent neoclassical academic monopoly.

To give them their credit, the heterodox thesis-nailers make many good individual points about how economics should, and should not, be done. More pluralism would indeed be welcome. Some of these economists are often engaged in interesting and important research themselves. The heterodox deserve a break. Yet they would also do themselves a favour if they were to rein in the daft generalisations about the state of mainstream economics.