Economics for idiots

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Political economist Associate Professor Evan Jones discusses the fraudulent neo-classical economics orthodoxy which has imposed itself like a religion on modern political thought, especially in Tony Abbott's Coalition.


ON 1 SEPTEMBER, the ABC Radio National Hindsight program was devoted to the Political Economy dispute at Sydney University in the 1970s and 1980s. As a Lecturer from 1973, I was a participant in the dispute. The Hindsight program was leveraged on the fact that senior parliamentarians Tony Abbott and Anthony Albanese were both involved in the dispute (anti and pro) as student activists.

Albanese is interviewed regarding his memories; Abbott is represented by recorded interviews in 1979.

Said Abbott:
“[Political Economy and General Philosophy (the breakaway Philosophy Department) are] thinly disguised attempts by unscrupulous academics to impose simplistic ideological solutions upon students, as it were to make students the cannon fodder for their own private version of the revolution.”

Abbott again:
“The Marxists that I said are operating in the universities, they realise that the universities now play a crucial role in the education of the elite of modern society and they understand that if they destroy the academic standards and perhaps even the moral standards of that elite, well then they have perhaps fundamentally and fatally undermined liberal democratic society.”

Abbott would have had no idea what the new Political Economy courses contained. The mere word ‘Marxism’ was enough to trigger in him a visceral war cry. As for General Philosophy, I sat in on an outstanding course on Political Philosophy by the Hungarian émigré György Markus — an intellectual giant. An ideal course for the education of young Tony for his future role, but alas the latter’s worldview had already been cemented.

I won’t vouch for the prevailing moral standards of the elite, but academic standards were rather enhanced by Abbott’s bêtes noires, only to be now under siege from a rampant and malevolent bureaucratisation of the university system.

Abbott’s adolescent rants aside, the most significant aspect of the Hindsight program is the role of Henry Ergas (he wasn’t there, but …) as counsel for the prosecution.

When asked about the character of Neoclassical economics, the central school of thought in the conventional Economics syllabus, Ergas opined:
Neoclassical economics is not ideological in the same way. It is more a box of tools … One could use that tool kit for a wide range of purposes. The ideology and the tools were wrapped up in a single bundle in Political Economy.

Ergas was asked whether Neoclassical economics was now the mainstay of both major Parties:
I believe so. … it is such a powerful toolkit, used to illuminate issues policy makers face. It focuses on incentives that individual economic agents face when they take decisions, interaction with decisions of other agents, the way that all of that adds up to outcomes, that then allows you to see what happens when you tweak particular levers of policy one way or the other. … Those are questions that the tools of conventional economics can really give you a lot of rigour in dealing with. There are no competitors for those kinds of tools. …

I don’t think [Political Economy] even won on campus. The situation at Sydney University was quite exceptional. They have frozen the 1970s into really like a folklore that remains alive today. Like the hippie communes one finds in parts of Tasmania or the northern coast of NSW. They are relics of an earlier era. In most universities students really voted with their feet, for more conventional approaches.

One of the reasons for that is that those approaches of mainstream economics are not an ideological straightjacket. … There are many progressive or Left-wing economists who are steeped in the techniques of mainstream microeconomics. Indeed many of the best economists today operating in that tradition are on the Left politically, such as Joe Stiglitz, Paul Krugman, Tony Atkinson. They use those tools to try to understand the kinds of issues I was talking about: income distribution, environmental pollution, regulation and consumer protection, and big questions such as what should be our approach to climate change.

Neo-classical "toolkit": Henry Ergas.

There are some howlers in this monologue. Ergas is best known as a columnist for The Australian, most recently as a Murdoch attack dog against Labor in office. In articles over a decade, he has demonstrated a mixture of macroeconomic orthodoxy, intermittent iconoclasm, gun-for-hire (e.g. the privatised vertically-integrated Telstra), and heady doses of ‘neoliberal’ (i.e. pro-capital) ideology and political partisanry. There is little evidence that Ergas himself utilises this purportedly omnipotent toolkit that he prescribes for others.

Ergas is also capable of undiluted sophistry, as in his May 2010 exchange with (the appropriately focused if occasionally jejune) Robert Manne in The Australian, where Ergas consistently declines to proffer even a soupçon of intelligence on the Global Financial Crisis or on economists Missing in Action in explanations of said crisis. Ditto when questioned on the Hindsight program on identical themes.

As for the much-vaunted individual choice, students seeking an Economics education do not vote with their feet as there is no choice. The only feet-voting activity is when they can’t take any more and opt to specialise in other disciplines.

The Political Economy syllabus has been and remains rooted in methodological pluralism — on the presumption that economic theories and ideas are paradigm-based. Ergas pushes the sophomoric view that the dominant orthodoxy is value-neutral. More, that the dominant Neoclassical paradigm is robustly useful.

For inexperienced outsiders, I offer Exhibit A for the defense:
My aim is to separate the other uncertainties of living from those associated with risk of loss of life. Thus it is assumed that all relevant variables and functional relationships are known, the only uncertainty being the actual time of death. Let a person be infinitely sensitive; have full information of all prices, probabilities, and his preferences; and be interacting in competitive markets with zero transaction costs. Let him choose among life histories such as to maximize expected lifetime utility, the von Neumann-Morgenstern postulate. The objective function is of the form E(U) = ∑δ (t) u (.) p (.) whereby expected lifetime utility is separable into discounted single period utilities, δ (t) is the utility discount function, u (.) is a single period utility function, and p (.) is the probability of being alive.

Assume a can opener! This priceless gem is from the prestigious American Economic Review, March 1976. My doctoral thesis came from the same genre, so I am familiar with the mentality, and it is assuredly not an aberration.

The truth is that the Neoclassical paradigm is a fraud. The Neoclassical paradigm’s dominance of the tertiary Economics syllabus is a monumental scandal. Perennial dissent in the discipline has perennially been marginalised, crushed or colonised. Ergas here is merely embodying a long tradition of the Inquisition against heresy. Neoclassical economics is not the Queen of the Social Sciences, but a religion.

Ironically, the hegemony of Neoclassical economics is not primarily for ideological reasons. Neoclassical economic theory has a loose relationship with but is distinct from the politically influential neoliberal ideology. Both are rooted in a priori axioms, for which evidence is irrelevant. The latter, self-sufficient, appeals to vested interests and those seeking simple catechisms for a complex world.

Neoclassical economics is hegemonic predominantly for reasons of attractive analytical technique — grownups playing games with each other. Another school of thought, Austrian economics, is more transparently aligned to a pro-unrestrained capitalist ideology, but it remains marginalised or non-existent in the conventional syllabus.

Neoclassical economics is centred on a pure theory (or theories) of the market mechanism. But the theories do not explicate real-world markets. Bizarrely, a tertiary economics education serves not to explicitly articulate (and possibly defend) the character of the capitalist system but to obfuscate its character by ignoring it.

The vacuum that is created in terms of understanding wage labour and the labour ‘market’ is particularly pernicious. It is for this reason that distinct Departments of Industrial Relations were gradually established in universities after World War II, only to now have the vacuum recreated as those Departments are refashioned under the rubric of ‘Human Relations Management’.

Thus economics graduates (save for exposure to optional and disappearing courses in history/institutions/empirics) come out professionally ill-equipped to work in fields which presume substantive training under the label. Learning on the job and self-education have to fill the cavernous hole, but perennially a socialised ignorance remains.

Ergas is wrong about the famous names he cites. Joseph Stiglitz confronted the poverty of his training and is struggling to make up for his lost youth. Stiglitz receives publicity not for the acuity of his analysis but for the peculiar combination of his past respectability and his having renounced it.

Paul Krugman has reinvented himself as a public commentator, effectively jettisoning his academic past. The oeuvre for which Krugman acquired his ersatz Nobel Prize is pure mumbo jumbo.

Obtaining a diversity of opinion in a university degree is perennially thwarted by the centrality of conventional wisdoms (the ‘dominant paradigm’) in the compulsory core of disciplinary syllabuses. The Australian Research Council’s university research measurement matrix, Excellence in Research for Australia [sic], is a vainglorious attempt to quantify the unquantifiable. By the severe ranking of academic journals, dictated by mainstream (and typically metropolitan) practitioners in each discipline cluster, academics are being told where to publish and thus effectively what to research and write and on what terms. Conventional wisdoms are being brutally reinforced by indirect and dishonest means.

The reasons why the Political Economy dispute occurred 40 years ago remain as relevant as ever.

Read also managing editor David Donovan's five part series on the glaring deficiencies in neo-classical economics:
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