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Mainstream economists have bungled the management of economies right around the world, wreaking destruction and chaos — yet they carry on completely unperturbed, writes Dr Geoff Davies.

WITH COALITION GOVERNMENTS in power across the country, enthusiasm for free-market fundamentalism is surging yet again, however ineptly some politicians may attempt to enact it. 

Not that all the punters are happy about that; it always seems to have been imposed against the popular will. But why does it still infatuate the policy makers? That is the subject of my new e-book — Sack the economists.

If revolutionaries had destroyed factories, businesses and homes across Europe, the U.S., and much of the rest of the world, leaving tens of millions unemployed and many homeless, people would be howling for the blood of the perpetrators.

If a priesthood claiming to understand how society works had so bungled their exhortations that millions of people were thrown out of their homes and jobs, depression prevailed and fascist extremists were resurgent, that priesthood would by now be scorned, unemployed and hiding from public view, right? 

Wrong.

Economists so bungled their management of economies around the world that they wrought just such destruction of livelihoods and societies, yet they carry on almost totally unperturbed — beyond a bit of public hand wringing and some bemused tut-tutting from the commentariat.

The mainstream economists ‒ the ones who dominate our public policy and universities ‒ claim the Global Financial Crisis of 2007 was so anomalous it could not have been foreseen. According to them, it came out of nowhere; they can’t be blamed when the world behaves in totally unexpected ways.

That excuse is an admission that mainstream economists have no idea how economies work. Isn’t it their job to understand the ups and downs of economies, especially the really big booms and crashes that cause so much damage?

In fact, a few economists did see the GFC coming. They did so by noticing a few straightforward things — like private debt levels going through the roof and the ratio of household debt to income reaching unusually high levels. Unfortunately, however, the economists who sounded the warnings were ignored by the mainstream.

Academic economists who go against prevailing doctrine are marginalised. They find it hard to get papers published in mainstream journals and they rarely get jobs at the most prestigious universities. Australian economist Professor Steve Keen ‒ who sounded some of the clearest warnings and who should be an international hero ‒ even lost his job at the University of Western Sydney recently, when it was re-organised out of existence.

 

The GFC was a classic boom and crash — or bursting bubble as the Japanese call it.  Too many people take on too much debt, until some can’t repay and start defaulting.  When people are borrowing they have money to spend, and the economy booms.  When they start defaulting, they stop spending. The economy slows and then the whole thing spirals down, more people defaulting, everyone else spending less as they try to pay off their debt, people losing jobs, until you have a recession or depression.

This cycle is not a mystery — except to the mainstream economics profession. 

The profession is wedded to, or obsessed by, a branch of theory called neoclassical economics. The theory is very elegant. It makes everything predictable. Unfortunately, the theory is based on absurd assumptions and its predictions bear no resemblance to the real world. All the mathematical elegance exists only in a highly abstract fictional world.

The mainstream theory excludes money and debt from its considerations. 

Money, they claim, is only an intermediary, a passive facilitator of exchanges. Debt, they claim, makes no difference because when you borrow somebody else lends, and the only effect is that you spend the money rather than them.

Unfortunately this is not what happens when you get a loan from a bank.  It may startle you to learn that most of the money the bank ‘loans’ to you is created out of nothing by a few strokes of a keyboard. Nobody has to do without that new money — it simply adds to the total purchasing power in the economy. Then, as you pay off the loan, most of that new money is extinguished.

As a bubble inflates, lots of loans are made, lots of new money is created and the economy booms. When the bubble bursts, lots of money is extinguished and the economy shrinks. Thus, money is not a passive facilitator — at least not while our banks operate as they do at present. Excessive debt brings the danger of a collapse.

Economists exclude money and debt from their neo-classical theory because it would spoil the elegant results.

Instead of a gentle equilibrium, the theory would predict erratic fluctuations or chaos (rather like a real economy). Rather than face up to that reality, they stay in their tidy little theoretical cocoon.

Mainstream economists also make other absurd presumptions.

They think we can all foretell the future, that no-one is influenced by fashion or advertising and that we all fully inform ourselves before we buy anything. They add up all the transactions in the economy, whether they represent benefits or costs, call the total the Gross Domestic Product and refer to it as “the economy”. 

The list of absurdities goes on, and they grossly mislead economists, and economic policy.

Mainstream economics is pseudo-science. It is mumbo-jumbo dressed up in fancy mathematics to look like science. Because mainstream economists so actively exclude dissenters, they effectively comprise a priesthood, bound by a set of beliefs rather than by a dedication to evidence and understanding.

Sack the economistsIt is high time we laughed mainstream economists out of town, along with their baleful free-market fixation. We should sack them, and replace them with people who have some real-world knowledge and a willingness to honestly address the important questions, such as how to avoid, or recover from, a boom and bust.

Dr Geoff Davies is a retired geophysicist at the Australian National University and the author of the ebook Sack the Economists (BWM Books, Nov 2013). He blogs at Better Nature.

Read also managing editor David Donovan’s five-part series: ‘Why everything you thought you know about economics is probably wrong’.

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