Review of 'The Econocracy'

Jo Michell

Economics, both as an academic discipline and a profession, has attracted criticism of late. From the Queen asking LSE academics why they missed the Global Financial Crisis to the strident yet inaccurate predictions of post-referendum recession, economics and economists have come under attack from across the political spectrum. Critics of austerity who regard mainstream macroeconomics as neoliberal apologism have been joined by libertarian Brexiteers who appear to regard any recourse to logic or evidence as a breach of protocol.

Criticism that focuses narrowly on predictive failures is at least partly misdirected. Economic forecasting is difficult, imprecise and unreliable. But economists must take some of the blame for anger over predictive failures – official institutions and research organisations churn out detailed forecasts which purport to look years into the future with an apparent accuracy of multiple decimal places. The Treasury's claim that Brexit would cost £4300 per household by 2030 was a particularly egregious example. Excusing this behaviour on the basis that a forecast is nothing more than a probability distribution over a series rather misses the point. The standard models in use before the 2008 crisis not only failed to see it coming, but assumed it couldn’t happen. In summary, economists should be more circumspect about their powers of clairvoyance.

Alongside the anti-neoliberal left and the anti-rational discourse right, a growing strand of criticism can be found in a constituency closer to home: students of economics. This is particularly troublesome since it represents dissent within the ranks – albeit at a junior level.

Dissent has arisen as a result of dissatisfaction among some students with the teaching of economics in the wake of the financial crisis. Students complain they are taught according to narrow curricula that are dominated by abstract neoclassical ideas which appear far removed from reality. Their campaigns have caught the attention of journalists and commentators, leading to substantial media coverage.

Defenders of the academic status quo argue that students and their interlocutors in the media misrepresent the subject, needlessly demand the addition of material which is already taught, and – most galling for the defenders – are not qualified to question the judgement of their academic superiors.

It is true that critics sometimes over-simplify complex issues. Inaccurate criticisms – for example, conflation of neoclassical economics with neoliberalism, claims that no mainstream macro models include monetary or financial mechanisms, or blanket assertions about the use of 'homo economicus' – are easy to rebut and weaken the position of critics.

It will be harder for defenders of the status quo to dismiss the arguments presented in The Econocracy. The book is written by three of the University of Manchester students who founded the Post-Crash Economics Society (PCES) – one of the early student groups campaigning for curriculum reform. PCES pulled off an early coup by publishing a report featuring a foreword written by Andrew Haldane, Chief Economist at the Bank of England. Haldane reprises his role here, providing a foreword to The Econocracy.

The back cover of the book contains strong endorsements from Martin Wolf, Vince Cable and Lord Skidelsky, among others. Even Diane Coyle – who stood firm against student demands for pluralism after being appointed at the University of Manchester – offers a cautious acknowledgement, noting that ‘many economists will not agree with all of the book's analysis, but they certainly should not ignore it’.

The book makes two main arguments. The first is that the society we live in has become an 'econocracy'. Actions and policies are justified or opposed purely on the basis of their effect on 'the economy'; political choices are increasingly framed in economic terms. When considering the outcome of any action, its effects on 'the economy' seem to trump all other concerns. The authors give examples: fathers reading to their children and mental health. Progress on each has been justified (by the OECD and a charity, respectively) as contributing to GDP. 'The economy', has ceased to be the means – in contrast with Lionel Robbins famous dictum – and has instead become the ends.

At the same time, and partly as a result of this shift, the language and concepts used in public policy discussion increasingly exclude the general public. Discussion of unfamiliar mechanisms using technocratic terminology excludes most of the population. Many citizens feel unable even to have an opinion on important issues, and may simply switch off from debates involving economic ideas, issues or language. Worse, they may turn to conspiracy theories, naive populism or overly-simplistic policy positions such as 'anti-austerity'. Gove's attack on 'experts' in the run up to the Brexit vote was a cynical demonstration of how this sense of exclusion can be used to political advantage.

I recently experienced this feeling of exclusion first-hand when I spent a day with the Citizen's Economy. This is a new project run by the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce), involving a series of one-day events that bring together citizens from across society to discuss the role of ‘the economy’ in their lives. The discussion was illuminating: to many of the participants ‘the economy’ was simply something that happened to them – and they felt they had little understanding of it and had no agency to influence it.

The authors of The Econocracy argue that this exclusion of the majority elevates economists to a status in society that is unwarranted. Instead of advisors offering impartial advice in an accessible way, economists have taken advantage of the opacity of discussion to set themselves up as all-seeing sages. But, the authors argue, economists are ill-equipped for this role at the top of the social and political hierarchy – and one important reason is the inadequacy of university economics education. Haldane summarises the argument in his foreword:

"Part of the critique is technical. Mainstream models have sacrificed too much realism at the altar of mathematical purity ... economics has become too much of a methodological monoculture [which has] narrowed the economics curriculum in universities... Accompanying this has been neglect of disciplines that abut and illuminate economics: economic history, moral philosophy, radical uncertainty, non-rational expectations. In short, neglect of the very things that make economics interesting and economies important." (p. xv)

The authors detail the dissatisfaction they felt when discovering this upon arrival at university – in the wake of the 2008 crash they wanted to understand what had gone wrong and why. Instead they found themselves faced with abstract mathematical problems that seemed to have little connection to the pressing issues of the day: financial instability, inequality, unemployment and environmental degradation. They recount their largely unsuccessful attempts to agitate for change at Manchester and how this experience led to the formation of the Post-Crash Economics Society. Similar experiences elsewhere led to the formation of Rethinking Economics and other groups which have since grown into a collection of organisations at academic institutions across the world.

Haldane continues:

"My view is that this is fair cop. Indeed, I think this particular element of the critique is no longer a source of great controversy, except within some academic cliques... I have myself been a supporter of student efforts to widen and deepen the curriculum ..."

This understates the degree of controversy surrounding the authors’ proposed curriculum changes. Resistance from the academic economics establishment is strong.  The key point of contention is their claim that economics curricula should embrace ‘pluralism’. The standard neoclassical toolkit, it is argued, is only one way to understand the functioning of the economy. This methodological toolkit – equilibrium and optimisation, utility functions and production functions – is useful and important but is not rich enough to analyse and understand the full range of extant economic phenomena. Students should also be exposed to ideas from different methodological approaches such as Austrian, Marxist, Feminist, Institutionalist and Post-Keynesian economics.

This is opposed by even the most sensible end of the academic mainstream – and opposition isn't confined to academia. The FT’s Martin Sandbu, in his review of The Econocracy argues that ‘perhaps it is not neoclassical economics that is at fault, but neoclassical economics badly done.’ He notes that institutions and gender relations can be modelled using the standard neoclassical tools – neutralising the call for the inclusion of Institutional and Feminist economics. He argues that the mainstream demonstrates flexibility in its willingness selectively to drop certain assumptions – for example 'rationality' (in the sense of utility maximising) in the case of behavioural economics and stable unique equilibria in the case of game theory.

These arguments echo the strategy pursued in the new CORE curriculum, a project led by Wendy Carlin and adopted by the Manchester department where the Econocracy authors studied. The curriculum includes 'previews' of more advanced material and thus, its supporters claim, obviates any requirement for non-neoclassical inputs. The danger of including such additional material, it is argued, is that this would undermine the supposedly scientific nature of the subject, reducing it instead to a collection of opinions. Margaret Stevens of Oxford University makes the argument clearly:

"[T]he solution to the problem of an established orthodoxy is not heterodoxy, or pluralism. Right opinions – whether one or many – get in the way of thinking. Students used to write in macroeconomics essays: 'Monetarists believe... and on the other hand Keynesians believe...' Lacking the skills to discriminate for themselves amongst arguments presented to them as equally valid, they could only resort to signing up on one side or the other, and concluding 'I believe... '"

Simon Wren-Lewis makes a similar point, opposing the demand for pluralism on the basis that economics is ‘an objective empirical science ... That it is a science, with a mainstream that has areas of agreement and areas of disagreement, is its strength. It is what allows economists to claim that some things are knowledge, and should be treated as such. Turn it into separate schools of thought, and it degenerates into sets of separate opinions.’

The problem with this is that propositions in economics are not, by the nature of the subject, ever incontrovertibly falsifiable. The scientific method of forming a hypothesis and then testing that hypothesis against reality can never be the final arbiter of knowledge, as it can in the physical sciences. And even when models have demonstrably failed, they are not discarded.

So is the current received wisdom of mainstream economics knowledge or is it a set of opinions? If the empirical predictions of the mainstream turned out to be relatively robust, a claim could be made could be made for the former. But empirical success in mainstream economics has been patchy at best – not just in prediction but also in understanding and explaining the past. If this were not the case, it would not be facing so much criticism.

What defenders of the orthodoxy seem unwilling to discuss is why the methods of neoclassical economics are uniquely and exclusively valid over the domain of investigation – while the methods of, say, Post-Keynesian economics are not – despite the fact that the empirical macro data over the last ten years or so matches Post-Keynesian theory rather better than that produced by, say, neoclassical DSGE models.

As Dani Rodrik, another defender of the ‘one economics, many models’ view likes to point out, you can generate any conclusion you want using a mainstream model by selecting your assumptions carefully. Put another way, you can dress up any opinion you like in the mathematical language of mainstream economics – and this mathematical formalism provides a useful way to hide unpalatable assumptions.

Why then, in the post-2008 era, is the Efficient Markets Hypothesis science and Minsky's Financial Instability Hypothesis not science? Why is Woodford's interpretation of Keynes knowledge while Godley's interpretation is opinion? Why should students read Lucas and Barro but not Minsky and Kindleberger? – On what basis is the boundary drawn?

The problem with the ‘knowledge versus opinion’ defence is that there have always been differences of opinion within mainstream economics as well as without – as Simon acknowledges in the quote above. In order for these opinions to be valid, however, it seems one must first accept the standard neoclassical apparatus as ‘knowledge’.

 The authors of The Econocracy calmly and cogently make the case for drawing the boundaries more widely. The book is superbly written, combining evidence, personal experience and historical narrative to produce a highly readable story. It would be an excellent achievement for any academic – it is a remarkable one for a group of young recent graduates. The questions they raise are serious and important. They deserve a hearing.