It’s often said that the failure of conventional economics revealed by the global financial crisis has prompted no serious effort to find a new economic theory that actually works. Look closer, however, and you see economists stirring themselves to lift their game.
That’s the view of a noted American economist and critic of his profession, Professor Dani Rodrik, of Harvard, in an article published this week by Project Syndicate.
Rodrik says the populist backlash sweeping the advanced economies in recent years – think Trump, Brexit and Pauline Hanson – has produced some soul searching in the discipline. It is, after all, a backlash against the austerity policies, free-trade deals, financial deregulation and labour market deregulation that economists urged on the politicians (and only in retrospect realised how naive they’d been and how misused by pollies with other agendas).
In consequence of this rethink, “the economics profession is gradually changing for the better”, according to Rodrik. But the transformation extends beyond thinking about economic policy.
Within the discipline there’s finally a reckoning with the hierarchical practices (reverence for seniority and high-status universities) and the macho seminar culture (where anyone who says something silly or unorthodox is brutally shot down) that have produced an inhospitable environment for women and minorities.
According to a survey of its members conducted last year by the American Economic Association, nearly half of female economists felt discriminated against or treated unfairly on account of their gender. Nearly a third of non-white economists felt they’d been treated unfairly because of their ethnicity.
Rodrik, an Egyptian American, thinks the bad policy advice and the inhospitality towards anyone not an old white male may be related. “A profession that is less diverse and less open to different identities is more likely to exhibit groupthink and hubris,” he says.
“If it is to generate ideas to help society achieve inclusive prosperity [and so not push outsiders into the arms of populist politicians with no real answers to the problems being reacted against] it will have to start by becoming more inclusive itself.”
The new face of the discipline was on display at its annual meeting in San Diego early this month. The sessions that attracted the greatest attention were the more than a dozen focusing on gender and diversity.
Also discussed was a new book by the Nobel laureate Angus Deaton and Anne Case, Deaths of Despair. Their research shows how a particular set of economic ideas privileging the supposed “free market”, along with an obsession with material indicators such as aggregate productivity and gross domestic product, have fuelled an epidemic of suicide, drug overdose and alcoholism among America’s (often jobless) working class.
Capitalism is no longer delivering for these people (many of whom switched their votes to get Trump over the line) and economics is, at the very least, complicit, Rodrik observes.
In a panel session at the annual meeting that Rodrik helped organise, Economics for Inclusive Prosperity (note that buzzword inclusive), several new strands of thinking were discussed that are, he claims, “taking over the discipline”.
One was the need to expand economists’ focus from average levels of prosperity (which often look okay) to the distribution of that increased income between top, middle and bottom (which often doesn’t).
Another strand of thought was the non-economic dimensions that are equally fundamental to wellbeing – such as dignity, autonomy, health and political rights – damage to which economists have tended to ignore.
“How economists talk about, say, trade agreements or deregulation may well change when they take such additional considerations seriously,” he says.
“This will require new economic indicators. One proposal that goes part of the way is for government agencies to produce distributional national accounts [something our Australian Bureau of Statistics has been working on].”
Mainstream economists have long claimed their theories and models to be “value-free”. This is self-delusion on a grand scale. In a paper presented to the panel session by Professor Samuel Bowles, of the Santa Fe Institute, and Professor Wendy Carlin, of University College, London, they boldly stated the bleeding obvious.
They argued that every policy paradigm has embedded within it not just a theory about how the economy works, but also a set of ethical values about what the good life entails. Neo-liberalism, for instance, presumes individualistic, amoral individuals and a free market that delivers efficiency, thanks to “complete contracts” (those that leave the other party no room to cheat you, but such contracts don’t exist) and few instances of “market failure” (where, for various reasons, the market fails to work the way the theory says it will).
Clearly, such assumptions go a long way towards explaining why economists failed to foresee that deregulation of the financial system and permissive supervision of it would lead eventually to collapse and deep recession.
Bowles and Carlin said what we needed was a new theory that integrates egalitarian, democratic and sustainability “norms” of acceptable behaviour (the ethical side) with a model of the economy as is really operates today (that is, which would incorporate the insights of behavioural economics).
Such a paradigm would place the community alongside the economists’ conventional dichotomy between the market and the government. And it would include policies such as wealth taxes, broader access to insurance to reduce people’s exposure to risks, workplace rights, reform of corporate governance (none of the convenient fiction that shareholders’ rights trump all others), and a substantial weakening of intellectual property rights (which have devolved from a device to encourage innovation to a prime source of big business rent-seeking).
Professor Luigi Zingales, of Chicago University’s business school, criticised economists for foisting their own preferences on the public. They tended to place greater value on certain outcomes (such as economic efficiency) rather than others (such as the distribution of income) and they fall prey to groupthink and to fetishising particular economic models over others.
I can’t say I’m convinced a revolution in economists’ thinking is imminent, but it’s a start.
