One of the comments I have made that is frequently picked on as a means to criticise me by right wing bloggers is that I became disenchanted with the undergraduate economics I was taught as a first year and remained so throughout the course, and pretty much ever since. This is taken as evidence that I know nothing of economics, although I went on to get one of the best results in my year even if that was now rather a long time ago.
I have always disputed this claim as being one made by economic charlatans with little or no understanding of the real world and therefore no ability to understand why, even at the age of 19, I could see no relationship between the economics I was being taught and the real world of human and business behaviour I could observe all around me. I knew, even then, that no one utility maximised, and because I went to university having already prepared my first set of accounts for a small business (probably sad, but true) I knew very well indeed that those businesses did not set prices in the way economics taught and had no clue how to maximise profit. It was pretty easy to rumble the consequences of the false assumptions that flowed from assuming these things happened once my eyes were wide open to these obvious faults in economics, which I'd gullibly and naively accepted as a sixth former but which were obviously wrong as an undergraduate.
Now, I know those assumptions can be and are relaxed in more advanced economic theory, but my point then and now is the same, which is that this does not matter when 99% of all understanding of economics carried from universities into the real world is based on the nonsense undergraduates are taught and not the reality of the world as it is. It is quite pleasing to see a new wave of recognition for this realisation (and that the situation has got much worse in the meantime) as a result, as evidenced by Prof Wendy Carlin in the FT, for example, this morning, who says:
The department chair at a top university in Turkey lamented that students could handle any applied maths exercises thrown at them, but if asked about the economy “their reasoning is no different from the wisdom of taxi drivers, and sometimes a bit less well informed”.
Turkey is no different from Manchester, or any other UK university on this matter.
The fact is that economics students are not taught the history of economic thought.
They are also not taught that economics is moral philosophy. Indeed, they are not taught much, if any, philosophy, at most universities.
And they are taught that maths is all that matters when very glaringly obviously it does not because the simplifying assumptions made to ensure that the maths of modern economics works do not reflect reality; they do instead reflect and also inform the dogma of neoliberal economics which is designed to make the maths work and not reflect reality and then imposes the answers on the world rather than see if they fit the way people actually behave. The resulting stress is, to most people, all too obvious.
So I feel vindicated.
But I'll only be happy when a better economics is taught. I suspect that's a long way off as yet. In the meantime the damage will continue.
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Once you again you conflate neoclassical economics with neoliberalism. I’m starting to think you are deliberately trying to mislead your readers. Why else do you keep doing it, given that you know it’s an error?
I happily conflate
I explained why in The Courageous State
I’m currently (the book is right next to me!) reading Philip Mirowski’s ‘Never Let A Serious Crisis Go To Waste,’ an investigation into how neoliberalism survived (and, indeed, thrived) through the crises of the past five years. He’s probably best known for his book ‘More Heat Than Light,’ which is basically about how economics nicked all its mathematics from physics. Terrific scholar.
Anyway, he insists on an analytical distinction between neoclassical and neoliberal for a number of reasons, the main one being the role of the state. The neoliberals do not believe in laissez faire in the same way that the neoclassicals do. The neoliberals know full well that a strong state (of a very specific kind) is needed to impose and create the conditions under which ‘free market’ economics can operate – that is a highly militarised state that provides security, protects property, etc. but also a state that actively propagates the neoliberal ideology in every way it possibly can (sound familiar?).
Neoliberalism is much, much more than a set of economic theories. Mirowski concentrates his historical sociological analysis around the Mont Pelerin Society, founded by Hayek, von Mises, Karl Popper and Friedman, among others. This society was the breeding ground for an immensely successful political movement that has infiltrated practically every element of our world.
He goes on to investigate the ways in which we have all internalised neoliberalism on a socio-psychological level. That’s why it won’t die. That’s why people are so angry but are seemingly incapable of rejecting the doctrines. We’ve come to identify with the neoliberal ideology on a very deep and fundamental level.
I’m sure that you have your reasons for conflating the two things, Richard (I haven’t read your book yet) but I think Mirowski has a point. Making the distinction allows us to understand the emergence of this specific (if very complex) ‘thought collective’ and, so, may also allow us to figure out how to better resist it. It’s an incredibly rich and thought provoking book, I highly recommend it.
Mirowski was on radio 4 earlier this week, too: http://www.bbc.co.uk/programmes/b03h428y
I think it politically an extremely sound point
In fact in terms of political economy it is spot on
I am not so sure economically
But I can be convinced
I have not read the book – bug will if you think it worth doing so
It’s definitely a sociology of economics rather than a book on economic theory per se, that’s correct. Although, Mirowski is a trained economist as well as a historian and sociologist so he certainly has a grasp of the theory. He summarises his differentiation between neoclassical and neoliberal in this lecture, specifically with relation to nature/climate change:
http://youtu.be/I7ewn29w-9I?t=21m14s
An abstract distinction but an interesting one, I think.
One point he’s making (in the book) repeatedly is that the neoliberals chop and change their economic theories depending on their circumstances. Sometimes they’re closely related to the neoclassicals, sometimes not. Moreover, they have different stories when speaking in private compared to their public pronouncements. There’s always an underlying faith in ‘The Market’ in some way or other but it’s worked out quite differently over time and space (that flexibility is what makes the movement so strong). The German Ordoliberal tradition, for instance, insists upon relatively stringent state intervention in the free market. That strand is very different from the Austrian or Chicago schools but they are all drawn together in various ways. What unites them, in particular those associated with the Mont Pelerin society, is a pragmatic political project that is surprisingly organised – not ‘spontaneously emergent’ as the Hayekians would have you believe but very deliberately and sometimes ruthlessly planned. It’s this active socio-political sophistication that sets the neoliberals apart not just from others on the right but, Mirowski argues, from pretty much everyone on the left too.
I’ve always found the definition of neoliberalism given by David Harvey (A Brief History of Neoliberalism, 2005, p.2) as both accurate and easily understood, Richard, and pretty much in accordance with what I read from you.
‘Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterised by strong private property rights, free markets and free trade. The role of the state is to create and preserve an institutional framework appropriate to such practices. The state has to guarantee, for example, the quality and integrity of money. It must also set up those military, defence, police, and legal structures and functions required to secure private property rights and to guarantee, by force if need be, the proper functioning of markets. Furthermore, if markets do not exist (in areas such as land, water, education, healthcare, social security, or environmental pollution) then they must be created, by state action if necessary. But beyond these tasks the state should not venture.’
If we think of pretty much any policy or action of the coalition since 2010 it’ll be underpinned and informed by one or more of the features of NL noted above. But then again, the same could be said for many of the actions of governments across the world – but particularly UK, US, NZ, Canada and Australia – since the late 1970s. I include China in the neoliberal turn, by the way, whatever, warped claims to “communism” it might make.
Agreed
Neoclassical economics is one of the bedrocks of neoliberalism. Simples!
Well since RM only specifically mentions ‘profit maximising’ he is indeed talking about Neoclassical economics.
“profit maximization lies behind the neoclassical theory of the firm” wiki
It does, but not in the way Richard seems to think. If he was paying attention during his undergraduate course (or even, you know, attempted to learn some economics in the subsequent years) he’d realise that economists don’t assume that businesses consciously attempt to maximise profit. Complete strawman.
It’s one thing to say “I didn’t learn economics because I didn’t understand it”. That’s fine. We all appreciate that Richard doesn’t understand economics. But he shouldn’t then make sweeping claims that misrepresent what neoclassical or indeed neoliberal economics has to say.
I don’t misrepresent
I am telling it as it is
That does not mean I do not understand economics
I just dispute your view of it, which is very different
No Richard correctly conflates neoclassical economics with neo “illiberalism” because the former underpins the latter.
Why are you trying to mislead readers of Richard’s blog into thinking otherwise.
The only one making an error is you sir. I would politely suggest that you consign most of what you have been taught to the dustbon and start a fresh, because there is no room for quackery in the 21st century!
If I were to read the term ‘Tax Heroes’, I would have assumed it was satire. But no, this is real life, or as close to it as Boris Johnson ever gets.
http://www.telegraph.co.uk/comment/columnists/borisjohnson/10456202/We-should-be-humbly-thanking-the-super-rich-not-bashing-them.html
It seems to me that Neoclassical economics is the economic theory of choice of the broader socio-political movement we call Neoliberalism. It ought in fact to be named Neo-libertarianism because it is in fact illiberal. The movement seeks to concentrate power and wealth in an elite of plutocrats, and to oppress the citizenry particularly through the use of debt slavery, at the expense of classic liberal values. Neo-libertarians have effectively employed the professors of Neoclassical economics to help them along. Whether those profs are dupes or willing catamites is moot, the result is the same.
If that was the case why does neoclassical economics have an entire theory of market failure, and why do free market fundamentalists make the exact same criticisms of the mathematisation and formalism of neoclassical economics that Richard does?
maybe it’s a bit like believing in Christianity and actually living it? So when one’s selfish needs are in conflict with the teaching, one decides to make oneself an exception? Like when the banks failed they demanded a bail out?
Just a suggestion.
Where do they refer to the biggest market failure – the land market? Which neoliberal predicted that debt secured on ever rising location values was the road to disaster?
Just a thought, perhaps the maths used by most Neoclassical practitioners tends to use too many approximations in order to simplify it to the extent that it no longer describes reality correctly?
As far as I can see there *are* differences between neoclassicals and neoliberals. But then again there are differences between neoclassicals and other neoclassicals – and neoliberals and other neoliberals. However, there is a ‘family resemblance’ between *all* of them: they all idealise and worship The Market in one way or another and think that the democratic state should be in the service of that rather than vice versa.
So much of the argument between neoclassicals and neoliberals reminds me of debates in the past between varying flavours of the far left
The narcissism of minor differences?
In “The Corruption of Economics” Professor Mason Gaffney describes how the Chicago School was formed with Rockefeller money with intention of changing the Classical definition of the three factors of production (Land, Labour, Capital) to just two, Labour and Capital.
By doing so, it masked how the monopoly ownership of natural resources is not only unethical but economically damaging.
This why we see ever rising inequality, unemployment and boom bust cycles. NCE’s is unable to explain any of these things because it deliberately swept the reason why under the carpet.
Rockefeller said the money he gave to the Chicago School was the best money he ever “invested”.
In the 1970’s a family friend, a lecturer in engineering at a very respected university, would often lament the fact that he was taught by a man who was taught by a man who was taught in a university. In three generations there was not a day of shop-floor experience. The rarified and theoretical world they lived and worked in bore little or no resemblance to the cramped and filthy workplaces my father (a workplace-trained engineer)knew.
I have long believed that this fundamental disconnect between our higher education establishments and the real world is the cause of a far greater malaise in our society. We make a huge mistake as a society when we confuse education with intelligence. Solzhenitsyn once pointed that education doesn’t make you smarter.
Just take a look at our Oxbridge educated political elite… I realise of course that previous generations have, at times, been similarly educated, but for many, if not most of them, their understanding was leavened by real-world experience (often by their experiences in global conflict)
Economics likes to regard itself as being on a par with the sciences, but economics fails to live up to the exacting criteria of ‘good’ science. The biggest failure of neo-classical economist is their inability to factor in (as Richard points out in his book) what scientists refer to as ‘compounding variables’, such as human nature. This is enough in itself to render the conclusions of economics invalid.
Accountants work and live in the real world, with real people. As a result they are far more aware of the irrationality of our species, and the difficulty of creating economic models that can encompass that.
I for one would much rather trust the judgment of an open minded accountant than an ideologically motivated economist.
Whatever you call the economic system I naively think that its the multiple levels of fraud in the system that have destroyed it. While an economy can absorb 5% of fraud it cannot absorb 50%.
So the economic problems aren’t economic but a matter of the enforcement of Justice.
Everyone with any power appears to be rigging the economic system in their favour.
So ultimately it was up to the International Institute of Accountants to hold the line.
And they failed.
Honesty, integrity & justice has to prevail for anyone to have confidence in what is otherwise an illusion, Virtual Economics.
Neo-classical economics has virtually annihilated our manufacturing base; it has given is a huge balance of payments problem; we have sold off a great proportion of our national assets and we have one of the most unequal societies in the western world.
One area where it does not have any problem with “socialism” is of course finance and the rich, on which they like to rain down bucketloads of money.
They have no problem with “socialising” profit and “privatising” the losses. It is a system that is designed to favour the richest in our society, whatever the cost.
And when their ludicrous, quack economics inevitably fail and there is a cost to be borne, who picks up the tab?
Three guesses!
In response to RM’s remark “And they are taught that maths is all that matters when very glaringly obviously it does not because the simplifying assumptions made to ensure that the maths of modern economics works do not reflect reality”.
Economists piggyback methods developed by mathematicians and physicists, maybe they should consider their methods and even look at Godel’s Incompleteness theorems. His second theorem states, that in some cases “A system [mathematical formulae etc] cannot demonstrate its own consistency”. In other words mathematics is a very useful tool and should be used appropriately.
Agreed!
This is true – economics takes its ideas from the naturals sciences – but it can go the other way too. Economists are increasingly colonising other sciences. Politics, sociology, policy studies – these are the obvious cases. But it even feeds back into natural sciences like ecology, treating all kinds of organisms as utility maximisers! They are prodigious falsehoods.