Any student who enrolled in an undergraduate degree at the Faculty of Economics at Sydney University in 1971 had to complete four year-long courses in economics, out of a total of ten such courses: Microeconomics and Quantitative Methods in the first year, Macroeconomics in the second, and International Economics in the third.
Forty years later in 2011, the Faculty of Economics and Business evicted the Economics Discipline into the Arts Faculty, and the Economics-free entity renamed itself as University of Sydney Business School. There is now just one compulsory semester-long economics subject (Economics for Business Decision Making) in any Bachelor of Commerce degree at Sydney University, out of 24 such subjects—and that pattern is replicated across the globe. Economics has declined from 40% of any business-oriented degree to 4% in 40 years. For a profession obsessed with linear regression, it has suffered a near-perfect linear regression of its own.
That 40 year decay coincided with my 40 year career in the University sector—though I think this is a clear case of correlation rather than causation. I started out as a True Believer in what I didn’t even know was Neoclassical Economics when I began my Arts/Law degree at Sydney University in 1971. In 2013—40 years after I graduated from the Arts degree—I ended up as the world’s most famous unemployed economist. And from the outset of my days as a radical in economics, I could see this end game coming. Though I certainly didn’t anticipate my own redundancy (or that of 12 of my colleagues) at UWS, it was obvious that Economics was on a hiding to nothing to collapse from the Heart of any business degree to its Appendix.
The reason is simple: Neoclassical Economics (and Neoclassical Economists) annoy the hell out of most other business academics. They have a “holier than thou” attitude about the intellectual rigor of Economics versus the wishy-washy (Marketing) or mechanical (Accounting) nature of other disciplines, and they frankly think that some (if not all) of these other disciplines are simply unnecessary.
In a dialectical reaction, many of their looked-down-upon companion subjects in Business faculties evolved precisely because economics deigned their topics to be unimportant. The real-world needs of business (as well as some of the delusions of managers) gave rise to a panoply of business subjects whose practitioners returned in kind the contempt of the economists. By the early 1970s, the academics in these “inferior” disciplines already outnumbered the economists, and as they grew in number, the contest for the scarce core units in business degrees intensified.
By alienating all their rivals, economists were on a hiding to nothing to be driven towards extinction. When it came to a vote at Faculty level about what subjects were needed in a given degree (in the days when academics enjoyed a modicum of democracy), the hopelessly outnumbered Economists would assert the centrality of Economics to any Business degree. Their fellow Faculty members would listen and nod—and then vote Economics down.
I saw this firsthand when, as the two most prominent student activists in the “Day of Protest” revolt at Sydney University in 1973, Richard Osborne and I were invited to speak to the Faculty of Economics about the proposal to investigate the Department of Economics. We spoke strongly in favour of the motion—as did Frank Stilwell, Evan Jones, Gavan Butler, Jock Collins, and several staff from other disciplines. We awaited the rejoinder from Hogan and Simkin, and when it came, it was devastating—to their own cause.
Simkin spoke on both their behalves. He noted that in 1969, when there had been a serious dispute in Economics, it had been preceded by one in Philosophy. Now in 1973, there was a serious dispute in Economics, and yet again it had been preceded by one in Philosophy.
That was it. We waited for the punchline—correlation proving causation with a perfect linear regression between disturbances in Philosophy and copycat actions in Economics—but Professor Simkin evidently regarded making that deduction as an exercise for the remainder of the Faculty. Neither he nor Hogan said another word.
I ended the awkward silence that followed by noting that, even though the correlation was correct, it did not explain why the copycat effect always occurred in Economics—rather than in, say, Italian. There was something endogenous to the tribulations in economics, and they deserved investigation.
The Dean handed out the secret ballot forms, and the vote was taken. He announced the score: 24 to 14 in favour of investigating the Department. Richard and I and the soon-to-be Political Economy staff were jubilant—as were most of the Faculty—and we poured out of the Board Room in loud celebration.
As we headed towards the stairs down to the Main Quadrangle, I glanced back at the Boardroom to see that Simkin and Hogan were still sitting, immobile, back in the boardroom. Not only had they not left their chairs, they had not moved—nor were they talking to each other. They simply sat there stunned, staring into the space in front of them, in obvious and profound shock. They had clearly not even entertained the prospect that the vote might go against them.
That was the first of many votes that Neoclassical Economists were to lose from that time on—and not only at Sydney University. Faculty after Faculty across Australia and the globe voted to progressively reduce the compulsory Economics content of business degrees. And the Neoclassical Economists never changed their tactics—or rather the lack of them. They never considered that they might need to alter their product—that would be too much like market research—nor that they should perhaps lobby the other disciplines—that would be too much like politics.
Instead, the purity of the science was defended at every challenge—even as the diminishing time devoted to it resulted in a trivialised tuition replacing rigor. The other disciplines whose votes held the fate of Economics in their hands continued to be disparaged and regarded as interlopers, who themselves should be expunged from University—even as the Economists were the ones who were effectively being expunged.
The situation did not improve when Managerialism replaced academic democracy, because the Law of Large Numbers alone guaranteed that the bureaucratic overlords in Business Faculties would be drawn from almost any discipline other than Economics. What was once done by the ballot was now done by decree (after, of course, due consultation), and the final result was that Economics found itself expelled from what once were Faculties of Economics—and in the worst instances, abolished altogether—with a single first year subject preserved solely because Accounting standards require Accountants to take at least one unit of Economics.
What a dismal fate for the Dismal Science—the more so because it was so largely self-inflicted. If Economics had been capable of reinvention in response to its unpopularity—as well as in a sane response to the discovery of its many internal logical and empirical contradictions (Sraffa 1926; Means 1936; Ara 1959; Jorgenson 1960; Sraffa 1960; Means 1972; Sonnenschein 1972; Blinder 1998)—it could have preserved itself as a vital discipline. It perhaps could have even re-assimilated those competitor departments that its rarefied definition of Economics had conjured into being.
But that did not happen. Schumpeter lives today in Management departments rather than Economics (though these days they cite Porter instead), precisely because Neoclassical Economists excluded him from the canon. Marketing evolved because economists disparaged the task of trying to find out what rational consumers must already know anyway. Operations Research developed because Economists knew that calculus was all one needed: this Deming process control stuff was meaningless, given the immutable Law of Diminishing Returns (which Sraffa had intellectually demolished in 1926, and which decades of empirical research starting with the Oxford Economists’ Research Group in 1936 and ending with Alan Blinder in 1998 had shown was an intellectual chimera—see Lee 1981; Lee 1998; Downward and Lee 2001 for the definitive history).
As it failed to adapt to its internal and external problems, the good ship Equilibrium crashed into iceberg after iceberg, yet refused to change course. A critic of Neoclassical Economics might have enjoyed this self-destructive irrationality by the champions of rational foresight, had the misfortunes of the orthodoxy led to better conditions for the heterodox. But they did not. Instead, for critics of the orthodoxy, every day felt like Groundhog Day as an iceberg spotter on the Titanic. Our Neoclassical captain would crash into one iceberg, and then almost go searching for the next one, all the while ignoring that the once grand ocean liner was progressively being whittled down to a dingy via the death of a thousand cuts.
Though heterodox economists heartily agreed with the dismissive attitude towards Neoclassical Economics that academics from other business disciplines displayed, the non-Neoclassical approaches to Economics that we hoped to develop were instead collateral victims of the academic self-immolation of Neoclassical Economics.
As the number of subjects and students taught by Economics Departments diminished, the room to tolerate dissidents within Economics itself declined, from barely above zero to well below. Some Departments—such as my own at UWS, under the leadership of Brian Pinkstone and then John Lodewijks (who themselves built on a tradition of tolerance towards alternative thinking already established by Colm Kearney and Raja Junankar)—kept the pluralist flame alive, despite the declining number of Economics units in Business degrees. But in a global phenomenon, the decline of Neoclassical Economics at the Faculty level was mirrored by the elimination of the few non-Neoclassical options within the Economics Degree itself. The descendants of Jevons, Marshall and Walras responded to the failures of their dismal anti-marketing of their own brand of Economics by throwing the descendants of the rival brands of Ricardo, Marx and Schumpeter into the abyss ahead of them.
However, though they were losing the battle within the Academy, Neoclassical Economists were winning in the public sphere, and in the process generating a mutant of the original Neoclassical vision that was even more surreal than that which Keynes had attacked in the 1930s. Keynes railed against Neoclassicism circa 1937 for:
being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future. (Keynes 1937, p. 215)
In the context of capitalism’s greatest slump, Keynes could satirise his contemporary Neoclassicals as resembling:
Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring.
But that is so yesterday compared to the “Rational Expectations” and “Natural Rate of Unemployment” revolutions of the early 1970s. The implied “axiom of parallels” of Keynes’s contemporary Neoclassicals has nothing on the “axiom of the identity of expected and actual inflation” which is the real gist of “rational expectations”:
In the preceding section, the hypothesis of adaptive expectations was rejected as a component of the natural rate hypothesis on the grounds that, under some policy [the gap between actual and expected inflation] is non-zero. If the impossibility of a non-zero value … is taken as an essential feature of the natural rate theory, one is led simply to adding the assumption that [the gap between actual and expected inflation] is zero as an additional axiom, or to assume that expectations are rational in the sense of Muth. (Lucas 1972, p. 54; emphasis added)
Armed with the assumption that rationality means the capacity to accurately predict the future, Keynes’s efficacy of counter-cyclical policy gave way to its impotence:
But by virtue of the assumption that expectations are rational, there is no feedback rule that the authority can employ and expect to be able systematically to fool the public. This means that the authority cannot expect to exploit the Phillips Curve even for one period. Thus, combining the natural rate hypothesis with the assumption that expectations are rational transforms the former from a curiosity with perhaps remote policy implications into an hypothesis with immediate and drastic implications about the feasibility of pursuing countercyclical policy.’ (Sargent and Wallace 1976, p. 173, 176, 177-178; emphases added)
This vision of the Impotent State succeeded politically as well as intellectually, in part because the argument was compatible with the political visions of the titans of conservative politics Thatcher and Reagan—who themselves came to power as rising inflation and falling unemployment ended the Bastard-Keynesian hegemony of the post-WW era. Neoclassical Economists replaced their “Keynesian” predecessors as advisors to politicians and international organizations—without, it seems, ever noting the Pythonesque contradiction between their intellectual support for the abolition of the State and their financial dependence upon it.
Subsequent economic performance seemed to support Friedman’s mantra that unrealistic assumptions don’t matter (and in fact are the hallmark of a good theory— Friedman 1953). The Neoclassical ascendancy can be dated to the Stagflationary crisis of 1973, and though both inflation and unemployment rose higher still at the beginning of the 1980 recession, inflation then fell rapidly during it, and ultimately unemployment joined inflation in heading down towards its “Natural Rate”.
Figure 2
The anti-Keynesian coup of public policy that had begun with Friedman’s adaptive expectations assault on the Phillips Curve was completed by the discipline’s self-laudatory interpretation of the decline in both the scale and volatility of unemployment and inflation since the early 1980s. Bernanke’s extolling of the period makes comic reading today:
As it turned out, the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility, both in the United States and abroad, a phenomenon that has been dubbed “the Great Moderation.” Recessions have become less frequent and milder, and quarter-to-quarter volatility in output and employment has declined significantly as well. The sources of the Great Moderation remain somewhat controversial, but as I have argued elsewhere, there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy. (Bernanke 2004)
So as the 20th century closed, Neoclassical Economists were exultant: they might be losing the Academy, but they were winning everywhere else. The clearest statement of this triumphalism appeared in a paper literally entitled “Economic Imperialism” by Ed Lazear, who later would become George W. Bush’s Chief Economic Adviser:
Economics is not only a social science, it is a genuine science. Like the physical sciences, economics uses a methodology that produces refutable implications and tests these implications using solid statistical techniques. In particular, economics stresses three factors that distinguish it from other social sciences. Economists use the construct of rational individuals who engage in maximizing behavior. Economic models adhere strictly to the importance of equilibrium as part of any theory. Finally, a focus on efficiency leads economists to ask questions that other social sciences ignore. These ingredients have allowed economics to invade intellectual territory that was previously deemed to be outside the discipline’s realm. (Lazear 1999)
And then the economic crisis in 2007 upset the economic applecart.
As a lengthy aside, it’s strange to be discussing the economic crisis of 2007 in a keynote speech in Australia, since until very recently the dominant attitude in the Australian Economics not-so-intelligentsia was that this crisis “hadn’t happened here”—so much so that the Treasury and RBA took to calling it “the North Atlantic Economic Crisis”. I am also regularly trolled in Australia for crying wolf about a crisis that never came, while in America and Europe I receive plaudits for being one of the handful who foresaw and warned of the worst downturn since the Great Depression (Fullbrook 2010). So I’ll briefly divert from my theme to compare the factors that I argued would cause the crisis: the unprecedented increase in private debt (which is what I argued would make the crisis so severe compared to other post-WWII downturns) and the sudden reversal in the rate of growth of private debt—which is what I argued would inevitably occur, and trigger a crisis when it did (Keen 2005; Keen 2005; Keen 2006; Keen 2007).
Both America, the epicentre of the crisis, and Australia, the land where it didn’t happen, had exponential increases in their private debt to GDP ratios—with the USA’s dating from 1945 and Australia’s from 1965. The USA’s ratio grew at an average 2.9% p.a. from 1945 till 2009, increasing its ratio by a factor of 6.8, from 44% in 1945 to 303% in 2009. Australia’s ratio showed no trend from 1945 till 1965, but from that date grew at an average rate of 4.2% p.a., which increased its ratio by a factor of 6.4, from 25% in 1965 to 158% in 2008. The correlation of both ratios with a simple exponential function is over 0.99 (see Figure 2).
Figure 3: Exponential rises in debt to GDP ratios
The dotted vertical line labelled “BNP” on the chart marks August 9, 2007: the date on which the Bank Nationale de Paris shut down 3 of its US Subprime-based funds, which is now taken to be the date on which the crisis began (see http://news.bbc.co.uk/2/hi/business/7521250.stm). The growth of debt began to plunge less than 2 months later in the USA, and 4 months later in Australia.
In the USA the decline in debt turned from massively positive to massively negative—in 2008 the increase in private sector debt was equivalent to 30% of that year’s GDP, while in 2010 the decrease in debt was equivalent to 20% of that year’s GDP. This was the first time since the Great Depression that the level of private debt had ever fallen.
In Australia the rate of growth of debt plunged as well, but it never turned negative. The rate of growth declined from 23% of GDP in 2008 to 1% in 2010, but from there it rose again. That marsupial bounced is the reason that it “didn’t happen here”—but now what is happening here is that the days of economic performance being turbocharged by rising debt are over.
Figure 4: Massive deleveraging in the USA versus none in Australia
Back to the topic at hand: the crisis—and the failure of Neoclassical models to anticipate it, and the success of many non-orthodox theorists to do so (including me, but also Wynne Godley and his collaborators using a sectoral balances approach (Godley and Wray 2000; Godley 2001; Godley and Izurieta 2002; Godley and Izurieta 2004; Godley, Izurieta et al. 2005), Ann Pettifor (Pettifor 2006), Michael Hudson (Hudson 2005), Nouriel Roubini, Dean Baker, and numerous Austrian-informed commentators (Fullbrook 2010))—and its lack of impact on Economic theory and pedagogy.
That Neoclassical economists—especially those relying upon Neoclassical DSGE models—completely failed to anticipate the crisis is indisputable. As late as June 2007, the leading economic modelling and advisory body in the world, the OECD, was advising policy-makers that the economic outlook was rosy:
In its Economic Outlook last Autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a “smooth” rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth.
Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment. (Cotis 2007 , p. 7; emphases added)
So much for that theory. The crisis began two months after this typically Panglossian Neoclassical forecast. By December the US economy had entered a recession, according to the NBER (see http://www.nber.org/cycles.html). At the same time, the Federal Reserve’s economic unit was advising that a recession would not occur:
“Overall, our forecast could admittedly be read as still painting a pretty benign picture: Despite all the financial turmoil, the economy avoids recession and, even with steeply higher prices for food and energy and a lower exchange value of the dollar, we achieve some modest edging-off of inflation. So I tried not to take it personally when I received a notice the other day that the Board had approved more-frequent drug-testing for certain members of the senior staff, myself included. [Laughter] I can assure you, however, that the staff is not going to fall back on the increasingly popular celebrity excuse that we were under the influence of mind-altering chemicals and thus should not be held responsible for this forecast. No, we came up with this projection unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies” (FOMC Transcript from December 11th 2007)
Figure 4 shows the sudden rise in unemployment and the collapse of inflation into deflation that Neoclassical models completely failed to anticipate—along with the key causal variable those models exclude, the rate of change of private debt.
Figure 5: Inflation and Unemployment diverge as Debt Growth collapses
The policy response was immediate and profound. Policy makers who had previously championed deregulation and small government threw government spending and money creation at the crisis in unprecedented haste and scale. The $700 billion TARP program was only the most prominent of the stimulus packages thrown together by a clearly panicked Administration, and it came on top of a huge boost from the “automatic stabilizers” as tax revenues tanked and welfare payments skyocketed. Hank Paulson’s On the Brink clearly conveys the sense of panic at the time:
“We need to buy hundreds of billions of assets”, I said. I knew better than to utter the word trillion. That would have caused cardiac arrest. “We need an announcement tonight to calm the market, and legislation next week,” I said.
What would happen if we didn’t get the authorities we sought, I was asked. “May God help us all,” I replied. (Paulson 2010, p. 261)
In contrast, the theoretical response was muted, slow, and defensive. Somehow, slightly more than one year after the crisis, Olivier Blanchard—previously and subsequently the Chief Economist of the IMF, and then the founding Editor of the AER: Macro—saw fit to publish a working paper on “The State of Macro” with the simple statement that “The state of macro is good”:
Facts have a way of eventually forcing irrelevant theory out (one wishes it happened faster), and good theory also has a way of eventually forcing bad theory out. The new tools developed by the new-classicals came to dominate. The facts emphasized by the new-Keynesians forced imperfections back in the benchmark model. A largely common vision has emerged. (Blanchard 2008; Blanchard 2009, p. 210)
Two years later, he had merely moved from oblivious to defensive (and note his statement below—prior to the disasters of Greece and Spain—that “Fiscal sustainability is of the essence … in the short term“):
It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater. Most of the elements of the pre-crisis consensus, including the major conclusions from macroeconomic theory, still hold. Among them, the ultimate targets remain output and inflation stability. The natural rate hypothesis holds, at least to a good enough approximation, and policymakers should not design policy on the assumption that there is a long-term trade-off between inflation and unemployment. Stable inflation must remain one of the major goals of monetary policy. Fiscal sustainability is of the essence, not only for the long term but also in affecting expectations in the short term. (Blanchard, Dell’Ariccia et al. 2010)
At least Blanchard later had the good grace to accurately report how wrong that emphasis on fiscal sustainability proved to be. But his defensive attitude to retaining conventional theory, despite an unprecedented empirical failure, was typical of the Neoclassical orthodoxy. Bernanke’s own defence was beyond absurd. As well as pretending that Bagehot’s Lombard Street (Bagehot 1999 [1873]) was part of the modern economic curriculum, it involved such novel ideas as models that are designed only for good economic times (when, one might think, models were therefore not necessary) and they therefore can’t be criticized for their failure to anticipate or help manage bad times:
the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science…
Shortcomings of … economic science …, were for the most part less central to the crisis; indeed, although the great majority of economists did not foresee the near-collapse of the financial system, economic analysis has proven and will continue to prove critical in understanding the crisis, in developing policies to contain it, and in designing longer-term solutions to prevent its recurrence.(Bernanke 2010, p. 3)
Standard macroeconomic models, such as the workhorse new-Keynesian model, did not predict the crisis, nor did they incorporate very easily the effects of financial instability. (Bernanke 2010 , pp. 16-17)
Do these failures of standard macroeconomic models mean that they are irrelevant or at least significantly flawed? I think the answer is a qualified no. Economic models are useful only in the context for which they are designed. Most of the time, including during recessions, serious financial instability is not an issue. The standard models were designed for these non-crisis periods, and they have proven quite useful in that context. Notably, they were part of the intellectual framework that helped deliver low inflation and macroeconomic stability in most industrial countries during the two decades that began in the mid-1980s. (Bernanke 2010, p. 17; emphasis added)
This circling of the wagons intensified as the crisis persisted. Initial statements that the crisis might necessitate a shift in paradigm gave way to the argument that the crisis could be interpreted simply as a set of unanticipated shocks to aggregate demand in an otherwise stock-standard DSGE model:
Indeed, the Great Recession’s extreme severity makes it tempting to argue that new theories are required to fully explain it. And given the prominence of the financial institutions whose solvency and liquidity problems grabbed and held the newspaper headlines as the broader economic crisis deepened, it is tempting to single out those solvency and liquidity problems as chief among the fundamental factors causing the recession itself.
But … considerations suggest that it would be premature to abandon existing models just yet… Attempts to explain movements in one set of endogenous variables, like GDP and employment, by direct appeal to movements in another, like asset market valuations or interest rates, sometimes make for decent journalism but rarely produce satisfactory economic insights…
even granting the possibility that declines in housing prices and problems in credit markets might have played an independent, casual role behind the Great Recession’s severity, it remains of interest to explore whether, in the context of a conventional, small scale aggregative framework, such impulses ought to be interpreted as shocks to aggregate demand, working through their effects on household wealth and consumer and business confidence, aggregate supply, working through their effects on the efficiency of the distribution of productive resources, or some combination of the two. (Ireland 2011, pp. 31-32)
The best that Neoclassical economists have offered as a paradigm shift is in fact a “Back to the Future” resurrection of the IS-LM model—more than three decades after Hicks himself rejected it, precisely because its assumption of continuous equilibrium was surely violated during crises like that of 2007-08:
We know that in 1975 the system was not in equilibrium. There were plans which failed to be carried through as intended; there were surprises. We have to suppose that, for the purpose of the analysis on which we are engaged, these things do not matter. It is sufficient to treat the economy, as it actually was in the year in question, as if it were in equilibrium… There are plenty of instances in applied economics, not only in the application of IS-LM analysis, where we are accustomed to permitting ourselves this way out. But it is dangerous. Though there may well have been some periods of history, some “years,” for which it is quite acceptable, it is just at the turning points, at the most interesting “years,” where it is hardest to accept it…
I accordingly conclude that the only way in which IS-LM analysis usefully survives – as anything more than a classroom gadget, to be superseded, later on, by something better – is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate. (Hicks 1981, pp. 150, 152)
Modern born-again Hicksians, unaware of the Master’s epiphany and apostasy of equilibrium methodology, now seriously propose that this model be resuscitated to explain a crisis that neither it nor DSGE models could have anticipated (Krugman 2011). Simultaneously they are rubbishing the legitimate claims of non-Neoclassical economists like Ann Pettifor, Wynne Godley, Michael Hudson and myself (Godley 1992; Keen 1995; Godley and Wray 2000; Godley 2001; Hudson 2005; Keen 2005; Keen 2005; Keen 2006; Pettifor 2006; Keen 2007) to have anticipated and warned of the impending crisis (see Figure 6).
Figure 6: Disparaging rather than engaging with rival economic traditions
I expect that this intellectual revisionism will, if anything, accelerate the decline of economics in the Academy. The excuses that Neoclassical Economists deem sufficient to justify not changing tack after the economic crisis will justify an even further narrowing of the economics curriculum, but they won’t wash with their non-economist fellow academics in other business or social science departments—nor with University administrators. Economics is likely to shrink as part of Business degrees, and to be even further marginalized within Arts Faculties.
That’s a pretty bleak picture of the future of the Dismal Science, but I can also see some rays of sunshine.
The first is to look outside the Academy, to formal economic bodies—to Central Banks and Treasuries in particular. In the past, these bodies uncritically reproduced whatever was the latest fad in academic economics: witness the rapid shift from IS-LM and AS-AD models to DSGE models when academic economists proclaimed that the former fell victim to the Lucas Critique (Lucas 1976).
But these bodies advise, report to, and provide economic projection numbers for, top-level bureaucrats and politicians. They in turn have to front journalists, where they announce policies and make forecasts. The continued failure of the policies to work as predicted, and the failure of the economy to recover its pre-crisis vigour, means that these bureaucrats and politicians frequently find themselves on the receiving end of journalistic and public derision, courtesy of what their economic advisors tell them.
Some of this public abuse is self-inflicted— for example, the political reliance on Reinhard and Rogoff was not a case of politicians being persuaded to follow a bad policy by bad economic theory, but one of cherry-picking academic research to find a case that supported the simplistic “household” vision of the economy that politicians tend to hold. But there is now a disconnect between economists in Treasuries and Central Banks and their political masters. The politicians no longer expect economists to give them trustworthy (or at least non-controversial) numbers. Without fail, their predictions are rosier than reality.
This in turn is putting pressure on Central Banks and Treasuries to be amenable to a wider range of economic thought than that which is sanctioned by academic economists. In response, Central Banks and Treasuries are now showing more adventurism in economic modelling than are academic economists. I’ve seen this firsthand, with invitations to speak at Central Bank conferences (though so far only periphery ones—Argentina, Turkey, Malaysia), seminars with Treasuries (New Zealand, Australia) and meetings with economists in Central Banks who are trying to develop stock-flow consistent monetary economic models (Bank of England, ECB). It’s early days yet, but I suggest that change in economics is more likely to come from these once conservative institutions than from academic economics itself.
The second is the media. Journalists who used to spout Neoclassical orthodoxy are now amongst its strongest critics—Anatole Kaletsky, for example, as Editor of The Economist and a columnist for The Times and the Financial Times, was a town crier for the Great Moderation and Neoclassical economics. He is now a strident critic of the mainstream, and Chairman of the Institute for New Economic Thinking. Non-Neoclassical economists are no longer regarded as cranks by the “Mainstream Media”, and there is room for heterodox voices in its pages on a scale that was impossible before the economic crisis. John Harvey, for example, has a column in Forbes; I have my column in Business Spectator.
A third is the world of social media. Neoclassical Economists are trying to dominate this arena, and certainly Krugman’s blog is far more influential than mine. But heterodox voices still get heard: they can’t be excluded as they can within the Academy. With blogs, Twitter and Facebook often the first resource that the public turns to these days, well-argued heterodox economics can have an influence that it can’t muster in University courses. The capacity for heterodox economists to communicate via social media far exceeds what was possible in Keynes’s day via pamphlets—see for example Dirk Bezemer’s excellent animated series “Debt: The Good, the Bad, and the Ugly“
A fourth factor is the rise of studies in Anthropology and Law in particular that challenge key elements of the Neoclassical vision—especially the Loanable Funds concept of money. Books like Debt: the first 5000 years (Graeber 2011) and Money: the unauthorised biography (Martin 2013), as well as work by legal scholars like Bob Hockett in the aftermath to the Subprime Crisis (Hockett 2009) give a basis on which an explicitly non-Neoclassical approach to economics can be developed by disciplines who are unafraid to tell would-be practitioners of Economic Imperialism to take a running jump.
A fifth is the development of computer simulation systems, ranging from multi-agent platforms like NetLogo to my own explicitly monetary system dynamics platform Minsky. Hopefully the visual and simulation aspects of these programs will make them more exciting to would-be economists than a pair of intersecting IS and LM curves, or a set of trivial linearized DSGE difference equations. Since these programs are readily available and free, some new students will be familiar with them before they are exposed to—and bored by—a standard Neoclassical university economics degree.
Figure 7: A predator-prey model in NetLogo
Figure 8: A monetary model of debt deflation in Minsky
A final ray of sunshine is in fact a silver lining in what I expect to be a very long lived black cloud. This crisis was caused by the bursting of the biggest private debt bubble in human history—as research by INET-funded scholars Schularick and Taylor has confirmed (Martin 2013). Yet even after four years of private sector deleveraging, the level of accumulated private debt still exceeds the peak reached during the Great Depression–see Figure 1.
Figure 9: An unprecedented debt bubble
Government policy has also been trying to restore the pre-crisis rate of growth of the financial sector as a means to end this crisis—as if that rate of growth was sustainable in the first place. This has succeeded to some extent—there is now the slightest uptick in private debt in the USA (see Figure 6)—but this will be short-lived, because there simply isn’t room for private debt to rise substantially relative to GDP when it is still in unprecedented territory. A renewal of private sector deleveraging—and hence a return to recession conditions—could easily be triggered by a policy shift back towards budget surpluses, and higher interest rates as QE is unwound.
Figure 10: From deleveraging to very slight releveraging
A similar phenomenon played out during the Great Depression itself. The Roosevelt administration’s attempt to return the budget to surplus triggered a renewed bout of private sector deleveraging, resulting in a return to a Depression level of unemployment of 20 per cent in 1938-39, after it had fallen from 25 per cent to 11 per cent between 1933 and 1937.
It is feasible that this fall back into Depression after the worst had seemed to be over played a role in the overwhelming success of Keynes’s General Theory. The paradigm shift itself was aborted by Hicks’s IS-LM interpretation (Hicks 1937), but the willingness to embrace one was there.
A similar possibility could await modern-day critics of Neoclassical Economics. This crisis isn’t over—far from it. The longer it continues, the more Neoclassical economists will come to be regarded as “Euclidean geometers in a non-Euclidean world”.
So the Neoclassical Citadel of Academic Economics is under attack from the outside, and it could be that in the next decade or so, the Neoclassical hegemony over academic economics could be ended. That in turn is, I believe, the only chance for academic economics to undergo a revival. Even though many heterodox economists are critics of capitalism, heterodox approaches to economics are inherently closer to those of other Business and Social Science disciplines than Neoclassical economics. If Economics Departments offer non-Neoclassical courses that are compatible with Sociology and History in Arts Faculties, and Management and Accounting in Economics ones, there is some chance that economics might regain some of academic ground that it has ceded to more realistic disciplines in the last 40 years.
But if the Neoclassical hegemony over academic economics is maintained, then even the survival of Neoclassical economists will be under threat. UWS is an outlier in abolishing its Economics degree, but even there it is not alone: the Australian Catholic University did the same thing—though with far less visibility. If economics is reduced to a rump discipline teaching one unit only because the official accreditation of accountants requires it, how long will it be before Accountants decide that, if economics as taught is so obviously irrelevant to the real world, then even that one unit isn’t worth maintaining? Or that maybe they can teach their own economics unit, which would be more realistic about the role of money in a market economy, and more compatible with accounting itself?
To survive, economics needs the revolution in thought that it has been ardently trying to prevent from as long ago as when Veblen first penned “Why is Economics not an evolutionary science?” (Veblen 1898). The only alternative to this revolution from equilibrium to evolution is extinction. And economists should know that—after all, they’re already 90 per cent of the way there.
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