Part 2: The decline and fall of neoclassicism

26th June 2012


If you'd like dig deep into the story of how economics became so detached from human realities and why its proponents insist on continuing to believe in totemic ideas which, post-crisis, are widely considered to be dangerous fantasies I strongly recommend reading Russell Napier's "Why we must retool our economics faculties and eject the financial engineers".

What I'd like to provide here is a brief overview of the realpolitik of neoclassical economics or, to put it another way, a sketch of how a heavily skewed perspective of what economics is became our orthodox view of reality.

The spirit of '68 comes to the Ivy League

Even Harvard University undergraduates are now rebelling about being fed a one-sided diet of neocon orthodoxies.

Last November, 70 first year economics students at Harvard University walked out of an economics lecture being given by Professor Greg Mankiw, an arch neoliberal, in sympathy with the Occupy movement.

They complained that Mankiw, who chaired President George W Bush's Council of Economic Advisers and is advising Mitch Romney's presidential campaign, was pushing a "heavily skewed perspective" and slammed him for "perpetuating problematic and inefficient systems of economic inequality in our society."

Politics not economics

In their open letter to the professor, published on November 2, 2011, the students wrote:

"we enrolled in Economics 10 hoping to gain a broad foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines … . instead we found a course that espouses a specific-and limited-view of economics that we believe perpetuates problematic and inefficient systems of economic inequality….

The League of Vampire Squids

Mainstream economists have also shot themselves in the foot through their myriad incestuous relationships with wholly unscrupulous Wall Street firms including Goldman Sachs and JP Morgan.

Markets want to be free

During the 1990s and early 2000s, such firms used their pliable economist friends, some of whom sat as non-executive directors on their boards, as an effective Trojan Horse to ram home the misleading message that a deregulated market in financial derivatives would eliminate risk and make the financial markets safer.

Opening Pandora's box

And when Harvard economist Larry Summers became Treasury secretary in the administration of president Bill Clinton in 1999-2001, things really got out of hand.

He personally pushed for the deregulation of OTC derivatives 1999 and endorsed the Gramm-Leach-Bliley Act, which formally unwound Glass-Steagall and removed the separation between investment and commercial banks, and was passed in 1999.

The first of these moves opened a Pandora's box of untrammelled global financial speculation while the second paved the way for banks to become "too big to fail".

Jobs for the boys

The cringe-making scenes featuring Glenn Hubbard, dean of Columbia Business School, and Frederic Mishkin, a professor of economics and finance at Columbia University in the movie Inside Job are a powerful reminder of how corroded and corrupted some mainstream economists have become.

Mishkin revealed himself to be an a borderline charlatan, having no apparent qualms about writing a report that showed Iceland's economy to be in good health in 2006  in exchange for a $124,000 from the Icelandic Chamber of Commerce (when its economy was dangerously over-leveraged, and its banking sector stuffed with fraudulence and already perilously close to collapse!).

Such behaviour has done little to reinforce the credibility of economics as currently practised.

Steve Keen's personal take

Seeking further enlightenment on such matters, I spoke to Professor Steve Keen, the Australian economist and author of Debunking Economics, when he was on a recent whistle stop tour of Europe.

Keen has devoted much of his working life to tearing down the walls of neoclassical thinking and advocating alternatives.

His alternative approach is called the Circuit Theory of endogenous money. (A full interview with Keen will be published as a viewpoint article in Qfinance later this summer).

You don't need economics to run an economy

Keen explained that one reason that economics had been allowed to drift into the realms of unreality, severing all ties with the real world, was because "you don't need economics to run an economy".

He added: "An economy is a self-replicating system. If you needed economists to build one, as you need engineers to build a bridge, then millions of people would be killed by the economic equivalent of collapsing bridges, and the discipline would need to be completely redefined."

The role of laziness

And Richard Murphy, tax reformer and author of the Courageous State believes laziness also has a part to play. He said economics professor and other teaching staff:

"…have a set of nice, easy-to-teach diagrams with criss-crossing supply and demand curves which prove that market profit maximization delivers optimal results for society-and this model is so ingrained in the textbooks, and the presentation so convenient, it's going to take time to change."

Asperger's economics and the absence of empathy

Another stalwart of the new economics movement, Bill Mitchell, a research professor at the University of Newcastle, New South Wales, Australia, believes a key problem is the "absence of empathy" displayed by most economists, a trait that was perhaps epitomised by the extraordinary performance of Glenn Hubbard, dean of the Columbia University Business School, when interviewed for the movie Inside Job.

Mitchell believes that this almost autistic (Laputan?) absence of empathy makes mainstream economists dangerously blind to important economic and social issues such as unemployment and poverty and also fuels their obsession with what Mitchell describes as "non-issues such as public debt ratios". So another parallel with the Laputans, then?


Intro: The end of economics as we know it

Part 1: What's wrong with neo-classical economics? 

Part 2: The decline and fall of neoclassicism  

Part 3: The rise of the New Economists – key players and ideas 

Part 4:  Conclusion: Bye Bye Laputa?


20 'New Economics' sites you should read

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