Chapter 3
Science & Religion
“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” – Joan Robinson[162]The failed predictions of Malthus, that mass starvation awaited because human fertility was outpacing food production, like similar gloomy prognostications of other economists, soon prompted economics to be dubbed ‘the dismal science’. Yet Malthus’ predictions, originally deemed dismal because of their gloom, now also seem dismal because of their inaccuracy. In achieving this result, however, Malthus, as an economist, cannot be considered untypical.
This chapter examines the difficult task facing economic ‘science’ and the extent to which it fails. Whereas ‘hard’ sciences like physics have much scope for measurement and mathematical modelling of objective properties, economic activity depends on many subjective and changeable perceptions, evaluations and circumstances – too many to expect predictable behaviour bound by rigid ‘laws’. Economists nevertheless try to deduce such laws, using mathematical models about economic data, but they must at every stage make overly restrictive assumptions that leave out enough significant details to render their results questionable if not meaningless. (Section 3.1)
Furthermore, although claiming to avoid value judgements about goals and ends, economists tend to incorporate many that support the status quo into explicit or implicit assumptions at the foundations of their models. (3.2) Many of these assumptions, often necessary to make mathematical modelling even possible, are based on the previously discussed and rejected notion of natural liberty as a source of optimality – but rather than treating their assumptions as working propositions capable of refutation, instead economists defend them against all contrary evidence, tweaking models as necessary to retain the assumptions. This is exemplified by two fundamental economic models – optimisation and equilibrium – as well as the standard treatment of international trade, and economics’ underlying assumption of scarcity (3.3).
Defending their ‘science’ against these crucial issues, most economists skirt around them by claiming that if an economic model can be used to make accurate forecasts then this suffices. This proves a poor defence given that economic predictions too often fail – a hardly surprising outcome given that predictions can only be made by assuming the validity of the deduced but assumption-saturated ‘laws’ used to make the calculations that form the basis of predictions. (3.4)
The failures of economic science are further exemplified by its practitioners’ recent call for ‘sustainable development’, a camouflaging phrase by which most economists really mean the oxymoron of sustainable growth – another futile attempt to run in two different directions at once. (3.5)
3.1 The Dismal Science
“To the intellectual reputation of chemists, physicists, biologists and microbiologists, economists and other social scientists, perhaps inevitably, aspire. This requires that the ultimately valid propositions of economics be essentially given, like the structure of neutrons, protons, atoms and molecules. Once fully discovered, they are known forever. Unchanging also, it is held, is human motivation in a competitive market economy. Such fixed and permanent truths allow economists to view their subject as a science. It is the paradox of the discipline that it is the wish so to see itself that commits economics to an obsolescence in a changing world that, by any scientific standard, is to be deplored.”- John K.Galbraith[163]Take one ‘science’ that has bitten off more than it can chew, add pre-disposing tunnel-realities so belief can over-ride truth, blend with vested interests, coat with a generally cautious attitude to change, and garnish with a blurred distinction between authority and ability. Salt wounds to taste. Serves several million (fails to serve several billion). Here we have economics’ recipe for success.
All sciences share one common assumption: that the behaviour they attempt to understand or explain can be ‘scientifically’ described. Scientific description or theory consists of conclusions and explanations based upon invented (mostly mathematical) models which attempt to mimic or parallel the behaviour in question. Models begin with, derive from, and always incorporate certain hypotheses or postulates – working assumptions chosen because they seem to agree with, or are perceived as likely to agree with, existing knowledge about that being studied. Using models built from assumptions, scientists try to derive theoretical explanations of behaviour, and testable predictions which can be supported or contradicted by experiment. Supporting experiments do not prove a scientific theory correct, because later more refined experiments could prove it incorrect. But theory must be constructed in ways that allow it to be tested, and so verified or not, otherwise it makes for religion rather than science.
Most economists – as one textbook put it – regard “economics as a science: as a body of analytical models (theories) that yield verifiable implications about the real world.”[164] Many economics textbooks even begin with, or include, a section defending the scientific status of their subject. Yet many people remain unconvinced – and for sound reasons. More detail is provided in later sections of this chapter, but for now a general overview of the problems facing economic ‘science’ is provided…
Economics attempts to describe and predict the ‘economy’ – the activity of people producing, distributing, exchanging, and consuming. Economic activity is motivated by individual evaluations, which in turn stem from received information as translated by each individual’s belief-system or tunnel-reality. Economic activity is also influenced by the differing availabilities of economic resources, which are determined by environmental factors such as climate and geology, and the technological knowledge at hand to make use of those resources. Consequently, like the perceptions, evaluations and circumstances that underlie it, economic activity constantly changes. By comparison, ‘hard’ sciences like physics and chemistry deal with predictable behaviour bound by rigid laws. For instance, a round ball cast at a uniformly flat wall at a certain angle will always bounce back at the same angle; so will light from a mirror. People tend not to behave so consistently nor so simply, which means that economics, like all other social sciences, has ‘more’ to explain. Indeed, according to dissenting British economist Thomas Balogh, economists “consider… matters which one of the wittiest of their number, the late Professor Sir Dennis Robertson, once dismissed as being better suited to the divinations of prophets or priests.”[165] Nonetheless, economists try.
Most sciences, including economics, make much use of mathematics. The subject or behaviour in question is modelled by appropriate equations which are mathematically manipulated to derive further equations and, from them, predictions. To be modelled by mathematical equations, however, a subject must be treated quantitatively, which is to say in terms of measurements and numbers – data. This poses few problems for a hard science. For instance, attributes of atoms, such as their mass or speed, can be represented in mathematically manipulable equations, from which predictions can be derived, which can be either verified or disproved by actual experimental measurements. But what apparatus measures economic quantities such as ‘standard of living’, ‘consumer satisfaction’, ‘productivity’, or even the ‘value’ of material goods? Where lies a ‘wealthometer’ or a ‘progressotron’ to point at or insert in an economy? And where exactly are they pointed or inserted? Without accurate and meaningful measurements, mathematics has no use, and economic science becomes a contradiction in terms. As economist K.William Kapp put it: “We defeat the purpose of scientific inquiry if we make a fetish of precision and measurement by initiating standards and procedures which may be applicable to the measurement of temperature but which are difficult or impossible to achieve in the social realm.”[166] Nonetheless, economists try.
Economics actually abounds with numbers. But most economic data correspond to subjective evaluations of behaviour and performance, not measurements of objective properties. Even the simplest economic numbers like wages, costs, and prices do not come with specific values capable of being measured, but have values subjectively assigned to them in ways which vary depending on time, place, circumstance, and assumptions about what employers and consumers are willing to pay and employees willing to accept. Yet economists not only treat their basic data as meaningful and objective, they also contrive from them higher order, or macro, properties like money supply and economic growth. But to define macro properties also requires simplifying and largely arbitrary assumptions: definition of the money supply, for instance, depends on what, in this credit-infested world, one assumes to ‘be’ money (for details, see the appendix); ‘measurements’ of economic growth depend entirely on how it is defined. Hence, economic numbers can positively deceive: for example, economic growth, reported to the first decimal place, provides a ‘scientific’ surrogate for an accurate measurement of wealth or welfare, and helps to distract from, and disclaim, often very sub-optimal results. As dissenting British economist, E.F.Schumacher noted: “Quantitative differences can be more easily grasped and certainly more easily defined than qualitative differences; their concreteness is beguiling and gives them the appearance of scientific precision, even when this precision has been purchased by the suppression of vital differences of quality.”[167] Schumacher went even further: “to undertake to measure the immeasurable… constitutes but an elaborate method of moving from preconceived notions to foregone conclusions”.[168] Nonetheless, economists try.
Economists use their ‘measurements’ of the immeasurable as the basis of mathematical models. Models can be developed confidently if the data fit only certain equations. However, because of the complexity of economic behaviour, data rarely provide such easy solutions. More usually, the equations of mathematical economic models can be developed only by making yet more simplifying assumptions. For instance, does increased money supply growth cause inflation (as some think)? Or vice versa? Or both at once? Or does each proceed independently of the other? To establish the answer scientifically requires a controlled experiment where all other possible influences on money supply growth and inflation can be kept constant. In other words, we need to have at least two identical economies, with identical people, then alter only the rate of money supply growth or inflation of one economy, and measure any resultant differences with the other. Of course, no economy fits into a laboratory, and neither can any be duplicated or controlled experimentally. Consequently, economists can only assume particular cause-effect relationships, mathematically model them in equations that can be manipulated to derive predictions, and then make more assumption-bound ‘measurements’ to check if they agree with the assumption-bound and necessarily simplifying model’s expectations. When they do agree, it seems inappropriately presumptuous to call the assumed relationship a ‘law’ – nonetheless, economists try.
Assumption-bound mathematical ‘laws’ that attempt to describe or predict the complex, diverse, dynamic economic behaviour of billions of unique individuals, in scores of unique nations with differing social conventions and conditions, must necessarily reflect a crudely simplified view of reality that leaves out many – possibly very significant – details. Accordingly, the results have rarely proved satisfying. As Balogh put it: “varying attempts at mechanistic explanation and prediction…, even if they have produced a good ‘fit’ to the data for a short time, have lacked explanatory power in the longer run.”[169] The complexity of the subject ensures that the mathematical approach in economics can have only very limited success. Even Alfred Marshall, one of the most prestigious and influential economists, expressed doubts about mathematical economics. Near the turn of the last century he remarked: “In my view every economic fact whether or not it is of such a nature as to be expressed in numbers, stands in relation as cause and effect to many other facts, and since it never happens that all of them can be expressed in numbers, the application of exact mathematical methods to those which can is nearly always waste of time, while in the large majority of cases it is positively misleading; and the world would have been further on its way forward if the work had never been done at all.”[170]
So, forced by the nature of their subject, economists find themselves adrift in a chaotic ocean of human behaviour, clinging to lifeboats of assumptions from which stable islands of order and ‘law’ can be sought. But while actual islands sometimes sink and are often battered by tides and hurricanes, not so the economic counterparts. As the previous chapter mentioned, and section 3.3 further details, once ‘laws’ are found, economists generally treat them and their underlying assumptions as “fixed and permanent truths”. When “verifiable implications” suggested by a previously deduced ‘law’ are later contradicted by actual behaviour, economists often adjust an equation’s constant, make it variable, or alter some other minor detail that allows them to keep the ‘law’ and its underlying assumptions more or less unchanged. Such an approach cannot be regarded as scientific: as physicists David Bohm and F.David Peat wrote, “an acceptable scientific theory… must be formulated in such a way that its implications are not subject to too many arbitrary assumptions, so that the theory can always be ‘saved’ by suitable adjustment of these assumptions to fit the facts, no matter what these facts turn out to be.”[171]
So, economic ‘science’, difficult in theory, in practice has often just not occurred. Economists try, but nonetheless they seem very trying. Ultimately, in Balogh’s words, leaving “[e]conomic reality… circumscribed within the mathematical limits of some arbitrary system of equation… [has] reduced the history of economic ‘science’ into a tale of evasions of reality, into attempts to derive general rules from a few arbitrary and unprovable assumptions”,[172] especially the assumption of optimality through competition (discussed in section 2.5). No wonder that Schumacher, referring to “the most pressing problems of the times”, concluded that “it would not be unfair to say that economics, as currently constituted and practised, acts as a most effective barrier against the understanding of these problems, owing to its addiction to purely quantitative analysis and its timorous refusal to look into the real nature of things.”[173]
Economists began their retreat into the fantasy worlds of their mathematical theories when, compelled by the desire to build a ‘science’, they thought it best to exclude certain questions…
3.2 Normative & Positive
“In its scientific aspect economics is strictly positive. It answers the question ‘What is reality like?’ But normative issues in public policy, turning upon the question ‘What should be done?’, also always require economic analysis. Given the social objective aimed at (with which he might in fact personally disagree), the scientific economist can use his knowledge of reality to analyze the problem and suggest efficient means for attaining the desired end.” – Jack Hirshleifer[174]Most economists aim to describe what happens and to leave normative questions involving value judgements for others to decide. In other words, economists may try to use their ‘positive science’ to determine the best means of achieving certain ends, but they do not determine the ends. So it goes in theory.
For modelling an atom or an electrical circuit, a positive approach can be taken because these objects behave according to rigid physical laws. Human economic behaviour, however, involves free choice motivated by normative judgements, and so economics must to some extent incorporate these normative judgements into its study. This leads inevitably, as in any science, to the colouring of conclusions with personal views; but more importantly, for economic ‘science’ it has also involved, to a far greater extent than in most sciences, the reduction of normative issues into explicit or implicit assumptions. For example, economists answer unavoidable normative questions like ‘what should we do about profits?’ by assuming that, whatever we do, profits will still be sought and won; in effect, the question is converted to ‘what distribution of profits should we seek?’. Economists treat not just profits but also competition, scarcity, inequality, and many other fundamental distinguishing features of capitalism as given and not subject to debate – as effectively ‘ends’ already ‘determined’. This is not positive science.
The fundamentals of capitalism are not ends, least of all community-determined ends, but merely the less-than-best transient results of cumulative historical processes. We do not have to have competition, scarcity, inequality, profits, and many other capitalist basics. They are not absolutes to be dogmatized by economic theory. Yet because economic theory does just this, it implies and effectively makes a normative judgement: that the underlying features of capitalism should be retained.
So, by not considering alternatives to the arbitrary reality of the day – an accident of history – the “strictly positive” ‘science’ of economics normatively sides with things as they ‘are’. Even some within the profession recognise that this cannot but assist the maintenance of the status quo. Frank Hahn, for instance, stated that “economics… is easily convertible into an apologia for existing economic arrangements, and it is frequently so converted… It is an unsatisfactory and slightly dishonest state of affairs”.[175] The extent to which economics supports the status quo can be glimpsed in the details of some basic economic models…
3.3 Models & Assumptions
“Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.” – John Maynard Keynes[176]As one standard first-year university textbook put it: “An economic model is a set of mathematical equations designed to represent the important features of the economy. To cast something as complex as the economy into a mathematical form, it is necessary to make simplifying assumptions about the basic internal behavior of the economy and its reactions to various external shocks.”[177] These assumptions correspond to “simplifications of reality that allow us to approximate reality with a mathematical expression.”[178] Models built on such assumptions necessarily are not realistic, but as another standard first-year textbook correctly emphasises, “no model in any science, and therefore no… economic model, is completely realistic in the sense that it captures every detail and interrelationship that exists. Not only is such a model impossible to build, but it would also be impossible to work with… The nature of scientific model building is such that the model should capture the essential relationships that are sufficient to analyze or answer the particular question at hand.”[179]
But how does one identify the “essential relationships”? How does one know which parts of the system to simplify, and which not? (How does one know how to model the system, and how to simplify?) As it turns out, economic behaviour can only be modelled using particular assumptions – insurmountable inconsistencies and difficulties of computation result from others. So, assumptions are chosen which facilitate modelling and which seem reasonable to those assuming them.
Economists must make assumptions to build models and theories, but proper science requires the propositional nature of underlying assumptions to be kept firmly in mind. Assumptions must be seen as working assumptions able to be refuted by real events. The assumptions mostly used by economists, which usually make mathematical modelling fairly easy (probably too easy), are based on the notion of natural liberty as a source of optimality; yet such assumptions, rather than being treated as working propositions, have instead tended to develop (via their associated theories) very loyal followings who defend them as permanent self-evident truths against any evidence to the contrary. This unscientific approach can best be demonstrated with just a few examples. Indeed, as a textbook admits, “the great bulk of economic reasoning makes use of only two analytical techniques… optimization and… determination of equilibrium.”[180]
People are assumed to ‘optimise’: producers try to maximise profits, and consumers try to maximise satisfaction. The textbooks claim that: “Given a number of ideal conditions, optimizing behaviour on the part of individuals and firms under pure [ie. perfect] competition leads to an efficient… social outcome.”[181] Of course, the ideal conditions are rarely met, competition is not pure or perfect, and while we may try to optimise, we need not succeed – after all, each person has a different capacity to optimise, largely depending on the extent to which they have already won or lost. Furthermore, people do not always try to optimise, at least not in the short-term. Balogh provided an example: “When a large corporation forgoes profit opportunities in the short run in order to maintain good public relations with its clients, or to secure industrial peace, or to avoid government interference, this could equally be regarded as intelligent profit maximization in the long run.”[182] In any case, as section 1.5 explained, the zero-sum game of competition means that for every successful optimiser, a non-optimising loser exists. So, calling people optimisers may imply, but cannot guarantee, optimal results.
The concept of equilibrium suffers from even more glaring weaknesses. According to textbooks,[183] various forces act upon economies, but most have a tendency to counteract each other and so result in a balanced state called equilibrium. For instance, as section 2.2 explained, LSD is supposed to cause the supply of commercial products to generally alter so as to match public demand for them. When supply and demand match, we have equilibrium, which is said to involve “no tendency for price or for quantity to change”,[184] and to represent not only stable but also optimal situations – at least, as section 2.2 explained, as long as one assumes perfect competition,[185] single prices, zero transaction costs, and the constructability of schedules.
Such balanced states – very reminiscent of those studied by chemists, physicists and many other scientists – can be mathematically modelled much more easily than disequilibrium. So the circumstance seems fortunate for economists. But it also seems suspicious. Certainly, the tendency for supply and demand and other economic ‘forces’ to adopt some state of equilibrium seems anything but beyond dispute. Kapp, for one, spoke of a “mass of factual evidence”[186] against the notion. Even textbooks admit that “given a world in which determining conditions are ever-changing, the chances are that prices will always be some distance from and scarcely ever at their equilibrium values. Disequilibrium is therefore the prevalent state of affairs.”[187] In Kapp’s view, equilibrium nonetheless stuck because it not only eased the task of building theory, but also allowed economists “to demonstrate that production and distribution were self-regulating processes capable of achieving an optimum solution of the economic problem without positive direction by public authority.”[188]
Indeed, equilibrium provides so much optimality, it even ‘saves’ the environment. Supposedly, equilibrium forces provide salvation, from whatever economic activity is unleashed, by efficiently and quickly repairing any ecological damage that might be caused; at worst, a little government regulation such as pollution taxes might be required to tidy things up properly. This convenient piece of wishful thinking, which simplifies the task of modelling, and sits very comfortably with the notion of natural liberty as an optimising system, implies that ecological resources have no limits and can be plundered without concern. Only in the last few decades have a growing minority of heretic economists voiced opinions against this doctrine.
Meanwhile the concept of equilibrium has been further entrenched by treating change as causing the economy to move from one supposedly stable and ‘optimal’ state of equilibrium to another. Despite the alleged stability of equilibrium prices, when supply and demand change – for instance because of “changes in tastes, technology, resources, and the political-legal system”,[189] or because of changes to related goods (for instance, “an increase in the price of butter… will tend to raise the demand for margarine[;]… a rise in the production of wool will almost necessarily increase the supply of mutton”[190]) – the intersection point of their curves is said to also change, and hence so too does the equilibrium price. If demand rises, economists shift demand curves vertically upwards; if it falls, downwards (see Figure 3). If supply rises, supply curves are shifted to the right; if it falls, to the left. These movements are supposed to represent prices adjusting in accordance with LSD to changed conditions. The new equilibrium price then results at the intersection point of the shifted curves. So, different equilibria represent static ‘snapshots’ of an economy between which comparisons can be made (an approach much easier than trying to model continuous dynamic economic development). Economists call this approach comparative-static analysis.
A textbook admits that comparative-statics involves “drawing explicit comparisons between various hypothetical equilibrium positions.”[191] But even if the hypothesis is granted – along with its requirements and assumptions of perfect competition, single prices, zero transaction costs, and the constructability of schedules – then still the simple movements of curves in four possible directions need have little or no correspondence with what actually happens. Different people react differently, and their preferences can change differently, resulting in differently shaped curves, and several prices.
A simple movement of curves and a single final price could result only if two conditions are met (in addition to the long list previously mentioned and reiterated). Firstly, all individuals’ preferences must closely and constantly match market curves – and not even neoclassical economists think quite that uniformly. Secondly, no ‘secondary’ reactions must occur: the changes represented by a movement from one equilibrium to another cannot feedback so as to further alter equilibrium; for example, oil price rises cannot boost inflation in ways that give rise to more oil price rises. In this way assuming ‘all other things equal’, equilibrium analysis can give determinate (predictive) answers, but otherwise not.[192] Although, by using comparative-statics, economists “waive consideration of such problems”, they do admit that the final hypothetical “equilibrium reached might conceivably depend upon the path for getting there.”[193] Occasionally textbooks even admit the assumption is not valid: “disequilibrium in one market will tend to reduce demand… in all other markets. A second-order adjustment in these other markets will then carry the process further. A self-reinforcing process may thus ensue”.[194]
And yet, the belief that natural liberty ensures the optimality of free enterprise apparently makes it easy for most economists to disregard all these issues – and the evidence – and instead to believe in equilibrium as a normal economic state. A few unbelievers such as Balogh see it differently however: “As changes are continuous and adjustments take time, no position of ‘eventual equilibrium’ will in fact ever be reached, or is necessarily existent even in principle. The system may be in continuous disequilibrium ‘chasing’… a steadily receding and changing ‘equilibrium’ position. What is happening is history. History never reaches equilibrium, it merely moves slower or faster and in frequently changing directions.”[195]
Even if, despite the evidence, stable equilibrium states could be regarded as typical (and unaffected by secondary reactions), they would still not necessarily have optimality. In Balogh’s words: “Why the equilibrium will be ‘optimum’ has never actually been explained. One leading neoclassical theorist of… equilibrium, Professor Frank Hahn, has pointed out that there is in fact nothing whatever in general equilibrium theory to justify the claim of social optimality, and he condemns writers who make the claim. The textbooks do make the claim, almost universally.”[196] Equilibrium then not so much describes economic reality, as restates the very dubious assumption of the Invisible Hand.
Nevertheless, most economists continue to model economies as if in states of equilibrium, so no wonder that they often find reasons in favour of natural liberty and self-regulation. One textbook admits that “presumptive assumptions (assumptions that in essence provide the answer) occur all too often in economic analyses… [but] cannot be defended”.[197] Yet textbooks do not call equilibrium a presumptive assumption, nor many other obvious candidates for the title.
International trade provides another glaring example of how economic ‘science’ assumes away reality. According to neoclassical theory, free trade between nations serves their self-interest. It works like this: if the country of Up produces a nic for ten dollars and a nac for nine dollars, while the nation of Down makes a nine dollar nic and a ten dollar nac, then (as long as importing either item costs less than a dollar) both nations can save if Up exports its cheaper nacs, and Down, its nics. A textbook claims that, in this way, “trade offers each country the possibility of specializing in the line of its comparative advantage and then exchanging these products for those in which she has a comparative disadvantage. Both countries can reallocate their factors of production to… where their comparative advantage lies and then export this product and import the other product. In short, with a given amount of resources each country can consume more by trading than in isolation.”[198]
But what happens to the producers of Up’s nics and Down’s nacs, who can’t compete against their foreign counterparts? Neoclassical theory recommends they reallocate their assets to other fields of production. Yet this need not prove feasible or affordable, because of the specialisation of modern production equipment and the skills needed to run them. International prices (and currency rates) also fluctuate, and can turn a comparative advantage one day into a disadvantage by the time any possible reallocations of assets are completed. So, with free trade, some win, but others lose – as a textbook admits: “There is no guarantee that every consumer will be better off under free trade than under no trade, even though the country as a whole will be better off. Only if a policy of redistribution is pursued can free trade guarantee such an outcome.”[199]
Redistribution because of free trade occurs less often, however, than the avoidance of free trade, aptly called protectionism. Up’s nic producers would have plenty of motivation to lobby their government to put a tariff on nic imports – a charge owing to the government that would raise the cost of imports to levels near or above those of local producers. But although tariffs protect local producers, they also cause higher prices, discourage improvements in efficiency, and damage the exporting nations by preventing or lowering their sales and income (which could run down Down, and stuff up Up).
For these and other reasons, neoclassical theory advocates tariff-free trade. Indeed, textbooks easily demonstrate – after making several “quite strong assumptions… [that] one might think… are rarely fulfilled in the real world”,[200] including perfect competition – that tariff-free trade causes wages to gradually alter, so that eventually the same work will receive the same pay in all trading nations. But textbooks also explain why this trickle down from rich to poor nations does not actually occur: “Someone must own the capital… [and] the more capital a country has for a given amount of labor, the higher the average income will be. So even if factor rewards were completely equalized, as long as the capital stocks differ, incomes will also differ.”[201]
In other words, a head start makes it a lot easier in the game of competition (perfect or otherwise). And as Balogh pointed out, “in periods of accelerated technical change the handicap of being small and weak is heightened, for the education, research and development effort of the small and weak cannot match the formidable technical and economic advances secured by the strong. The rapidity of change acts to accentuate and increase the differences among countries.”[202] And so, instead of the wishful thinking of trade theory, actual imperfect competition leads not only to economic elites forming within nations, but also to elite nations dominating the world community. Rather than wealth trickling down to the poorest, they more often receive just the rich’s industrial waste.
The strongest international players, those with the biggest head start, consist mostly of oligopolist ‘multinationals’. It should be emphasised, in the words of Robert Heilbroner, that “multinational companies are in fact national companies that have extended their operations abroad. They are not, as their spokesmen sometimes claim, companies that have lost their nationality.”[203] Like any firm or producer, multinationals chase maximum profits; this is often most easily achieved by setting up production equipment in countries that have plentiful cheap labour or raw materials, or low taxes or minimal regulation – which often requires abandoning their original profit-making facilities in the process, thus leaving unemployment behind. However, as Galbraith explained, producers of advanced goods “must have organizations in the receiving country to assemble… [their products], to market them and, on occasion, even to repair them… International trade in things like automobiles and computers means automatically that there will be multinational corporations.”[204] Of course, multinationals provide employment in their host countries, and a share in their often very maximised profits for local investors, executives and governments; but they also, in Heilbroner’s words, “often support technologies and social structures that are inimical to the rounded development of the backward areas – for example, shoring up corrupt and privileged classes or encouraging countries to concentrate agricultural production on exports rather than on badly needed food for local consumption.”[205]
As international trade has increased, multinationals have grown more dominant. Given their prominence, trade theory should include multinationals in its models. But “the increasing importance of the multinational corporations in international trade is, of course, ignored by the conventional model, which assumes that trade is conducted by myriad atomistic units unable to influence prices.”[206] Once again, perfect enough.
Devotion to convenient presumptive assumptions of mythical states like perfect competition and equilibrium manages to hide an even more fundamental presupposition lurking behind the flawed case for optimal outcomes flowing from market competition: scarcity. Economics, the ‘science’ of production, distribution, exchange and consumption, has been defined as that “which studies human behaviour as a relationship between ends and scarce means which have alternative uses”;[207] and “the study of the changing patterns of cultural relations which deal with the creation and disposal of scarce material goods and services by individuals and groups in the light of their private and public ends.”[208] Competition for self-betterment tries to defeat scarcity, but even if material abundance were gained, economists say this ‘optimal’ result would leave us scarce time to enjoy it.[209] And so, with scarcity assumed to be always there to motivate competition, the economic engine can’t be turned off. Not so much competition to overcome scarcity as ever more of the same – ever more production, consumption, debt and work.
A competitive economic system based on the assumption of scarcity must predispose us to neither achieve, cope with, nor even recognise a prosperous lack of scarcity. Rather than assuming permanent scarcity, surely abundance and the time to enjoy it must be regarded as at least possible. If we grant this possibility, then economics should be re-defined as the study of the strategies and behaviour of people as they attempt to survive and, ideally, prosper. It should pay particular attention to consensus tunnel-realities, because they determine what ‘prosper’ actually ‘is’, and also to the environment, from which ultimately all survival and prosperity is drawn. Economics would then treat scarcity as a failure to survive and prosper – not as a perpetual predetermined fate.
Ultimately, economics seems to ignore or neglect whatever seems too cumbersome to model – however significant. Economists can model order, which most believe natural liberty optimally provides, so no wonder they adopt assumptions that support and/or define natural liberty. To do otherwise would render the mathematics much more difficult if not impossible, and the ‘science’ a faint hope at best. But while economists have thus found order, they have lost the plot. If you assume everything ‘is’ optimal, then you know what should be done: leave the status quo alone. And so, economists have developed not a positive science, but one ridden with normative assumptions which do not even fit the facts.
All science runs the risk of hanging on to out-dated assumptions. Even nineteenth century physicists, when they could not detect the ether they had postulated to exist, at first modified its concept to make it undetectable. Not until Einstein’s relativity theory had been supported by experiment did (most) physicists abandon the ether. But generally, economists hang on far more tenaciously to their concepts than do other ‘scientists’. They have, in effect, dogmatised natural liberty, equilibrium, and many other unrealistic assumptions, despite the wealth of evidence against them. A long citation from Kapp seems to best demonstrate the extent of the problem: “Instead of testing… solutions by trying to disprove them… [social scientists] tend to defend them against evidence to the contrary. Instead of formulating… problems and… solutions as clearly and as definitely as possible so that they may be critically discussed and revised, social scientists have often tended to save untenable propositions by refining their definitions or by introducing auxiliary hypotheses – thereby rendering more difficult their disproof. Indeed, when new data come to light which contradict earlier conclusions strenuous efforts are sometimes made to play down their significance and to evade their impact… [T]heoretical systems… respond with considerable vigor to new data… due to the abundance and the complexity of social evidence and the extreme difficulty of disproving ‘experimentally’ and once and for all any particular social theory… In the social sciences, entire systems of analysis have succeeded in surviving by a restatement of assumptions and by redefining concepts or by narrowing the scope of their investigations. This has made it possible to attribute empirical facts which seemed to contradict the conclusions either to minor disturbances and exceptions or to factors which were said to fall outside the ‘proper’ subject matter of the discipline.”[210]
So, economic ‘science’, implausible in theory, in practice rests on normative, eternally ‘true’, presumptive assumptions. Nonetheless, economists try very hard to believe in their ‘science’. Armed with their very own sophisticated, almost indecipherable, specialist terminology, economists defend their ‘science’ with the claim that, whatever the assumptions, accuracy of prediction matters most – if an economic model can be used to make accurate forecasts, then this suffices. Such a neat defence could only be accepted if economic predictions worked. But alas, usually they don’t…
3.4 Prediction & Myth
“Big Science. Hallelujah. Every man, every man for himself.” – Laurie Anderson[211]The story will probably seem all too familiar…
Gorged on orthodoxy, muttering so much economic jargonspeak as to suggest the native tongue has been forgotten, masquerading authority with a title like Treasurer, Chancellor of the Exchequer, or Minister of Finance – and desperate to invoke confidence in that authority – the ‘democratically’ elected political representative, convinced that the signs have been correctly read, conveys to the public (with great gravity) the sad sobering ‘truth’.
“The economy’s stuffed”, screams the economic minister from the press-room pulpit. “It’s over-heated, unbalanced, impaled on a J-curve, crushed under debt, infected by foreign problems, congested, brittle, strangled, suffocated, castrated and crippled; but above all, it’s no longer competitive. We aren’t winning anymore. Time to pull the finger out, tighten our belts, make the extra effort…”, and perform all those other clichés that might more accurately be rendered: “The gods of the economy have been angered and we must offer them a sacrifice”.
With a seal of approval from the most fashionable economists, credit might be tightened, interest rates hiked, taxes raised, government services reduced, and/or some other bitter policy pill popped… “for the national interest… to regain our competitive edge… so living standards can rise.”
But, usually, living standards drop as the policies bite. Only later will the minister release the screws, when confident the ceremony has had the desired effect (or else when convinced no other option exists).
In practice, though, the policies often just do not work. Instead, everyone races faster just to stay still, while breathlessly awaited economic indicators degenerate, cancelling the promise of imminent prosperity and eroding faith in the holy prophecies of economic priests.
Using orthodox economics to predict the results of government policies, or indeed anything else, has not achieved notable success – indeed, at times, it has caused particular embarrassment. For instance, almost all economists failed to predict the ‘credit crisis’ turmoil of 2007-08 that unleashed the Great Recession – instead they optimistically forecast more onwards and upwards movements of the most sacred economic indicators. This at least maintained their long track record: in 1929, almost all economic soothsayers similarly agreed that the stock market would not crash – it crashed anyway. Soon, the same people were predicting that the economy would recover quickly; they continued to predict this for months, then years. The false sense of security encouraged by these and other economic predictions only aggravated the situation by ensuring that nothing was done when much indeed was needed.
As another example, just before UN-sanctioned forces attacked Iraq in January 1991, ‘experts’ predicted that the offensive would restrict the supply of oil and so cause oil prices to rise, possibly three-fold. When war came, prices fell: fearing higher prices, people had stockpiled in advance; although less able to then take advantage (though also having done so to some extent beforehand, when prices doubled between July and October 1990), most oil producers felt obliged as part of their support for the UN action to avoid profiteering, and so prices were deliberately kept low. The official predictions failed because, firstly, they were based on past economic events which do not have to be repeated in the future, and secondly, because they were based on only a partial picture of those events which did not and probably could not give sufficient emphasis to what, in the end, had the greatest influence: human perception. An example of how economists make predictions should clarify this.
If the price and number of sales of a particular item – say, fish – are measured at various times, these observations might suggest that a relationship exists between price and sales. It might seem that LSD rules, that the higher the price, the lower the number of sales, and vice versa. Plotting observations on a graph might even reveal a straight line – a linear relationship between the two ‘variables’. On the basis of this relationship, if fisherpersons intended to increase their prices, then a prediction could be made that sales would decrease. In fact, sales might not alter at all, or they could conceivably even increase. Other factors, not measured or plotted or previously taken into account, might invalidate the observed – or rather deduced – relationship.
Despite increased prices, fish sales might not decrease if beef went into short supply, and/or if water pollution suddenly reduced, and/or if the time of year corresponded to a period when religious customs forbad the eating of red meat, and/or if some in-vogue celebrity or tabloid dietary expert expressed a preference for fish, and/or if most prices were rising, and/or for numerous other possible reasons. Normally, the many interdependent influences of people’s intricate thinking processes and subsequent economic behaviour prevent relationships between specific factors from being recognised, but sometimes they act coincidentally to imply a relationship that exists only in atypical circumstances or for short periods.
Even when relationships can be confidently established as genuinely ‘real’ – rather than merely being assumed so – they do not ensure accurate predictions because they vary from place to place. “For example exports and imports have behaved under similar policy treatment in startlingly different manners at different times and in different countries.”[212] Ultimately, predictions can only be made by assuming the validity of deduced relationships, an act rarely justified in economics (see the appendix for a detailed example).
Almost certainly, too many interdependent factors exist in market economies for them to be modelled well enough for economics to have a chance of any accurate predictive capabilities. At the very least, the evidence forces a conclusion similar to Balogh’s: “the difficulties in the way of using economic ‘systems’ or models to arrive at determinate answers to… economic problems are innate and insuperable.”[213]
Some hold hopes that chaos theory may enable more accurate modelling of the economy than has been previously achieved. Certainly, non-linear chaos theory seems more suited to modelling the complex interdependencies of economic behaviour than does the simpler linear mathematics normally used. However, chaos theory still depends – as must all mathematical techniques – on accurate measurements. So, given the difficulties and impracticalities of making accurate measurements in economics, probably chaos theory will help little with modelling, and even less with prediction.
However sophisticated the techniques of modelling, human action remains indeterminate – not even the calculating abilities of computers can prevail. With multi-coloured, laser-printed, computer-generated graphs, spreadsheets and flowcharts, calculations frequently take on an aura of authoritative prediction; they look scientific and unarguable. But while computers can calculate much more quickly than people, they do so in ways determined by what humans program into them. To program equations that computers can use invariably involves the making of various assumptions – and the more sophisticated the computer technique, the more likely it acts to disguise the assumptions underlying it. In Schumacher’s words: “The person who makes the forecasts may still have a precise appreciation of the assumptions on which they are based. But the person who uses the forecast may have no idea at all that the whole edifice, as is often the case, stands and falls with one single, unverifiable assumption… If the forecasts were presented quite artlessly, as it were, on the back of an envelope, he would have a much better chance of appreciating their tenuous character”.[214]
Whatever the mathematical techniques employed, accurate prediction of even some aspects of the intricate and varied behaviour of millions or billions of people seems unlikely. As Schumacher pointed out, “in laboratory science, dealing with carefully isolated deterministic systems, future events may be described as certain. The real world, however, is not a deterministic system; we may be able to talk with certainty about the acts or events of the past… but we can do so about future events only on the basis of assumptions. In other words, we can formulate conditional statements about the future, such as: if such and such a trend of events continued for another x years, this is where it would take us. This is not a forecast or prediction, which must always be uncertain in the real world, but an exploratory calculation”.[215]
Calculations can work successfully as predictions, but (as the principal ‘definer’ of falsifiable science, Sir Karl Popper, put it) “only if they apply to systems which can be described as well-isolated, stationary and recurrent. These systems are very rare in nature, and modern society is surely not one of them.”[216] The nonetheless widespread treatment of economic calculations as predictions is motivated normally by faith in the soundness of their assumptions – faith usually inspired, yet again, by the desire for economic ‘science’, and by the compatibility of the assumptions and the ‘predicted’ future with the notion of optimal results through natural liberty. Only when ‘predictions’ fail do economists adopt humble tones and stress how their forecasts can never be guaranteed for reasons they, and/or those they advise, forget when they next attempt to foretell the future.
Ultimately, it seems difficult to avoid agreeing with Galbraith’s conclusion that “there are very great limits to what economists can predict… You must always remember that prediction itself derives from the fact that no one knows… The safe rule for the citizen on economic predictions is to ignore them.”[217] However, people often do not ignore them. Indeed, people sometimes believe economic predictions so much that behaviour alters in ways which help make the predictions come true and turn them into ‘self-fulfilling prophecies’. As Balogh put it, “one of the most disagreeably important characteristics of economic phenomena is their potential self-justifying nature. Provided the brainwashing is sufficiently intensive, reactions to change may themselves also alter, thus justifying nonsense claims”.[218] Authoritative forecasts of inflation, for example, can inspire people to raise prices in order to avoid falling behind others expected to do the same; widely publicised predictions of recession can encourage staff cuts as a means of reducing production thought excessive for the anticipated future; expectations of higher trade deficits, and a consequent increased chance of import restrictions and/or higher tariffs, can compel people to import now rather than later, and so widen the deficit; and so on.
Yet economic predictions rarely foretell the worst possible scenarios. As Galbraith observed, partly because of the possibility of self-fulfilment, the “economist in high office is under a strong personal and political compulsion… to predict what is wanted, and it is better, not worse, economic performance that is always wanted… It follows that all official prediction in economics is suspect; everyone reading it should assume a heavy component of wishful thought.”[219] Wishful thought even of an economy turning around when it might actually be nose-diving…
Just close your eyes, Dorothy, and imagine you’re in Prosperity – soon you’ll be there.
And don’t worry about ecological collapse either. The state of the environment has not escaped the attention of the economic orthodoxy – they have rallied and adapted to the times, combined their talents, earnestly applied their abilities, and come up with their ‘panacea’ for LSD-competition’s self-destructive woes: a brand new catchphrase…
3.5 Sustaining Faith
“Economists have the unenviable task of telling people confronted with inadequacy that, in a world of resources that are scarce, there are limits to the demands that can be made on them; that man as an individual, firms as units of industry, and governments have to make choices in which they must reject claims that are seen by men of sensibility and compassion as humanitarian.” – Arthur Seldon[220]While the biosphere crumbles under the slow-motion impact of all our manic economic busy-ness, and our social environments wilt as inequality worsens and materialism grows ever more blind, political and business powerbrokers continue to defend their privileges. Armed to the teeth with orthodox explanations provided by myopic economic experts rigidly facing yesterday, they confound common-sense with their wishful thinking and their reality-tunnel-vision. However bad it looks, they advise us merely to continue, perhaps a little more carefully, with habits of the past.
Yes, we have some trouble – even economists are forced to agree. But not to worry, they say, because if something has enough importance, the market will act – LSD, the Invisible Hand, optimising equilibrium forces and all that – remember? Just trust us. The market knows best.
Yet as long as the market maximises its profits by externalising its costs in the form of ecological degradation, it has no monetary incentive to change its practices – unless doing so would somehow increase profits. However, usually the opposite occurs: short-term costs are normally involved in arranging pollution control or sustainable timber-logging or developing renewable energy alternatives or most other changes that might enhance the future by improving present techniques. Consequently, those who must pay the additional costs (initially at least) simply don’t (a few responsible exceptions aside) – instead they pursue their self-interest and maximised profits most easily by continuing entrenched externalising habits.
Neoclassical theory has recognised this, and even proposed how to deal with it.
Early in the twentieth century, A.G.Pigou proposed that taxes be levied on polluting or otherwise externalising firms (and subsidies given to those few who provide positive externalities).[221] Such taxes would push up the costs and prices of the externalising firms, so giving them at least some incentive to consider other methods of production not subject to the same taxes, including previously costlier alternatives that the taxes might thus render ‘competitive’. Pigou’s approach, to this day, remains the standard one – even the 1992 Earth Summit and later iterations advocated its widespread adoption, and it lies at the foundation of carbon taxes and emission trading schemes.
Of course, Pigou’s call for government regulation – of what, in his day, was thought of as a perfectly self-regulating system – was not then popular with other economists; even so, his proposal contains serious flaws.[222] Firstly, the ecological effects of productive techniques often cannot be properly anticipated, and hence, taxes cannot be expected to apply to some producers until long after they have caused problems. But even then, to work as intended, any such tax would have to cost producers more than it would for them to stop degrading the environment; otherwise, as Commoner put it, “some producers might be willing to buy the right to pollute by paying a tax and then damage the environment in ways that no taxes can repair.”[223]
However high the extra costs, and whether imposed by taxes or by willingly chosen adoption of more ecologically aware techniques and equipment, producers would still attempt to pass the costs back to consumers by raising prices; if they did not, usually they would lose profits and probably eventually go out of business. Either way, as Commoner again pointed out, “inevitably, the poor would suffer most… either through increased prices or reduced wages.”[224] Governments could compensate the poorest, by redistributing some of the tax gains back to some of those ultimately paying for it, and this is often advocated by carbon tax/trading proponents – however, the complexity of such an approach, especially given the potentially difficult task of settling on a level of tax sufficient to actually dissuade pollution, makes this approach potentially far more cumbersome and bureaucratically involved than direct investment by government in research and development of greener technologies (not that any neo-classicists would heretically suggest that government should take over the role of any part of the market).
So, taxing of negative externalities might reduce them, albeit by transferring costs of cleaning them up from those causing them, but it does little to prevent or dissuade externalities from arising in the first place. And, of course, externalising firms often have sufficient profit levels to motivate them to argue strongly to government against being taxed, to at least delay if not prevent change.
And so, we barely change at all, instead muddling on with BAU (most suitably pronounced as ‘bore’): Business-As-Usual.
BAU remains approved and sanctified by neoclassical economics, for which the bottom line ‘is’ that we must continue to compete – fighting scarcity enough to survive and prosper, but not so well as to avoid needing to invent more jobs to keep the numbers of losers low enough for winners to continue winning and fighting scarcity enough to survive and prosper, but not so well as to avoid needing to invent more jobs to keep the numbers of losers low enough for winners to continue winning and fighting scarcity enough to etc etc… ad nauseam.
BAU invariably advocates greater market rule (however much already exists, and however much damage it has caused), increased competition (which usually means lowered wages and/or reduced tariffs), and growth. These, claim neoclassical advocates, give us our only real chance of achieving optimality in circumstances of eternal scarcity. Indeed, in their view, without competitive growth, the market won’t make enough profits to afford investing in ecological protection and restoration. So, first things second (if not last).
But if we can only afford to fix our problems when we are growing, then the question becomes how often will we fix them? In theory, frequently. Because ecological responsibility involves work, and therefore jobs, it can actually increase (as well as accompany) growth. But in practice, as explained, the questions of who pays for it all and who might lose profits take precedence – and because the market rules, responsibility is generally avoided until ecological or social degradation mounts so much that even LSD-prices cannot mask it. Hence, growth tends to occur without the problems that most need attention being addressed before they turn critical.
So, following BAU-ing economically rational prescriptions means acting as though (most of the time) we cannot afford to save the world (although, apparently, we can afford to destroy it). Rational behaviour, did they assume? Even a textbook recognised that “to be economically rational, production should represent a conversion from a less desired to a more desired configuration.”[225]
Recently, perhaps belatedly aware of BAU’s pitfalls, economists have augmented their claims with another: as well as market rule, competition, and growth, we require ‘sustainable development’. If we manage this, say economists, wealth will trickle down in the most optimal manner. A couple of decades ago, it was even suggested that sustainable development with growth rates of just three percent could all but remove poverty worldwide any year now.[226]
It certainly makes sense to develop sustainably – otherwise, eventually, development stops. If development isn’t sustainable, then we run out of trees to chop down, oil and coal and minerals to dig up, clean air to breathe, and functioning ecologies on which to depend. If development isn’t sustainable, then we won’t be able to sustain development. Trivially accurate, such advice provides no hint of how to develop sustainably.
Truly sustainable development could happen if we stopped defining development as economic growth, and concentrated instead on improving the quality, rather than increasing the quantity, of our economic activity. But the fierce futility of LSD-competition, sanctified by BAU-ing neoclassical economics, does not allow this. It demands not actually sustainable development, but the oxymoron of sustainable growth – another hopeless attempt to run in two different directions at once. And so, ‘sustainable development’ seems a mere catchphrase, bereft of meaning, adorning neoclassical economics like a tatty thin mask, and borrowed by canny politicians to placate frustrated electorates.
The prominence given to economics, particularly in recent times, and especially to its ministers’ largely incomprehensible ramblings, seems to give it an air of authority and indisputability. But as the state of economies often suggest, authority does not guarantee understanding. Devoted to flawed assumptions, implausible aims, and unreliable predictions, and ever defending its sacred tenets, however authoritative and indisputable it might seem on the surface, economics functions more as faith than science. This seems oddly apt, because modern society so strongly worships money…
 Chapter 2 |
Chapter 4 |