Review: What’s wrong with economics, anyway?
By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Economics is known as the dismal science. Thomas Carlyle coined the phrase in the 19th century to describe the then nascent discipline’s view of mankind as calculating and base. After reading Guy Routh’s “The Origin of Economic Ideas”, the most dismal aspect of the field appears to be something else: a long tradition of putting ideology first and observation almost nowhere.
In a book first published nearly 40 years ago, Routh takes issue with the main lines of orthodox economic theory from the 17th to the mid-20th centuries. He moves from the decision, on theoretical grounds, that general gluts – meaning recessions and depressions – were impossible, to the inability of economists to admit that something had gone wrong during the Great Depression. He closes with the peculiar ability of textbook writers to include theories and their refutations without apparently noticing the contradiction.
Routh does not hide his judgments, deploying chapter titles such as “The Preposterous Origins” and “From Propaganda to Dogma”. His style is witty, and his targets are easy. The economics profession’s method is one. He claims that David Ricardo was the first to show “the characteristics of the modern economist” at the beginning of the 19th century, offering “logical rigour applied to axioms arrived at a priori, the determination of economic variables by economic variables, the dismissal as irrelevant of those intrusions of reality that appear to refute the conclusions.”
Ricardo was certainly not the last to be blinded by pseudo-science. Today’s central banks rely on what are known as dynamic stochastic general equilibrium (DSGE) models of the economy, which start with a breathtaking series of simplification and assumptions. Most notably, until some revisions in the last few years, they assumed away bad behaviour and inefficiency in the financial sector. That made them essentially useless in anticipating or explaining the financial crisis of 2008.
Routh’s other great enemy is the common ideology of the mainstream, whichever side prevailed on any given controversial question. Through much of his narrative, he notes that most economists believed that people should be allowed to mind their own business. Such universal selfishness might lead to subsistence wages and starvation, as Thomas Malthus and Ricardo thought, or to general prosperity, as Adam Smith and the late 19th-century “marginalists” argued, but – until the limited dissent of John Maynard Keynes – they all agreed that the interference by governments and self-conscious do-gooders made matters worse.
The obvious counter to a critique published in 1976 is that the science of economics has advanced since then. Mainstream economists have certainly become less hostile to governments since Routh wrote his book. And they do far more empirical research. Almost every article in the latest edition of the American Economic Review, the leading academic journal, makes use of some statistical analysis. Defenders of the profession often say critics like Routh look only at the simplifications of basic textbooks, ignoring the subtle and supple analysis done by real experts.
Still, as the shortcomings of DSGE models exemplify, the basic methods remain flawed. That particular failure was not an accident. It reflected an intellectual structure which is still built on Routh’s “preposterous” foundations.
The fiction of perfect markets remains the underpinning of most models. Equilibrium is considered the normal state. Self-interest is the default psychology. The government is almost always treated as an intruder and corrector of a natural market economy, rather than accepted as an integral, defining part of a complex economic system. The insights of sociology and political science still receive scant attention. Issues of justice are studiously avoided, while pseudo-scientific babble about things like “Pareto optimality” flourishes.
Routh starts his book with a discussion of previous critics of conventional economic paradigms. He knew his basic complaint was not new, even in the mid-1970s. But sadly – even somewhat dismally – it still does not seem old.