Three Ms for economics re-education

May 21, 2014

Many economics students are unhappy with what they are being taught. A network of 62 groups from around the world has drawn up a petition calling for more “pluralism” in instruction. The malcontents find the dominant neoclassical model too narrow and want to know why so few experts predicted the 2008 financial crisis. They also want less abstract theory and more study of actual economies. The reproaches are just, but the students’ reform agenda is insufficiently radical.

They underestimate the scale of the intellectual scandal. The profession’s ignoble tradition started in the 19th century, when most political economists, as they were then known, failed to notice that industry was leading to massive improvements in the standard of living. Today’s practitioners know much more, but they still struggle to explain the most basic phenomena – prices, wages, money, credit, unemployment and development.

Pluralism, the study of alternative schools of economic thought, would help, but not much. With the partial exception of the still underdeveloped study of institutional economics, the available alternatives to the neoclassical synthesis largely rely on the same erroneous assumptions that humans are rational and that market forces almost exclusively shape economies.

The demand to study intellectual history and other social sciences is more promising. Add in philosophy, and a new curriculum could lead the next generation of economists to undertake a profound re-evaluation of some basic concepts.

The role of markets is a good place to start. Economists generally refer to “market economies”, but they are not talking about supermarkets. They are referring to a theoretical model of economic activity. What they call perfect markets are a sort of eternal war of all against all with no durable winners. Most professionals assume that such markets are the best form of economic organisation: the closer to market perfection, the better.

It is a bizarre assumption. Even imperfect markets actually play a relatively minor role in modern economies. Almost all people work in hierarchical bureaucracies, not markets; the producers in most industries work in cartels, deliberate or accidental; regulation is omnipresent; and governments are always the largest economic actors. Sociological considerations, technological developments and traditions are generally far more important than abstract market forces.

There is a simple reason that economists’ ideal markets are almost never found in human societies. The theory was modelled on Newtonian mechanics, and people are not actually much like the inert bodies of elementary physics. The cure is also simple: discard the grotesque market oversimplification. Instead, base the analysis of consumer activity, industrial structures and financial arrangements on more accurate psychological and sociological models.

Money is another economic fetish in need of demythologisation. Of course, money is far more real than a theoretically perfect market, but economists treat money as if it is, or can be made into, an objective measure of value.

The exaltation of what is ironically known as the real gross domestic product is a prime example of this fallacy. There is nothing real about numbers constructed in large part from estimates and arbitrary judgements. Worse, GDP combine things that cannot actually be valued on the same scale. My luxurious seaside holiday may cost 2,000 times as much as the food that keeps me alive, but the numbers involved are far more misleading than revealing.

Money plays an important role in modern societies, mostly as a very useful tool for organising a complex economy. The ability to create a monetary system based entirely on trust is a remarkable accomplishment. However, money cannot offer an absolute value in an economic world that will always be shifted. A less idealised and more flexible approach to the value of money would lead to a more realistic and less crisis-prone financial system.

With less time in the university curriculum dedicated to markets and money, there would be more space for another M-word: morality. Economists do sometimes talk about practical ethics, but they almost never concern themselves with the ultimate subject of morality: the good.

Economists usually assume that this good, also partly captured by the notion of quality of life, can be measured by something like GDP. Producing ever more goods and services therefore counts as progress. Such an objective might suit a machine, but it demeans people, who have complicated and sometimes contradictory desires, including to be virtuous and happy, and to lead fulfilling lives in just and peaceful societies.

A few economists and governments do try to move beyond GDP. Nobel laureate Joseph Stiglitz tried it on behalf of the French government five years ago, considering a variety of metrics but reaching no clear conclusion. British Prime Minister David Cameron in 2010 set an effort in train to measure citizens’ well-being. The Himalayan nation of Bhutan attempts to maximise gross national happiness, not GDP.

But those efforts are still numerical and simplistic. In truth, it is not obvious how economic activities – labour, production, consumption and distribution – can help or hinder people in their search for a good life. The exploration of that great moral question, not just the largely empty mathematics of markets and money, should be part of the foundation of the economics curriculum. That would make the subject far more interesting and useful.


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Another relevant and unique piece from one of the few economists that actually think for themselves. Bravo!

Posted by OneOfTheSheep | Report as abusive

Yes, great piece sir. But it also helps people justify dismissing economists.

Good to see you’re still around OOTS. You’ve been quite lately :-)

Posted by tmc | Report as abusive


Thanks! Since Reuters changed the format of their “Opinion” section there are fewer “spotlighted” articles, and those have been unusually silent on issues near and dear to me.

In this case, I wish to raise awareness that humanity is in the midst of societal change greater than the industrial revolution. At a time when there are SEVEN BILLION plus people present on our big blue marble, the Data Revolution is steadily reducing the number of people needed to do what societies everywhere need doing.

The greatest population growth is occurring where there no more land, less and less potable water per person, little or no sanitation, poor (if any) educational opportunities, only primitive skills, and few jobs. The only surplus for export is hate, urine and feces.

It should be of the absolute highest priority for every society to figure out an economic recipe for sustainable societies of stable or decreasing population if humanity’s sheer weight of numbers is not to bring about a Soylent Green existence ending as the Earth becomes our big brown marble. To date professional economists have yet to even theorize how to raise or even maintain current standards of living without population growth.

Denial is not a plan for a viable future, people. I ask you, in the short term, what are all these new college graduates in the U.S. going to DO that needs doing?

Those that cannot become entrepreneurs, to envision, promote, finance and produce original ideas, are going to find it harder and harder to find employment security for even a decade. Then what?

Posted by OneOfTheSheep | Report as abusive

Firstly, a journalist suggesting that economists are too concerned with GDP is rather ironic. Any Econ 101 class will teach students that the main objective of their discipline is not to maximize income but rather to maximize an aggregated function of total utility (social welfare) or in some instances an aggregated function of consumer utility (consumer welfare). This objective which underpins almost all economic models is equivalent to maximising total human happiness. Thus, where is the void of morality here? Even modern macroeconomic models will predominantly stipulate a microfounded aggregated utility function that can be maximized.

The discussion of “grotesque market oversimplification” would imply that the author is not familiar with the very mainstream advances in the fields of information economics, game theory, industrial organization, matching theory etc. Many of these advances can quickly be identified from a quick google search of which papers have won recent Nobel Prizes. Overall, this article appears to be either 40 years out of date or assumes that all economists conclude their education after their A-level economics exams. The discipline has moved on and perhaps if the author had studied economics rather than philosophy and classics, he may be aware of this. The broad unfounded conjecture here is perhaps a logical outcome when a labour market provides the perverse incentives of paying “opinion” columnists to write about a topic of which they have no substantive knowledge.

I am aware that Reuters will not publish this comment but I hope that at least internally someone in the organization will understand the severe limitations of this article and if possible, I suggest that the author reads this article by Paul Seabright which makes similar points but from a much more informed perspective: ary/paul-seabright-criticizes-the-povert y-of-the-undergraduate-microeconomics-cu rriculum

Posted by Carcassonne1000 | Report as abusive

A good place to look for new ideas is Ecological economics economics

Posted by Sleepless | Report as abusive

This is a great piece – I thoroughly enjoyed it. “it is not obvious how economic activities – labour, production, consumption and distribution – can help or hinder people in their search for a good life” – Really? I would argue that it is exactly those attributes – labour (working hard); production (making something useful); consumption (refueling one’s body) and distribution (sharing and helping others) – that ARE the good life and ARE happiness embodied in themselves. I believe that the challenge is that our modern society has only one metric of performance – monetary. Until we realize that there is ‘value’ other than monetary we will continue on the current path.

Posted by Tahoe58 | Report as abusive

Interesting @Sleepless. Though in its pure form it would be very difficult to implement politically, I think parts of it would have to be incorporated in any solution and will be in the future anyway. The millennial generations will insist on it. Thanks for the link.

Posted by tmc | Report as abusive

top on my list of study – the behavior of corporations and the corruption of individuals as they move up the ladder and its affect on society.

Corporations run the world and are basically amoral.. What happens to well meaning good neighbors once they enter the power structure of a corporation?? They morph into profit driven avatars justifying their decisions with a laser sharp focus on profits. Laid off workers, or workers paid below minimum wage are just a fact of life in the corporate structure. Things that were wrong as an individual (underpaying employees, avoiding taxes, buying legislative favors) are fair game in the pursuit of growth and profits. Why does society turn a blind eye to this behavior?? When will it be too much to accept causing the common folks to start the next revolution?

Posted by michaelryan | Report as abusive


Consider moving English up on your “list of study”. That’s “effect on society”, not “Affect”.

Corporations are but one form of business. Their “behavior” is the result of management decisions. Nothing more.

The “corruption of individuals” you speak of may well be merely normal maturity. In France there is a saying: “If you’re young and not a Socialist, you have no heart. If you’re older and still a Socialist, you have no brains.”

“When will it be too much to accept causing the common folks to start the next revolution?” You gonna take a megaphone to your local mall to distract all the shoppers there? The local grocery store? Movie? Of course not.

You want OTHERS to take the lead and do this. Please.

Posted by OneOfTheSheep | Report as abusive


Consider moving English up on your “list of study”. That’s “effect on society”, not “affect”.

Corporations are but one form of business. Their “behavior” is the result of management decisions, nothing more.

The “corruption of individuals” you speak of may well be merely normal maturity. In France there is a saying: “If you’re young and not a Socialist, you have no heart. If you’re older and still a Socialist, you have no brains.”

“When will it be too much to accept causing the common folks to start the next revolution?” You gonna take a megaphone to your local mall to distract all the “common folks” there? The local grocery store? Movie? Of course not.

You just want OTHERS to take the lead and do this while you sit in your air conditioned room typing nonsense. Please.

Posted by OneOfTheSheep | Report as abusive

I somehow disagree with author. Economics is a basic tool to better understand current societies. Anthropology, psychology, sociology, etc, have been far more distant from accurately predicting human behavior than economics.
Years ago I learned as a lesson that economic models are by nature a simplification of reality. Just as a 1:1 map defeats its purpose a model of society that includes everything that may matter is irrelevant. That would be a 1:1 map, or reality as we live it. Then, you can have 10:1 maps or 1000:1 or 100000:1. Each one of them would have a different purpose. If you want to see the distance between San Francisco and London what is the right map to use? Not a 1:1 map for sure.
What matters most is our choice as individuals in terms of what map is most useful for our purpose. Sometimes, an oversimplified macroeconomic model would give you an answer. Sometimes it won’t. But that doesn’t mean they have no purpose. It means as a society we’ve failed to recognize when to use them and when to stop from using them.

Posted by NEchevarria | Report as abusive

@OOTS: The use (and mis-use) of Affect and Effect are one of the top mistakes made in the English language. A recent study found that even English professors at leading universities have made this error from time to time… So get a grip, and loosen up your corset.

Posted by edgyinchina | Report as abusive

Mr. Hadas needs to start over… Go back to your freshman year of college, and retake Econ 101…. Maybe this time he’ll actually learn something about economics…

Posted by edgyinchina | Report as abusive

The very point of an economic model is that it is a simplification of reality. Just as a 1:1 map would defeat its own purpose, a model that includes every single detail of life is worthless. It actually has a name: reality.
Now, it is up to us to decide to use a 10:1 or a 1000:1 or a 100000:1 map. The model varies depending on what you are trying to achieve as an individual. Each model is good for one purpose, and in choosing it you understand you are giving up some details. Just as a map that would should how to drive from San Francisco to New York. You would have to miss many details in such a map.
Economics as a discipline has had much better results in explaining human behavior than other social sciences such as anthropology, sociology or psychology. It is up to us to decide on the basis of our best information which map to use at a particular time.

Posted by NEchevarria | Report as abusive

Thank You for an excellent article, Mr. Hadas! You summarized the problem perfectly. Every government – from community, to city, to county, to state/province, to regional, to national, to world must include social welfare and social conscience when deciding how and where to put OUR hard-earned money. This is the critical time in history to end the “winner take all through any means” mentality that has created such unimaginable wealth disparity around the world and begin a new model of wealth and well-being sustainability for all people around the world.

Posted by njglea | Report as abusive

Thank You, Mr. Hadas, for an excellent article! Yes, you summarized the problem perfectly. Governments at every level must weigh the social welfare first when making decisions about how to spend OUR hard-earned money. This is an exceptional moment in world history with enough knowledgeable people to demand a new model of economics where great discrepancies in wealth distribution are ended forever.

Posted by njglea | Report as abusive


So, by advising I “…get a grip, and loosen up [my] corset” you question that I duly consider and weigh those few clues available as to such evidence as might lend or deny credibility to a posted opinion? Well, so much for yours.

Then you suggest Mr. Hadas is wrong in stating the obvious, that “old school” economics is increasingly clueless when it comes to how to preserve or improve standards of living with stable or decreasing populations. So you deny the existence of these new and unsolved economic questions?

I understand where you’re “coming from”. You would deny an evolving future we must understand if we are to nudge it in a desirable direction, instead seeking the false comfort of an ignorant head in sand. No, thanks.

There is an old, old saying: “Consider the source”.

Posted by OneOfTheSheep | Report as abusive

You mangled your quote. It was Churchill about Communism not “France” about “socialism”

While supporting aspects of socialism, I agree with the original quote…many people do go through a phase of authoritarian moralizing and would like to see a brilliant vanguard of revolutionaries shake things up. Such fantasies are indeed the realm of children… and the Tea Party.

I am pretty sure Mr. Hadas knows a thing or two about economics, despite the ranting of some. In fact it doesn’t take a genius to figure out that so-called Free Market Economics is an exercise in politics designed by and for teh dominant economy in the world. Britain did it in the past (briefly) when they were on top also. But the ideology… No, the religious fanaticism of the current horde of economists hath spoken, and no heresy is permitted.

The USA was made great by pragmatism, not dogmatism. Now we would throw it all away to satisfy the tiny financier class at the expense of others.

IF you don’t understand what I am saying an easy-to-read primer is “23 Things They Don’t Tell You About Capitalism”, by a Mr. Ha-Joon Chang. Before you bitch, he is a capitalist who sets out to de-mythologize capitalism and point out that it is only the so-called free-market version that is causing the problems we now face, not capitalism itself

Posted by Benny27 | Report as abusive


Long time no see here. Your personal judgment that I “mangled” my quote is categorically incorrect. Out of curiosity (I pulled that quote from personal recollection) I used my Google browser window and inserted: “If you’re young and not a Socialist…”.

Fourth item down, none other than Reuter’s own Mark Leonard, on 12/20/2012, made the same reference I did. I’ve used it many, many times so I certainly didn’t get it from Mr. Leonard that recently.

It is not uncommon that good lines get recycled from time to time to address changing new issues as appropriate. With North Korea the last bastion of traditional Communism, the world will now watch the Socialist economies of Europe succumb to income/spending imbalance.

Posted by OneOfTheSheep | Report as abusive

No offense, I just know that it was an old Churchill quote. true enough about times changing, but I think it rather less relevant, as the difference between socialism (as practiced in Europe) and Communism is not exactly small. Churchill was thrown out of office by English voters to enact socialist measures, notably the NHS. For all it’s problems the English public still prefers NHS to the wild west health system in the USA.

In fact after a minute of research I owe you an apology and retraction. Politician that he was, I should have known Churchill stole it also… It turns out the oldest version of the quote is:
“The earliest known version of this observation is attributed to mid-nineteenth century historian and statesman François Guizot:
Not to be a republican at 20 is proof of want of heart; to be one at 30 is proof of want of head.”

It just goes to show how you get what you want out of these sayings… his view changes it around significantly, doesn’t it?

Regardless, socialist democracy is not done yet. Even the good USA uses certain collectivist actions that derive from socialism, such as public fire brigades and public libraries. I certainly am glad to have both available for “free” rather than pay out of pocket for what I get out of it.

Furthermore, I stand by my original point, that pragmatism is becoming of the land of the free, and clinging to a dogma, be it so-called free market capitalism or socialism or anything else. I suspect people appreciate public libraries for their usefulness, not for the ideological commitment people have to solidarity and class struggle 😀 Have a good one until next we meet.

Posted by Benny27 | Report as abusive

….or anything else is harmful.

(correction to my last paragraph)

Posted by Benny27 | Report as abusive