Economics in crisis

Recent debate has centred on the current state of economics as a discipline. Some have accused economics of not being a "science" due to its lack of predictive success. This is an old argument that betrays a narrow view of what science is. This line of criticism has drawn a sharp response from some economists. 

Others go in a different direction, identifying the problem in economics with the sociology of the economics profession. Paul Krugman writes that:

 "the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions and uses hard math instead".

Below I reproduce a piece I wrote on the crisis (or more non-crisis) in economics. I argue that while many economists have come to endorse progressive policies they have simultaneously accepted essentially the same approach to economic theorising. There has yet to be any revival in heterodox economics. Indeed heterodox economics remains essentially locked-out of mainstream economics debates, this despite the need for alternative economic thinking and economic policies in the wake of the worst economic crisis in living memory.  

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The academic discipline of economics ought to be in crisis. Its reputation has been severely damaged by the financial crisis. The implosion of finance and the slowdown in economic growth has left economics floundering. Economists have routinely assumed that markets work more or less perfectly and have assumed away the possibility of crisis. These assumptions betray an economics that is out of touch with reality and in need of revision.

Yet in several ways mainstream economics is continuing as if the events of recent years had never occurred. Its approach to research and key underlying theories remain essentially the same as before the financial crisis. The radical thinking that those outside economics might have hoped and expected to develop has not materialised: rather economics has been hemmed in by the standards and conventions of the dominant neoclassical paradigm. It has been business as usual in academic economics: no fundamental change in the economics profession, no fundamental change in economics journals, and no fundamental change in the economics curriculum.

Economics is more diverse than in the past, to be sure. Developments such as information-theoretic economics and behavioural economics have opened up economics to new thinking. Such research led by economists such as Joseph Stiglitz and George Akerlof has provided a platform for economics to extend its reach and potential influence across the social sciences. But economics has evolved according to the strictures of its dominant theory and method. Behavioural economics and other new perspectives bear the imprint of neoclassical economics. These perspectives reject the assumptions of perfect information and perfect rationality, but at the same time retain other core aspects of orthodoxy at least in part such as the concept of individual optimising behaviour and, more generally, the insistence upon methodological individualism and mathematical formalism. They also draw on other social sciences in a manner that fits with the framework of neoclassical economics: for example, the psychological and social dimensions of behaviour are incorporated into the utility maximisation model, and models of individual behaviour are estimated using econometric methods. Interdisciplinary research is then pursued with a view to extending, at most modifying but not otherwise questioning, neoclassical economics. Research has had to take this form in order to get published in top economics journals and gain access to the profession. Compliance with set codes of behaviour has stifled real dissent.

What economics refuses to do is give a voice to heterodox economists. Heterodox economics spans a variety of approaches including “old” institutional economics, post-Keynesian economics, feminist economics, and Marxian economics. These diverse and sometimes conflicting perspectives have for many years offered an approach to economics that situates the economy in a broader social, historical, and political context with greater attachment to realism. They have by their nature and often by their design sought to develop links with other social sciences and to push economics in a more interdisciplinary direction.

Academic economics continues to operate as if heterodox economics does not exist. It marginalises rather than confronts dissent towards neoclassical economics. Alternative thinking is permitted as long as it accepts and uses the same formal and individualistic method and set of concepts. Economic journals continue to publish the same kind of work and offer no place for alternative schools of economic thought. Economic degrees at all levels are relatively narrowly defined – neoclassical economics still defines the core of the economics curriculum – and economic students leave university with no real knowledge of the history of economic thought and economic history.
On economic policy, economists can sound progressive and even radical. Many mainstream economists have taken a stance against austerity policies, for example. But this dissent is to be set against their acceptance of the status quo within the economics profession. Academic economics remains closed to thinking other than that which supports or extends neoclassical economics. Those defending a progressive politics may at the same time defend a non-progressive and closed economics. Dissent within politics coexists with conservatism within academia.

Yet, there remain tensions in the development of economics. As economics reaches out to other social sciences, its insistence on a barren core of methodological individualism, mathematical formalism, and individual optimisation is exposed to those who have long recognised that the real social structures, institutions, and norms that shape economy and society cannot be reduced to an individualistic methodology. The outward expansion of economics – or process of “economics imperialism” – opens it up to criticism from other social sciences who do not accept its ideas and method.

It is here where heterodox economics has an opportunity to develop and progress. It offers the potential both to stem the tide of economics imperialism and to build a better economics that is more applicable to the real world. Heterodox economics can reach out to other social sciences in ways that are not possible with recent developments in economics. Indeed, it can aid other social sciences in deflecting and contesting economics imperialism and more constructively can help to craft a different foundation for interdisciplinary research. Heterodox economics has much to offer other social sciences, not least in terms of the theorisation of the place of the economy in wider society, but also in respect of its openness to different methods and support for a critical research and policy agenda, that recognises the irreducible efficacy of social structure and the weight of history.

But after years of marginalisation of heterodox economics, and of the separation of economics from the social sciences, an alliance of heterodox economics and other social sciences is not an easy task. It cannot be achieved within economics given the current narrowness of the economics discipline. It is better achieved outside of economics where debates on economic matters and economics are ever more pressing. History, sociology, politics, and human geography offer potentially fertile ground for a renewed “political economy” approach that can fuse the insights of heterodox economics with those of other disciplines and mount an exciting alternative to mainstream economics.

What is ultimately needed, then, is for economics to give way to political economy, where “political economy” denotes an open and interdisciplinary approach to the economy, one that considers society and history as a matter of course and one that integrates the insights, methods and concepts of other social sciences with heterodox economics. The renewal of a political economy approach is particularly germane at the present time given the heightened concern within other social sciences of the economic realm and economic reasoning, considering the pressure on other social sciences to confront and understand the nature and impacts of the crisis and austerity policies. The challenge for modern-day advocates of political economy is to meet this demand drawing on expertise that still exists in heterodox economics and catalysing critical resources within other social sciences. A renewed political economy remains essential if we are to understand better the functioning, development, and crisis-prone nature of modern capitalism.