Without doubt, a growing number of people and institutions are expressing discomfort with the performance of economics in the face of concrete human problems and challenges
ADEREMI MEDUPIN
A Hard Subject to Be Handled with Care
I will open this discussion by referencing an admirer of one of the foremost American economists with very progressive orientation, Paul Baran. That admirer, Howard Sherman, made a point in his July 1, 2012 article, titled: “Two Pauls”- in reference to the two giant intellectual soul mates, Paul Baran and Paul Sweezy-published in Monthly Review which ran as follows:
I think every radical economist should work hard at being as clear and simple as possible, while working on the hardest problems. The object of radicals should not be to impress colleagues with their brilliance. Rather, the purpose should be to communicate important views to as large a grassroots audience as possible.
The need for this invocation of Howard Sherman arose from the nature of our theme which, unless carefully handled and appropriately simplified may suffer a miscarriage through an unintended misrepresentation by not caring to make it simple. I insist on not losing you, my dear reader on this important, perhaps even hard, subject which is to decide where the blame for economic crises truly lies-historically and in contemporary times. Let us start by illustrating the essence of economic crisis.
Explanations of Economic Crisis
A simple definition sees economic crisis as a situation in which acountry’s economy deteriorates significantly. Among economists, a distinction is made between two technical terms both of which are general descriptions of economic crisis, namely: recession and depression. Whereas the former is milder than the latter and refers to a situation where a country’s GDP falls over two consecutive quarters, depression is more acute as it refers to a situation of falls in GDP over a more extended period.
Notwithstanding the applicability and measurement of these technical terms, a more pragmatic approach to defining economic crisis is at two levels: the first and simpler one is when the standard macroeconomic objectives become elusive-here, I refer the reader to imperatives of rapid economic growth, full employment, stable prices, external balance and equitable income distribution. The higher level of viewing economic crisis is of course the overall imbalance between the potential productive capacity of an economy on one hand and its actual realization on the other. Interestingly, at neither level are economists agreed on the underlying causes and possible solutions. Indeed, in some instances, economists compound the problems with unrealistic perspectives-but that’s for another section.
Limitations of Mainstream Definitions and Explanations
The overall weakness of mainstream economics on the subject of economic crisis both in terms of definition and cause is the inability or failure to grasp the inner logic of the economy of interest. The impression one gets on the surface is as if mainstream economists are blindfolded. However, the truth lies somewhere more foundational as clinically exposed in February 2013 by the Editors of Monthly Review when they averred that:
For a long time now orthodox economics has been hindered by its extreme irrealism—a refusal even to attempt a realistic theoretical understanding of how modern capitalism functions. The shift to using fanciful assumptions to explore largely minor issues, following a brief Keynesian moment in the post-Second World War era, has been in many ways self-reinforcing. Once fundamental characteristics of the capitalist economy such as labor exploitation, accumulation, built-in inequality, monopoly power, rent-seeking behavior, technological change, and the tendency to stagnation were removed from the analysis—as a result of an ideological process of system-rationalization—there was little recourse but to fall back in successive stages on more and more abstract models based on increasingly purified notions of individual rationality.
In his piece, “Marxian Economics: Definition, Theories, Vs. Classical Economics” shared on the platform of investopedia on January 16, 2021, Daniel Liberto showed clearly how schools of economic thought differ and depart, citing the specific case of the two schools featured in headlines above, summing up the situation as follows:
Marxian economics is a rejection of the classical view of economics developed by economists such as Adam Smith. Smith and his peers believed that the free market, an economic system powered by supply and demand with little or no government control, and an onus on maximizing profit, automatically benefits society. Marx disagreed, arguing that capitalism consistently only benefits a select few. Under this economic model, he argued that the ruling class becomes richer by extracting value out of cheap labor provided by the working class. In contrast to classical approaches to economic theory, Marx’s favored government intervention. Economic decisions, he said, should not be made by producers and consumers and instead ought to be carefully managed by the state to ensure that everyone benefits. He predicted that capitalism would eventually destroy itself as more people get relegated to worker status, leading to a revolution and production being turned over to the state.
It is pertinent to note that this radical position of Marxian economics understandably made the capitalists and many conservative intellectuals very uncomfortable, leading as a first reaction to their hostile reaction and rejection and the resort to alternative, more capitalist-friendly theories. However, although mainstream economists and commentators once dismissed Marx’s work as outmoded and flawed, some are begrudgingly acknowledging an analysis that sees capitalism as inherently unstable.
There is an interesting but hidden message of importance in a comment made by the Jaypee Brothers when they recalled how, “during early days, Economics was called Political Economy as it was applied by famous kings to govern the state or city. Prof. Alfred Marshall, a famous economist, first used the term Economics instead of Political Economy. The use of the term Economics results in two advantages according to Sir Dennis Robertson – (i) the termination –ics indicates that our study is or aspires to be a science, like Physics, Dynamics, and so forth, and (ii) the dropping of the word ‘Political’ emphasizes that our ultimate concern is with individual human beings, not with states”.
Later, at the definitional level of clarification, the Jaypee Brothers made the equally interesting point that: At present, there are four definitions of economics, namely:
1. Wealth Definition: Adam Smith is the first Economist who defined Economics and hence is regarded as Father of Economics. According to Adam Smith “Economics is a science of Wealth”. Economics was regarded as the science which studied the production and consumption of wealth. He actually wrote a book titled: “An enquiry into the nature and causes of wealth of nations” popularly known as “Wealth of Nations” published in 1776. The other classical thinkers have supported the views of Adam Smith include JS Mill, to whom economics is “the practical science of the production and distribution of wealth.” Also, according to J.B. Say Economics is “the science which treats wealth.”
2. Welfare Definition- Prof. Alfred Marshall was the first economist who lifted the science of Economics from the morass into which it had fallen towards the close of the 19th century. He authored a book, “Principles of Economics”, which was published in the year 1890Marshall shifted the emphasis from ‘Wealth’ to ‘Welfare‘. According to him wealth is not an end but only a means to an end, the end being human welfare. Apart from Marshall's definition, there are other prominent Economists who have tried to define Economics in Welfare terms. For example, to Edwin Cannan, “The aim of Political Economy is the explanation of the general causes on which the material welfare of human beings depends.”
3. Scarcity Definition- The Scarcity Definition of Economics was advocated by Prof. Lionel Robbins. In his book – “An Essay on the Nature and Significance of Economic Science” published in 1932, Robbins initiated an altogether fresh controversy regarding the definition of Economics. Till then, Marshall’s definition had been accepted as a final definition of Economics. The book published by Prof. Robbins made some economists to change their faith in the old, traditional definitions of Economics. According to Prof. Lionel Robbins, “Economics is the Science which studies human behavior as a relationship between Ends and Scarce means which have alternative uses.” The scarcity definition of Robbins was supported by many Economists. Thus, according to George Stigler, “Economics is the study of the principles governing the allocation of scarce means among competing ends, when the objective of allocation is to maximize the attainment of ends.” Similarly, Prof. Cassel defines Economics as “the science of scarcity.”
4. Growth Oriented or Modern Definition of Economics- In the words of J.M Keynes, “Economics studies how the levels of national income and employment in the community are determined and how the national income grows over years.” In the same vein, Prof. Benham says, “Economics is the study of the factors affecting the size, distribution, and stability of a country's national income.”
Given the popularity of the scarcity definition of economics as the base of mainstream economics, a word or two needs to be entered as footnote. To start with and as observed by objective commentators, the scarcity definition is too narrow and restricted in scope for a social study like Economics. The rendition effectively divests Economics of ethical considerations. This divestment is what led to the isolation for recognition of so-called positive economics, the essential title of Richard Lipsey’s text very popular in our undergraduate days. In the scarcity definition a la Robbins, “the human touch is entirely missing”. But, as Prof. Boulding noted, “Economics is not merely a study of scarce resources but also of human welfare because welfare is an end in itself.” According to critics of the scarcity definition, an economic problem does not always arise from scarcity as suggested by Prof. Robbins; it can arise from abundance also. For example, during the 1930s, the USA faced Great Economic Depression not because of scarcity of resources or goods and services but because of abundance of goods (over production of goods and services on over anticipation of profits resulting in over investment activities) which created economic problem for governments in various capitalist countries of the entire world. Also and more generally, during floods, abundance of water destroys agricultural crops, human settlement, etc. Sometimes farmers face deflation and incur losses due to overproduction.
Furthermore, there’s the major defect of scarcity definition which is that it suffers from inadequateness. As critics have pointed out, the definition of has taken an entirely static view of the scarcity problem in the sense that it admits no possibility of a change taking place either in the means or in the ends. Of course, this is a highly static and rigid view of a dynamic reality. In the present dynamic economy, the ends and the means are subject to change. In other words, there is possibility of ends changing or means undergoing a process of growth and development in course of time. But these aspects are ignored by Prof. Robbins in his definition-and it is evident the deluge of intellectual rainfall started here.
Where the Rain started beating Economists
Prof. L Robbins in his book, “An Essay on the Nature and Significance of Economic Science”, regards economics as a pure science of “what is”, which is not concerned with moral or ethical questions. To him and his ilk, Economics is neutral between ends (wants). In this perspective, the economist has no right to pass judgment on the wisdom of ends itself; he is simply concerned with the problem of scarce resources in relation to the ends desired. But economics is also a normative science, concerned with ‘what ought to be’. As a normative science, economics is concerned with the evaluation of economic events from the ethical viewpoint. Prof. Marshall, AC Pigou, Prof. Frazer and many other economists do not agree that economics is only a positive science. They argue that economics is a social science which involves value judgments and value judgments cannot be verified to be true or false. This can be proved on following grounds: (i) The assumptions on which economic laws, theories or principles are based relate to man and his problem; (ii) Economics being a social science, economic theories are influenced by social and political factors. In testing them, economists are likely to use subjective value judgments; and (iii) In natural sciences experiments are conducted which lead to the formulation of laws, but in economics, such controlled experimentation is not possible.
Transcending the Mainstream Blindness and Creating a Happier World
Perhaps the most direct exposure of the limitation of mainstream economics in its understanding of the nature of economic crisis is the offer by Peter Seybold, Indiana University/Purdue University, Indianapolis in his “The Endless Crisis reviewed in Socialism & Democracy”, published in July 2013 edition of Monthly Review where he argued that:
Since the Great Recession hit the US in late 2007 there have been competing understandings of the nature and causes of this devastating economic crisis. Mainstream economists have struggled to explain what caused it and what measures are necessary to revive the economy. As Paul Krugman noted in the New York Times Magazine, the majority of mainstream economists did not anticipate such a catastrophic event. Trapped by questionable assumptions, mathematical modeling, and ideological blinders, they neither foresaw the crisis nor could account for its magnitude.
What is of greatest concern to me is the cavalier attitude of otherwise respectable economists to the relevance of their discipline as they harp on its scientific status in a carefree manner. On this, Michael D. Yates in a 2011 review article covering three books titled, “The Emperor has no clothes but still he rules” drew attention to the tendency whereby:
Economists have taken certain scientific concepts (such as equilibrium, stability, efficiency, feedback loops) and certain mathematical and statistical techniques and notions (such as calculus, probability, normal distribution, randomness, independence) and applied them to society in ways both inappropriate and simple-minded. Each of these writers concludes that, while economics has scientific pretensions, it is primarily an ideology that supports the interests of the rich and powerful, and in the process, confers prestige, influence, and money on its practitioners.
It is this kind of derailed understanding of the essence of the discipline of economics that informed David Orrell, a Canadian writer and mathematician, in 2010 to come up with the text, “Economyths: Ten Ways Economics Gets it Wrong”. In the work, Orrell “showed how mainstream economics is based on key myths such as fair competition, rational behaviour, stability and eternal growth”. A reviewer described the book as “a brave effort at debunking the neoclassical economic framework that is taught in undergraduate courses . . . it reveals ten ways in which economics has failed us all”. In a similar mood of disenchantment with neoclassical economics, Yanis Varoufakis, Joseph Halevi, and Nicholas J. Theocaratis in their Modern Political Economics, show us, according to its reviewer, “in superb detail how economists have constructed a model of the capitalist economy that assumes it is exactly analogous to a flawlessly operating machine system”. In their words:
Neoclassical economists assume that society is made up of independent, self-interested, and all-knowing human beings, who come together in marketplaces over which they exert no control, and all at once arrive at agreements in such a way that every market clears. That is, a price is established at which the supply of every single commodity equals the demand for it. Furthermore, the general equilibrium achieved is one of maximum social efficiency. It is what economists call “Pareto efficient,” after the Italian economist Vilfredo Pareto; it describes an equilibrium such that no change away from it can make at least one person better off without making anyone else worse off. Such an economy bears no resemblance to any actual existing economy, nor could it. There is no money in it, no government, no notion that there is a natural world in which production occurs, no workplaces. It is constructed in abstraction from the distribution of wealth and income. It is like a Georgio de Chirico painting, timeless and idealized. Yet, in an act of stunning legerdemain, neoclassical economists employ this imaginary model as if it were the ideal system of production and distribution, the only one that can be used to judge how well any contemporary capitalist economy is performing.
In the book, according to its reviewer, ‘“the authors argue that the failure of mainstream economists either to see that an economic collapse was coming or to know what to do about it was due in large part to what they call “lost truths” and “inherent errors.”’
Without doubt, a growing number of people and institutions are expressing discomfort with the performance of economics in the face of concrete human problems and challenges. In this vein, Ladislau Dowbor, in the piece, “A derailed economy: Overview from Brazil”, published on the platform of Latin America in Movement on August 25, 2020, reported how:
Pope Francis called on a global meeting in 2020 to address a new economy, symbolically named the Francesco Economy. The proposal is associated with the views of Saint Francis of Assisi. The city of Saint Francis where the meeting was to be held. The discussion of the proposed issues, basically “another economy”, gave rise to a broad movement by portions of different religious and non-religious communities. The tenet that the economy should serve society and not the other way round is resonating deeply within people. We live in an era of staggering uncertainties and the pursuit of new models. The current system, based on individual profit maximization and deregulated corporate giants, is simply not working. . . The challenge is not a lack of resources. The world currently produces US$85 trillion in goods and services per year, which, soundly distributed, would guarantee US$3,700 per month per family of four. Our problem is not our production capacity but knowing what, to whom, and with how much environmental impact we produce. The real challenge is the system’s governance, a technical challenge, doubtlessly, but above all an ethical and political one. Our problem is not strictly economic, it basically a problem of political and social organization. We must change the rules.
What else can one add but just to draw attention to the role of major global institutions in promoting the suffocating economic model here above torn to pieces.
Practical Lessons from IMF and World Bank
Unexpectedly but gladdening, in October 2023 ActionAid published a 29-page report titled, “Fifty Years of Failure –The International Monetary Fund, Debt and Austerity in Africa”; a section of its introduction contains the following:
“ . . . in practice the IMF’s insistence that countries prioritise debt repayments, rather than seeking a systemic solution to debt, is a major obstacle to spending on health, education and climate action. Globally six billion people are now facing austerity, largely owing to the IMF’s reluctance to accept that its economic model has failed . . . . It is important to understand the coloniality of the IMF and World Bank, which were created before most African countries were independent and which have voting structures that remain largely unaltered. African countries still have very little say in decision-making in the World Bank and the IMF with less than a 10 percent vote share in the IMF board - and the 46 countries in sub-Saharan Africa are represented by only two executive directors.”
Two important messages are conveyed in the above observation, namely: first and main-the policies of the international financial institutions have had disastrous effects on the developing countries especially across Africa that have implemented the twin institutions’ recommendations. The relevance of this point comes from the intellectual roots of the recommended policies-essentially liberal ideology of neoclassical economics. On this note, the thesis that ‘bad theory, like bad medicine, can kill’, registers forcefully. The second message conveyed is the undemocratic structure and operations of these institutions and which says a lot about the imperialistic character of the prevailing global economic order supervised by the USA and aided by its West European allies and Japan. It is reassuring that ActionAid researchers realize that Africa having greater representation on the boards of the international financial institutions is only a step in the right direction but not the desired destination; this realization is clear from the entry that: “But getting a better seat at the table will not be enough until the fundamental ideology that drives the institution is transformed in practice. That transformation would have to include prioritizing development over debt repayments, shifting definitively away from austerity and fiscal fundamentalism, and advancing progressive alternatives”.
To summarize the foregoing sections, specific schools of economic thought have propounded and pushed theoretical positions which inform the policies of governments in various parts of the world and over time, most of them ending in disasters. In other words, the economic crises that mankind has witnessed historically can be traced to either failed or misguided economic perspectives. Inevitably, the enactment of the regimes of inappropriate economics at the respective nation-state levels has been globalized through the operations of the imperialist institutions of IMF, World Bank and World Trade Organisation-resulting in the perpetuation of the underdevelopment of formerly colonized economies of Asia, Latin America and especially Africa. I come in peace, please.
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