The End of Economics
Part One: Dreams of Being a Science Led to Irrelevance
Forty years ago today, any student who enrolled in an undergraduate degree at the Faculty of Economics at Sydney University in 1971 had to complete four year-long courses in economics, out of a total of ten such courses: Microeconomics and Quantitative Methods in the first year, Macroeconomics in the second, and International Economics in the third.
Now in 2011, the Faculty of Economics and Business evicted the economics discipline into the Arts Faculty, and the economics-free entity renamed itself as University of Sydney Business School. There is now just one compulsory semester-long economics subject (Economics for Business Decision Making) in any Bachelor of Commerce degree at Sydney University, out of 24 such subjects – and that pattern is replicated across the globe. Economics has declined from 40 percent of any business-oriented degree to 4 percent in 40 years. For a profession obsessed with linear regression, it has suffered a near-perfect linear regression of its own.
That 40-year decay coincided with my 40-year career in the university sector – though I think this is a clear case of correlation rather than causation. I started out as a True Believer in what I didn’t even know was neoclassical economics when I began my Arts/Law degree at Sydney University in 1971. In 2013 – 40 years after I graduated from the Arts degree – I ended up as the world’s most famous unemployed economist. And from the outset of my days as a radical in economics, I could see this end game coming. Though I certainly didn’t anticipate my own redundancy (or that of 12 of my colleagues) at UWS, it was obvious that economics was on a hiding to nothing to collapse from the heart of any business degree to its appendix.
The reason is simple: neoclassical economics (and neoclassical economists) annoy the hell out of most other business academics. They have a ‘holier than thou’ attitude about the intellectual rigor of economics versus the wishy-washy (marketing) or mechanical (accounting) nature of other disciplines, and they frankly think that some (if not all) of these other disciplines are simply unnecessary.
In a dialectical reaction, many of their looked-down-upon companion subjects in business faculties evolved precisely because economics deigned their topics to be unimportant. The real-world needs of business (as well as some of the delusions of managers) gave rise to a panoply of business subjects whose practitioners returned in kind the contempt of the economists. By the early 1970s, the academics in these ‘inferior’ disciplines already outnumbered the economists, and as they grew in number, the contest for the scarce core units in business degrees intensified.
By alienating all their rivals, economists were on a hiding to nothing to be driven towards extinction. When it came to a vote at faculty level about what subjects were needed in a given degree (in the days when academics enjoyed a modicum of democracy), the hopelessly outnumbered economists would assert the centrality of economics to any business degree.
Their fellow faculty members would listen and nod – and then vote economics down.
I saw this firsthand when, as the two most prominent student activists in the ‘Day of Protest’ revolt at Sydney University in 1973, Richard Osborne and I were invited to speak to the Faculty of Economics about the proposal to investigate the Department of Economics. We spoke strongly in favour of the motion – as did Frank Stilwell, Evan Jones, Gavan Butler, Jock Collins, and several staff from other disciplines. We awaited the rejoinder from Hogan and Simkin, and when it came, it was devastating – to their own cause.
Simkin spoke on both their behalves. He noted that in 1969, when there had been a serious dispute in economics, it had been preceded by one in philosophy. Now in 1973, there was a serious dispute in economics, and yet again it had been preceded by one in philosophy.
That was it. We waited for the punch-line – correlation proving causation with a perfect linear regression between disturbances in philosophy and copycat actions in economics – but Professor Simkin evidently regarded making that deduction as an exercise for the remainder of the faculty. Neither he nor Hogan said another word.
I ended the awkward silence that followed by noting that, even though the correlation was correct, it did not explain why the copycat effect always occurred in economics – rather than in, say, Italian. There was something endogenous to the tribulations in economics, and they deserved investigation.
The dean handed out the secret ballot forms, and the vote was taken. He announced the score: 24 to 14 in favor of investigating the Department. Richard and I and the soon-to-be political economy staff were jubilant – as were most of the faculty – and we poured out of the boardroom in loud celebration.
As we headed towards the stairs down to the main quadrangle, I glanced back at the boardroom to see that Simkin and Hogan were still sitting, immobile, back in the boardroom. Not only had they not left their chairs, they had not moved – nor were they talking to each other. They simply sat there stunned, staring into the space in front of them, in obvious and profound shock. They had clearly not even entertained the prospect that the vote might go against them.
That was the first of many votes that neoclassical economists were to lose from that time on – and not only at Sydney University. Faculty after faculty across Australia and the globe voted to progressively reduce the compulsory economics content of business degrees. And the neoclassical economists never changed their tactics – or rather, the lack of them. They never considered that they might need to alter their product – that would be too much like market research. Nor that they should perhaps lobby the other disciplines – that would be too much like politics.
Instead, the purity of the science was defended at every challenge – even as the diminishing time devoted to it resulted in a trivialized tuition replacing rigor. The other disciplines whose votes held the fate of economics in their hands continued to be disparaged and regarded as interlopers, who themselves should be expunged from university – even as the economists were the ones who were effectively being expunged.
The situation did not improve when managerialism replaced academic democracy, because the law of large numbers alone guaranteed that the bureaucratic overlords in business faculties would be drawn from almost any discipline other than economics. What was once done by the ballot was now done by decree (after, of course, due consultation), and the final result was that economics found itself expelled from what once were faculties of economics – and in the worst instances, abolished altogether – with a single first year subject preserved solely because accounting standards require accountants to take at least one unit of economics.
What a dismal fate for the dismal science – the more so because it was so largely self-inflicted. If economics had been capable of reinvention in response to its unpopularity – as well as in a sane response to the discovery of its many internal logical and empirical contradictions – it could have preserved itself as a vital discipline. It perhaps could have even re-assimilated those competitor departments that its rarefied definition of economics had conjured into being.
But that did not happen. Schumpeter lives today in management departments rather than economics (though these days they cite Porter instead), precisely because neoclassical economists excluded him from the canon. Marketing evolved because economists disparaged the task of trying to find out what rational consumers must already know anyway. Operations research developed because economists knew that calculus was all one needed: this Deming process control stuff was meaningless, given the immutable law of diminishing returns.
As it failed to adapt to its internal and external problems, the good ship equilibrium crashed into iceberg after iceberg, yet refused to change course. A critic of neoclassical economics might have enjoyed this self-destructive irrationality by the champions of rational foresight, had the misfortunes of the orthodoxy led to better conditions for the heterodox. But they did not. Instead, for critics of the orthodoxy, every day felt like Groundhog Day as an iceberg spotter on the Titanic. Our neoclassical captain would crash into one iceberg, and then almost go searching for the next one, all the while ignoring that the once grand ocean liner was progressively being whittled down to a dingy via the death of a thousand cuts.
Though heterodox economists heartily agreed with the dismissive attitude towards neoclassical economics that academics from other business disciplines displayed, the non-neoclassical approaches to economics that we hoped to develop were instead collateral victims of the academic self-immolation of neoclassical economics.
As the number of subjects and students taught by economics departments diminished, the room to tolerate dissidents within economics itself declined, from barely above zero to well below. Some departments – such as my own at UWS, under the leadership of Brian Pinkstone and then John Lodewijks (who themselves built on a tradition of tolerance towards alternative thinking already established by Colm Kearney and Raja Junankar) –kept the pluralist flame alive, despite the declining number of economics units in business degrees. But in a global phenomenon, the decline of neoclassical economics at the faculty level was mirrored by the elimination of the few non-neoclassical options within the economics degree itself. The descendants of Jevons, Marshall, and Walras responded to the failures of their dismal anti-marketing of their own brand of economics by throwing the descendants of the rival brands of Ricardo, Marx, and Schumpeter into the abyss ahead of them.
But as the 20th century closed, neoclassical economists were still exultant: they might be losing the academy, but they were winning everywhere else. The clearest statement of this triumphalism appeared in a 1999 paper literally entitled “Economic Imperialism” by Ed Lazear, who later would become George W. Bush’s chief economic adviser: "Economics is not only a social science, it is a genuine science. Like the physical sciences, economics uses a methodology that produces refutable implications and tests these implications using solid statistical techniques. In particular, economics stresses three factors that distinguish it from other social sciences. Economists use the construct of rational individuals who engage in maximizing behavior. Economic models adhere strictly to the importance of equilibrium as part of any theory. Finally, a focus on efficiency leads economists to ask questions that other social sciences ignore. These ingredients have allowed economics to invade intellectual territory that was previously deemed to be outside the discipline’s realm."
And then the economic crisis in 2007 upset the economic applecart.
Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program. This article is the first in a three-part series on the end of economics, and is reprinted with permission from the author.