In Defence of Economics part 2

This week I had a post up on the Guardian blog in response to Suzanne Moore’s bizarre attack on the field of economics- there was a variety of interesting responses on twitter, but one irritation that kept appearing was this piece claiming to identify 8 elementary errors of economics 

Only one of them seemed remotely valid- see for yourself:

• The measure of success is growth of the Gross Domestic Product.

Economists developed this measure, but it is a very rough tool and its limitations are acknowledged by the field. If politicians over rely on it, that does not say anything about econ as a field of study. Does the fact that life expectancy makes no measure of quality of life invalidate medicine?

• Clear evidence of poor performance is ignored. Growth, unemployment and inflation measures in the neoliberal era, since 1980, have never been as good as those in the 1950s and 1960s, when governments involved themselves substantially in the economy.

In the fifties and sixties the economy was better in the West only- by being so far ahead of other countries it was easy to out-compete. Most countries will not remember this period as a golden era. Now as development raises capabilities and living standards across the world Western workers are less in demand.

• Money and debt are excluded from economic models. I’m not making this up.

You are making this up. There are plenty of economic models which deal with debt and the money supply. What is true is that printing money is not counted as evidence of productivity or development- otherwise ZImbabwe would come top of development indices.

• Modern free-market theory, called the neoclassical theory, predicts the economy will always be close to equilibrium. If that were true it should tick along steadily and sudden changes should only occur in response to large external events like natural disasters or wars. Yet many times over the past two centuries financial markets have suddenly collapsed without any external cause. Some of the more recent examples occurred in 1987, 1997, 2001 and 2007. In 1987 stock prices dropped by 30-40% in a day, though thirty percent of the world’s factories had not been bombed overnight.

Stock prices are the cumulative predictions of all participants in the market. If there is widespread disinformation or ignorance which changes quickly then participants’ predictions will also change quickly. It could have nothing to do with the physical infrastructure, as this is only one aspect of the expectation of performance.

• The neoclassical theory is based on assumptions that are patently absurd or clearly shown by other disciplines to be untrue. Among the patently absurd, it is assumed our collective guesses about the future are accurate, yet people in 1890 could not have conceived how aeroplanes, two world wars, nuclear weapons, computers and digital communication would radically transform the world.

Evidence? Who assumes our collective guesses about the future are accurate?

• Economists assume there are no economies of scale beyond a point of diminishing returns, ignoring the lesson of Henry Ford’s assembly lines. Economies of scale allow the biggest firm to undercut other firms and grow faster, until it dominates a market. The existence of many such dominating firms, such as Microsoft, McDonald’s and Facebook, is also ignored.

This is the most nonsensical point. If you think that economists have ignored Henry Ford, you are misinformed. What you are saying is that the big companies you name did not reach the point of diminishing returns. If you can understand that at some level of car production between zero cars per year and infinity cars per year, it would become more difficult to produce each additional car (for example, when every acre of land is already covered in car plants) then you too, assume that there are no economies of scale beyond a point of diminishing returns, just like those foolish economists.

• It is assumed that people are innately individualistic and competitive, but psychologists have clearly documented our tendency to favour cooperation by punishing cheaters, even at a personal cost. Almost every mammalian species lives in groups, and social groups have an innate, and healthy, tension between individualism and cooperation. Most people understand they are better off if they balance their own wishes with those of their family and community.

Now in balance this is probably more valid- levels of cooperation differ widely between societies and are strongly correlated with economic success and political stability (compare Norway with Greece). There are economists studying these effects but there is a lot of political pressure to not look into this area as it has major implications for immigration and development policies.

• It is assumed we are coldly “rational” calculators, yet we are obviously strongly motivated by love, envy, fashion and insecurity, and marketers ruthlessly exploit these foibles. Psychologists have also clearly documented our tendency to other “non-rational” behaviours such as being risk averse. Neither the fashion industry nor the marketing industry would exist if economists were right.

In what sense would anybody regard ignoring somebody that you love as ‘rational’? The motivations from your goals are different to the means by which you go about achieving them. Most people are pretty rational about how to spend their money to maximise the benefits, whatever their motivation is. I would also query that risk aversion isn’t rational- it is simply a preference which people express with their spending.


This link was being sent around by people who really ought to know better. There are criticisms to be made of any field, but surely we can do better than this?

You should write what you think about this here, especially if you disagree- help smash my media bubble!

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