Neoclassical economics has become an unquestioned belief system and treats those challenging the creed as dangerous
In October 1517, an unknown Augustinian monk by the name of Martin Luther changed the world when he grabbed a hammer and nailed his 95 theses to the door of the Castle Church in Wittenberg. The Reformation started there.
The tale of how the 95 theses were posted is almost certainly false. Luther never mentioned the incident and the first account of it didnt surface until after his death. But it makes a better story than Luther writing a letter (which is what probably happened), and thats why the economist Steve Keen, dressed in a monks habit and wielding a blow up hammer, could be found outside the London School of Economics last week.
Keen and those supporting him (full disclosure: I was one of them) were making a simple point as he used Blu Tack to stick their 33 theses to one of the worlds leading universities: economics needs its own Reformation just as the Catholic church did 500 years ago. Like the medieval church, orthodox economics thinks it has all the answers. Complex mathematics is used to mystify economics, just as congregations in Luthers time were deliberately left in the dark by services conducted in Latin. Neoclassical economics has become an unquestioned belief system and treats anybody who challenges the creed of self-righting markets and rational consumers as dangerous heretics.
Keen was one of those heretics. He was one of the economists who knew there was big trouble brewing in the years leading up to the financial crisis of a decade ago but whose warnings were ignored. The reason Keen was proved right was that he paid no heed to the equilibrium models favoured by mainstream economics. He looked at what was actually happening rather than having a preconceived view of what ought to be happening.
Somewhat depressingly, nothing much has happened, even though it was a crisis neoclassical economics said could not happen. There was a brief dalliance with unorthodox remedies when things were really bleak in the winter of 2008-09, but by late 2009 and early 2010, there was a return to business as normal.
The intellectual monopoly is something of an irony given how central the idea of competition is to orthodox thinking, but it is a sad fact as the preamble to the 33 theses notes that the neoclassical perspective overwhelmingly dominates teaching, research, advice to policy, and public debate.
Many other perspectives that could provide valuable insights are marginalised and excluded. This is not about one theory being better than another, but the notion that scientific advance only moves ahead with a debate. Within economics, this debate has died.
That debate needs to be rekindled. A more pluralist approach would take account of the complexity of markets, the constraints imposed by nature and rising inequality. So what needs to be done?
Firstly, listen to consumers, because it is pretty obvious that they are unimpressed with what they are getting. The failure of the economics establishment to predict the crisis and its insistence that austerity is the right response to the events of a decade ago has meant the profession has rarely been less trusted.
Of course, there were economists who got it right and some of them Paul Krugman, for example wielded real influence. But it should have come as little surprise that when it came to the Brexit referendum, voters took the warnings from the UK Treasury, the Organisation for Economic Co-operation and Development, the International Monetary Fund and the Bank of England with a very large pinch of salt. After all, not one of these august bodies armed as they were with their general equilibrium models saw the deepest recession since the second world war coming, even when it was already under way.
It is welcome news that discontent is bubbling up from below on university campuses. True, the prestigious academic journals remain in the hands of the old order and in economics faculties there is strong resistance to change but increasingly students are showing their frustration at being told to learn and regurgitate economics that is not just narrow and of little relevance, but also plain wrong. Of the 33 theses pinned to the LSE, five involved the teaching of economics, with demands to be taught history and economic thought, and for the monopoly of the status quo to be broken.
One of the theses demands that economics must do more to encourage critical thinking, and not simply reward memorisation of theories and implementation of models. Students must be encouraged to compare, contrast, and combine theories, and critically apply them to in-depth studies of the real world. The fact that students feel the need to say this is a terrible indictment of the way economics is being taught, and their discontent negates the idea that this is just whingeing from aggrieved Keynesians.
Secondly, we should stop treating economics as a science because it is nothing of the sort. A proper science involves testing a hypothesis against the available evidence. If the evidence doesnt support the theory, a physicist or a biologist will discard the theory and try to come up one that does work empirically.
Economics doesnt work like that. Theories can be shown to work only by making a series of highly questionable assumptions such as that humans always behave predictably and rationally. When there is hard evidence that disputes the validity of the theory, there is no question of ditching the theory.
Thirdly, economics needs to be prepared to learn from other disciplines because when it does the results are worthwhile. One example is the way in which auto-enrolment has increased pension coverage. If humans were truly economically rational, it would make no difference whether their employers automatically enrolled them into pension schemes: they would decide whether to join schemes on the basis of whether they deemed it worth deferring consumption until they had retired. Yet, basic psychology says this is not the way people actually act. They are far less likely to opt out of something than they are to opt into something.
Fourthly, economics needs to be demystified. One of the big battles between Catholics and Protestants in mid-16th century England was over whether the bible should be in Latin or English, a recognition that language matters. The easy part of an economic Reformation is to attack the current establishment; the difficult part is to present a compelling story without resorting to jargon. Control of the narrative as George Osborne realised when he criticised Labour for failing to mend the roof while the sun was shining is crucial.
At the launch of the 33 theses last week, Victoria Chick, emeritus professor of economics at University College London, put it this way: The economics mainstream has the hallmarks of certain religions. They think they have the truth. But read for yourself and think for yourself. Change has occurred before and it can occur again. Shes right. It can.