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Political Economy?

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From Peter Radford “American economics harbors fierce political debates over theory, methodology, and policy.  In practice and in comparative perspective, however, the main trend over the course of the twentieth century has been the standardization of training as well as a homogenization of evaluation criteria that has marginalized nonorthodox approaches.  After institutionalism was dethroned by the rise of mathematical economics and more politically challenging forms of intellectual heresy (such as Marxism) were relegated to peripheral institutions and sometimes to other disciplines, American economists installed themselves confidently within the neoclassical paradigm.  It is within this paradigm that the major intellectual debates have taken place. … In other words, the dominant

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from Peter Radford

“American economics harbors fierce political debates over theory, methodology, and policy.  In practice and in comparative perspective, however, the main trend over the course of the twentieth century has been the standardization of training as well as a homogenization of evaluation criteria that has marginalized nonorthodox approaches.  After institutionalism was dethroned by the rise of mathematical economics and more politically challenging forms of intellectual heresy (such as Marxism) were relegated to peripheral institutions and sometimes to other disciplines, American economists installed themselves confidently within the neoclassical paradigm.  It is within this paradigm that the major intellectual debates have taken place. … In other words, the dominant conversations within the discipline have centered around which hypotheses in the neoclassical framework may be modified or tweaked to account for observed empirical patterns.  But American economists implicitly agree to keep disturbances to a minimum; as a result the framework is almost never questioned as a whole.”

That’s a long quote from Marion Fourcade’s excellent study of the discipline of economics “Economists and Societies” published in 2009.  I think it helps us wrap our minds around why it has taken so long for any discernible change in the profession’s thinking to have seeped into the open.

The discipline of economics is a closed society with unwritten but deeply rooted rules.  It is easy to be cast out.  If you are, you cannot easily find your way back in.  And, given the excessive prominence of economics in policy making during the middle and later years of the twentieth century, the profession placed an acute premium on not breaking ranks.

That prominence was ill-founded, economists don’t really have a good grasp of actual economies — the complexity of the subject matter and its infernal intertwining with society as a whole make the supposed rigor of what became the mainstream an illusion.  But it was a convenient illusion.  It fit well with the appeal of rational construction of policy.  It was a short skip from such appeal to the imposter of rational decision-making that supports the edifice of market superiority over other forms of resource allocation and distribution.  Instead of accepting that all forms of human activity are equally flawed and/or rational, economists mistakenly imagined people to be rational within the hallowed halls of a market, but insufferably irrational everywhere else.

One of the dominant themes of the last century was this general assumption that human activities can be studied through an ever increasingly rational lens.  That may be, but economists then went too far: they projected rationality into the subject of study.  Instead of using the tools of reason to tease out regularities of interest, they made the subject matter itself entirely rational.  So the regularities they thought they saw were simply echoes, or mirrors, of their own thought processes.  People in markets suddenly became economists, which made studying them more easy.  The entire enterprise became a massive “if only” exercise.  If only people behaved like economists it would so much easier for economists to study them!  So that’s what happened.  Entire Nobel winning careers were built around what was nothing more than a gigantic bout of self-absorption.

No wonder the discipline rapidly became so sterile.

And irrelevant.

Now, however, there are feint signs of hope.

A younger generation is breaking free of the constraints of  theory dependent upon rational behavior within market spaces entirely cut off from the rest of society.  The messiness of life is slowly being recognized as a real thing worthy of attention.

I am happy about this.  I am even hopeful that we might eventually arrive at a day when beginning economics is based upon the realities of asymmetries of information, uncertainty, path dependencies, inequality, power relationships, institutional and cultural limitations, and even geography, rather than having all these sorts of things introduced as “imperfections” later on.

The way in which economics came to be taught was backwards.  The perfect alternative was posited and described before the imperfect reality was introduced.  The problem being that most students never got to that real part.   They left with a false image.  Which was the ideological intent of some of the founders of the modern discipline.  The homogeneity that Forucade refers to above meant that even those who were not ideologically inclined were trapped into spreading the ideas of those who were.  They became unwitting propagandists for what was, essentially, an anti-government political agenda.

But times are changing.  Here we are a decade after the enormous embarrassment of the discipline caused by its blindness to the possibility of the Great Recession, and books are appearing that suggest markets are not quite what was once thought, that governments are important if not essential, and that all sorts of things muddy the pristine waters of the neoclassical world.  Some of these books have the temerity to ponder the effects of distribution and question whether markets are very good at it.  Especially since markets can be infected with diseases such as power relations and so on.

I expect our libertarian friends will mount a stout rearguard action and belabor the importance of individual liberties in the construction of modern highly productive economies.  I would agree with them were they then to acknowledge the reality of the inequalities that unfettered liberty always produces.  We need a balance which implies something more than just markets to be involved in the economy.

In this regard one of the most important books written in recent years about inequality talks about exactly this.  Walter Scheidel’s “The Great Leveler” is a glittering tour through history with one simple message: inequality is the norm, not the exception.  More to the point history tells us that elites will always capture economies and create what economists call rents.  To rely on markets to provide equitable distributions is foolhardy.

The problem is well known to economists, so they say, but in their effort to eliminate the taint of politics from economics they had to pretend otherwise.  So we ended up with a ridiculously lopsided and unreal version of economics purged of politics unable to explain reality where politics is everyday.

Economics with politics is a real thing.  Economics swithout politics is not.

A resurgence of political economy?

An emphasis on policy rather than sterile internecine spats over theory?

Progress is possible after all these years.

Congratulations to all these who kept the fires of plurality burning through the dark ages of neoclassical dominance.  Now is the time to switch gears to writing the new political economy.

Well, I can hope can’t I?

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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