The Study of Economics Is Broken. Here’s How to Fix It

by Andrew Alexander
The views represented in this article are solely those of the author and may not be construed as in any way representative of the views or policies of Oxford Royale Summer Schools.
Image shows a painting of barrels of money. Of all the abuses of language that tie together to form modern academia, the use of the term ‘science’ when applied to the social and economic arms of a research programme is probably the silliest.

You should also read…

A science is a system of factual knowledge founded upon a series of claims that are demonstrably true. The limits of true science are the limits of our ability to test and our ability to reason. Each generation has an inherent advantage over its predecessor because it picks up a later stage in the chain of reason.

Image shows a chemist in the process of an experiment.
Sciences have consistent, provable answers.

It would be possible to ask a thousand physicists what would happen if I was to drop an iron weight from a great height and get the same answer. You could ask chemists about a reaction between two elements in the periodic table and receive a similarly unanimous opinion. Likewise again a galaxy of biologists when faced with the question ‘what happens if I stop breathing?’ would answer with one voice. Now let us ask just two economists what happens when taxes on income go up 1%. The answer will be entirely dependent on the political opinions of the academics, and not on any testable fundamentals of knowledge. This is not to say that it is impossible to gather empirical evidence in economics, and that this evidence cannot be used to test theories, but rather that the two do not ally themselves and have a tendency to beget further theories rather than causing a retrenchment of these.
Image is a button that reads, "Browse all Economics articles."This applies to pretty much any major question in economics and finance, even the most basic ones. Get a gold bug and a fractional reserve cheerleader in the same room and watch the sparks fly. If economics was anything by way of a science then these disputes would have been dead and buried centuries ago. Despite this, however, the subject cloaks itself in the regalia of science. Economists present their contentions as facts; represent their theories as drawing on a bank of uncontested and incontestable knowledge. Because theory is layered on to theory, as opposed to theory being layered on to fact, extreme, stupid and illogical economic dogmas have come over the past decade to represent the mainstream of the overeducated and unworldly cadre of economists merrily guiding the world economy onto the rocks. This is an argument against academic economics and against academic economists too.

The nature of economics

Economics is ultimately the conjunction of politics, philosophy and mathematics. As both politics and philosophy are and will always be contested then this immediately makes the subject of economics contestable too. It should also serve as a warning to beware of the theorists. Where we find a great theoretician sailing through political history, we usually find a wake of misery. Economics is also, however, something more even than this conjunction – it is a study of man and his decision and therefore it must be fundamentally based in a theology.

Image shows Adam gesturing to Eve shortly after the Fall.
Unlike the Christian view, modern economics sees human actions as essentially rooted in rationality and common utility.

The theology of economics at present is the theology of the atheist progressive. Progressivism as a doctrine holds that man’s fundamental nature is not as an ignorant and savage beast, but as a logical creature interested in the common utility as a means of maximising individual utility and concerned with the future as well as his immediate present. Man is either inherently good but corrupted by the wickedness of under-privilege or associated traumas in this view, or he is at the very least neutral until the world deals him a savage blow. This creed opposes the Christian view which sees man born with original sin and his soul as being the location of a pitched battle between temptation and righteousness that he usually loses unless he actively chooses to seek redemption. So wicked is man, in the Christian view, that he is unable ever to redeem his own nature – this can only be done by the Grace of God and as such is conferred as an mercy arising from His love and not an action which we can bring upon ourselves through special merit.
Why is this important to economics? Because for any progress into the thicket of economic theory, the student must accept that human beings are rational and inspired by intelligent self-interest. This assumption underlies everything from basic microeconomics to the macroeconomic actions of nations. It is also incorrect. Leaving aside the extreme examples of saints (an extreme of selflessness) and sociopaths (an extreme of narcissism and an inability to frame their actions in terms of their external impact), the dynamics of modern socialism would appear to dispel the point.

Image shows half a cake.
Ed Balls wants to restore the 50p tax rate, taking 50% of all earnings over £150,000 in tax.

Let us look at the highest rate of tax in the UK, currently 45p, introduced by the last Labour government at 50p and cut but not abolished by this administration. The cut in the highest rate has coincided with a greater incidence of tax raised. There is a legitimate argument about whether this was caused by the cut in the tax rate or whether the uptick in the national economy happened to come at such a time as to give this appearance. This does not particularly matter for the purposes of this argument. The key point is that the Conservative Party, who parade a conviction that the tax is so high that it encourages avoidance and therefore lessens receipts, will not cut it further because of “political reasons”. This is a grand way of saying “because of the jealously of a large section of the public”. Labour wants to restore the old rate as a punitive measure despite having again no great argument on its effectiveness. When presented between an option to benefit from a slightly larger government tax revenue, or the option to confiscate a larger part of someone else’s earnings through spite but lose the benefit of that tax take in government spending, the great British public fondly embrace the bitter option. This is not rational, nor is it self-interested; it is simply spiteful and it can have no explanation in an economic theology that does not base itself on the idea of a society founded on original sin. Amartya Sen wrote about the utility which humans could derive from the welfare of others, but as far as I am aware, nobody has noticed that one of the major drivers of mass-democracy is the pleasure large parts of the electorate take in imposing penalties on other people it dislikes.
At the opposite end of the spectrum, preference curves and marginal utility theory cannot cover the major drivers of the positive side of the human story. Utility models cannot cope with the quality of bravery – in the sense of forcing yourself to undergo something you have no desire to do out of a sense of duty or honour. It may be realistic in seeing love as a function of self-fulfilment, yet what use is it looking at a wild and variable emotion and saying to yourself – ‘aha, a preference curve’ – when the curve lacks any rational explanation and may be in a different place the next day. It reduces a model so that it contains no predictive power.

Image shows a hundred trillion dollar Zimbabwean banknote.
Some economists persist in arguing that printing money will not lead to inflation.

Worst of all is the function of modern academic economics in acting as an abuser of logic. If you have a certain number of xs in an ecosystem and then a large number of new xs are brought into that ecosystem then it stands to reason that, all things being even, the scarcity of xs is lower than it was and therefore the relative value of xs is diminished provided that the x is a positive and not a negative thing. This is a basic movement of logic and one which economic follows in terms of the interaction between the demand and supply curves. Where it departs is modern macroeconomics, which contends that a very great number of xs can be created without any diminishment in value, provided x stands for a unit of currency. Thus we have the incredibly inflationary policies pursued by central banks the world over presented as responsible governance in line with best practice. This amounts to magic masquerading as majesty, and because we lack the intellectual confidence to render the ridiculous terms that economists use to describe their intellectual sleights of hand we do not notice it as such.

Improving the model

The reader probably takes from the above that academic economists must be very wicked people indeed. This is, of course, not true – I don’t think anybody embarks on any form of government in the first instance with the express purpose of deceiving as many people as possible for no sound reason other than that they can. Unfortunately, economists as a corps have, however, adopted an intellectual arrogance which causes them to continue to endorse what they know to be false rather than to confront the seeds of those falsehoods. Someone like Janet Yellen has never once been proven wrong in all her professional career – no setback, no evidence to the contrary can ever disprove her positions beyond the range of an amendment to theory. These theories are unprovable, and in an economic world as complex as ours will remain so; in fact, they are designed that way.
The first step towards better economics is more humble economists. That is why I would suggest that all of the Bank of England’s pronouncements are vetted by a panel of moderately intelligent pensioners. Once they are written with sufficient clarity to be able to convey their purpose to this audience they are fit for the outside world. Stripped of the smoke and mirrors, economists will be largely seen for what they are – politicians in polyester cardigans – and this lack of cover will force them to introduce an element of realism into their policies.
The second step is to hammer home the message that for all its complexities, economics is fundamentally the academic discipline most in range of the man on the street. We are all to some extent experts in money – it’s what our society demands of us – and our ability to judge social and political interactions and events seems to vary with exposure rather than degree load. Again, mass participation economics is more likely to be ‘sense based’ than the present system.

Image shows the Bank of England.
Control of central banks should be restored to politicians.

Thirdly, we should end the dominance of central banks and academic central bankers in our economic systems and restore the power of the independent central banks to politicians. Economics is fundamentally political and philosophical, as outlined earlier. It is better to have an honest admission of this and the restoration of economic functions to a political unit under democratic control than it is to have an unelected body making deeply political decisions and then parading them as the findings of impartial concerned onlookers. The choice about the type of economy which we have is one that is too important to leave to technocrats and economic ideologues. It needs wider public participation and debate. Removing monetary policy from the government has been a gateway to enacting measures so insane, so extreme that no domestic politician would have tried them or, having tried them, could have kept them so long – ZIRP and QE, I’m looking at you. In addition the political need to explain complex events in concise language would bolster the points above around the de-mystification of economics.
Finally, we should make an effort at least to see the world as it is, rather than as we would like it to be. Idealists and liars plague every discipline in academics, but you will be hard-pressed to find the combination of professed impartiality and deep partiality that economics specialises in anywhere else. Nobody in the public eye seems to feel under much of an obligation to tell the truth at present – we take it as read that politicians lie to us at will, and that there is always an ulterior motive. In economics there is a golden opportunity to tell the truth, to admit the limitations of our own knowledge and the constraints placed on us by our own fear of the unpalatable. That would go a long way towards re-shaping not just the way we look at economics, but politics as well. It might make for more civil public debate, and also more useful debate at the same time. Let’s try it and see where we get.

Your email will not be shared and you can unsubscribe whenever you want with a simple click.

Image credits: banner; chemist; original sin; cake; inflationBank of England.