Misguided faith: The Guardian's economics editor slams neoclassical economic orthodoxy

My Fair London activist Tom McDonough writes:

Our leaders’ unquestioning faith in neoclassical economics is in dire need of a shake-up, according to the Guardian economics editor Larry Elliot.

Speaking last week to an audience of just under 100 MFL members at the UCLH Education Centre, Elliot claimed that despite its status as an ideologically bullet-proof model, neoclassical economics is in fact not fit for purpose, being unable to avert or even predict economic recessions.

This free market system, made famous in Britain by Margaret Thatcher and endorsed by all British political leaders since, crashed spectacularly in 2008 and is on course to suffer the same fate again, says Elliot. Add to this the model’s failure to factor in its impact on the natural world, its reliance on the provision of credit and its heavy weighting in favour of certain groups and we have a defunct and failing system.

Yet, argues Elliot, the neoclassical economic model has morphed into an ideology whose tenets are seen as so self-evidently correct that anyone who challenges them is considered a heretic or crackpot. Self-regulating markets, privatisation, the shrinkage of the state, free competition, the centrality of financial markets and huge income and wealth inequality are all seen as natural, beneficial and beyond reproach.

Heretics needed

The references to faith, ideology and heresy in Elliot’s articles and talks on this topic are reflective of his contention that neoclassical economics has become as dogmatic and as removed from ordinary people as a medieval church.

“It’s become lost in its mathematical thickets and its processes have been mystified. It’s similar to the way the medieval church used Latin to talk in its own language and mystify the whole process,” he said.

In fact, Elliot, together with a group of like-minded economists and students, has likened the call for fundamental economic change to Martin Luther’s instigation of the Reformation of the Catholic church in the 16^th century.

Led by economist Steve Keen, this group of economic reformers, Elliot among them, delivered a 33-point call for change to the London School of Economics in December last year. With Keen dressed as monk and carrying a giant inflatable hammer, the stunt was designed to be a humorous re-enactment of Luther’s alleged nailing of his 95 theses to the door of Castle Church in Wittenberg in 1517. The activists targeted a leading university to highlight the need for change not just in economic policy but also in economic thinking, research and teaching.

The 33 points read like a list of the shortcomings of neoclassical economics, with the areas covered ranging from the teaching of economics to the nature of decision making and the role of institutions in markets. Among the flaws highlighted are free markets’ tendency towards inequality. Point 17 acknowledges that people with the same abilities, preferences and talents do not end up with equal levels of wealth owing to differences in luck and circumstances. Meanwhile, point 18 states that unequal societies fare worse across a range of social indicators.

However, while Elliot believes that strong unions, a decent welfare state and lower levels of inequality are all crucial ingredients for a more successful economy, he is no far left egalitarian.

“People are not equal and you can only lean against the wind to a certain extent. In the 1970s the richest used to earn ten times more than the poorest; now the ratio is something like 150 to 1, which is dangerous. It should go back to what it was like in the 70s,” he said.

Where to from here?

If one reason why the badly needed backlash against the economic status quo has not happened is the neoclassical economists’ intellectual and ideological monopoly, a second, argued Elliot, is that it just hasn’t suited the country’s elite to reform it. By contrast, when Keynesian economics faltered in the mid-1970s, after having fostered a golden era of growth and falling inequality, the elite leaped at the chance to restructure the system.

A third reason would seem to be the lack of any viable, clearly defined alternative. The 33 theses do not point to one and while Corbyn’s Labour is seeking to neutralise the worst excesses of current system, it does not set out a vision for an alternative economic model.

Meanwhile, anger levels among the dispossessed are rising as evidenced by the Brexit vote in Britain and the election of Trump in the US. Change is imperative, and the 33 theses are make a decent point of departure, but bold, clearly defined alternatives are still lacking.

Larry Elliot speaking at My Fair London