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Digital Subscriptions > Prospect Magazine > May-18 > CREATIVE DESTRUCTION

CREATIVE DESTRUCTION

It’s time to rip up the old textbook, and build a new economics argues Howard Reed

Rip it up and start again

When the great crash hit a decade ago, the public realised that the economics profession was clueless. The claim that “boom and bust” had been solved came crashing down, along with about 7 per cent of national income.

Philosophers sometimes define science as an endeavour that makes verifiable predictions, so the failure to see major shocks coming makes this a very dismal science. But there are still more fundamental problems which precious few economists acknowledge, and even the most radical have thus far made only modest progress in solving.

After 10 years in the shadow of the crisis, the profession’s more open minds have recognised there is serious re-thinking to be done. Behavioural economics, which takes the trouble to watch and learn from how real people interact in experimental settings, has moved from the margins to become a speciality that can win Nobel prizes. Under the auspices of the Institute for New Economic Thinking, Adair Turner has been floating radical ideas about the government printing its way out of debt. The “Rethinking Economics” initiative has brought together students unhappy with the old textbooks and academics willing to debate what they teach. This is all very much to the good.

But the truth is that most of the “reforms” have been about adding modules to the basic template, leaving the core of the old discipline essentially intact. My view is that this is insufficient, and treats the symptoms rather than the underlying malaise. The real problems go to the theoretical core of modern economic theory—the so-called “neoclassical” paradigm.

This has underpinned the academic discipline for well over a century, and has more recently come to warp public policy too. Its tentacles reach far and wide—from our universities, which are now run on economistic lines that do not deem the humanities worthy of a teaching subsidy, to the bewildering structures of the NHS internal market.

What we need is not more tweaks, but a “deconomics,” which decontaminates the discipline, deconstructs its theoretical heart, and rebuilds from first principles. This may sound melodramatic, and—coming from a career economist—perhaps perverse. I retain enough of an economist’s instinct to be aware of the costs of starting over with an analytical blank slate. The admission of near total uncertainty would create a frightening void which could only be filled by vast and expensive new research. It can only be countenanced if the core tenets of “neoclassical” theory are not only awry, but so badly misleading that it would sometimes be better to operate without any theory at all. This, however, is the judgment that I have reluctantly reached.

THE NEOCLASSICAL TAKEOVER

Before I can explain why, we need to get straight on what exactly “neoclassical” economics is, and also understand how it came to dominate the discipline.

Neoclassicism is not, it is important to say, the same thing as “neoliberalism,” the rightward turn in economic policy since the 1970s. An upright neoclassical might well be against cosy public-private neoliberal deals, like PFI; in principle, one could be an egalitarian neoclassical, committed to redistribution. But neoclassical theory did, without doubt, help with the rationalisation of all the outsourcing, privatisation and the supposedly trickle-down tax cuts that have defined the long era which Thatcher and Reagan began.

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About Prospect Magazine

In Prospect’s May issue: More than a dozen writers critique the current state of economics, suggesting there are still lessons to learn more than a decade on from the financial crash. Howard Reed writes that the ideas we hold about the way economics works need to be ripped up. Ten of the world’s best living economists explain what, in their view, is the single most important lesson economics still has to learn, and Linda Yueh suggests what three of the past masters would think about economics today. Elsewhere in the issue: Vernon Bogdanor outlines why Brexit could cause a constitutional crisis in Britain; Jean H Lee explains why young South Koreans don’t want their country to reunify with their Northern neighbours; Sian Norris writes about the coming battle over abortion and shows where the UK ranks among its European peers; and Sonia Purnell profiles Jacob Rees-Mogg.