Could they both be right, the “rip it up” critics of economics, who—like Howard Reed in last month’s Prospect—claim that Econ. 101 is broken, and the economists fighting back—such as Diane Coyle on Prospect online—who point to the solid research the profession is doing to address pressing social problems?
The textbook model is definitely broken. In it, economic actors are amoral and self-interested, perfectly competitive market prices equate supply to demand implementing “optimal” outcomes, while environmental degradation, instability, and inequality are afterthoughts at best.
Nobody believes it. Yet it continues as the backbone of much undergraduate teaching. However remote from what economists really do and the way we think, this is the “economics” imprinted on the public’s mind. Most of the great research the defenders of economics point to is being carried out without reference to the outmoded textbook model.
But the valuable light they have shed on a warming planet, the China shock, and the dynamics of bubbles and crashes does not in itself constitute an over-arching alternative to the textbook model, one that provides an empirically-founded understanding of not just pieces of the economy but of the whole.
So maybe the critics and the defenders both have a point. And maybe, furthermore, they should equally welcome what has for the most part been missing from the “economics has failed” debate, namely an alternative.
Tom Clark and Chris Giles debate: Has economics failed?
The good news is that such a new model is now available. It sweeps away the old Econ. 101 and it is being successfully taught to undergraduates around the world.
The new model—like the Econ. 101 paradigm—provides a way of thinking about how the economy as a whole works. But this time, it is built on the solid foundations of contemporary research in economics and other social sciences. The panoply of greats are all brought in—Marx as well as Marshall, Hayek as well as Keynes, Coase and Simon, as well as Nash and Arrow—not as contrasting points of view, but as integral to forming a coherent picture of the economy as a whole.
The object of the study of economics is not a static equilibrium of a self-contained system, but an always-changing process that is part of the social system and biosphere, which it both impacts and reflects.
In the new paradigm people are capable of both calculative self-interest and extraordinary generosity. We interact not only in competitive markets, but also with monopolies; and, as managers and employees, as citizens and government, as members of unions and of families.
The economic outcomes arising from these interactions are seldom either efficient or fair, leaving governments—though they have their own failures—with a duty to address both the inefficiencies and the injustice.
The CORE project, which I direct, is instilling a comprehensive version of the new paradigm as the introduction to economics. Five years ago, a global team got together to attempt this, and we have since produced a new open access text, The Economy, which by now has been tested in hundreds of classrooms worldwide.
Dip into Unit 1, The capitalist revolution and you’ll discover how economies transitioned from hundreds of years of little change to a pattern of continuous growth; how inequality between countries emerged; and how growing living standards bumped up against the absorptive capacities of the environment as social systems were transformed.
The social nature of human behaviour is under the spotlight in Unit 4 Social interactions, power relations take centre-stage in Unit 6 The firm: owners, managers, and employees which helps explain how wages are set and why unemployment is ever-present in a capitalist economy.
The starting point for every recent debate about the state of economics is how the discipline performed ahead of the financial crisis. So how does the new paradigm deal with this?
For a start, it reinstates history as an integral element. By looking over a century (Unit 17), we ask how the lessons from one kind of crisis—the Great Depression—contained the seeds of the next, very different crisis—the stagflation of the 1970s.
A preoccupation with managing aggregate demand had diverted attention from the weakening of productivity growth and increasing tension between capital and labour over how to split the diminishing rewards it offered.
This supply-side crisis brought supply-side reforms and deregulation to the fore. A new macroeconomic policy regime delegated stabilisation to independent central banks who targeted inflation. This regime was tested by the oil shock of the 2000s, and passed with flying colours—there was no re-run of the hike in inflation and unemployment the 1970s oil shocks had wrought.
But as we now know, the new-found stability distracted attention from the build-up of imprudence, instability, and inequality that had all flowed from the deregulation. Then in 2007-8 things fell apart.
It was Barry Eichengreen and Kevin O’Rourke—both trained as historians as well as economists—who sounded the alarm. They produced the real-time data on global trade and industrial production, and discovered striking parallels with the initial months of the Great Depression. This helped precipitate the action that avoided a full-on rerun of the 1930s. If misguided economics fuelled the crisis, the actions to stabilise demand and the financial system after it hit are an example of pragmatic and historically-informed economics at its best. Economists schooled in the new paradigm will be no better at providing exact predictions of crises, but they will be better able to weigh—and warn of—the risks.
As economists struggle to understand why the high-income economies continue to perform so poorly, especially for workers and the less well off, the new paradigm suggests answers will come from best-practice economics research open to integrating ideas from diverse schools of thought.
And just as was the case in the midst of the crisis, economists and journalists need to communicate the valuable and practical insights economics brings in order to regain trust. It’s time to stop debating whether economics is broken or has already fixed itself. There’s a much better alternative—free to anyone interested—out there waiting to be taught.
