How to argue with an economist

Review article
Steve Keen

Edward's main contribution in How to Argue with an Economist is to articulate why proponents and opponents of economic rationalism can't understand each other. Proponents believe their reforms will deliver a more efficient, equitable and just society; opponents may concede efficiency, but believe that an "ER" world would be inequitable and unjust.

Economic rationalists can't understand this objection because to them, an efficient society is necessarily also equitable and just. But Australian egalitarianism defines equity and justice in terms of the relationships between people, whereas the ER ideal of efficiency defines them in terms of market outcomes.

This communication failure originates in neoclassical economic's treatment of interpersonal relationships. It begins by abstracting from them, focusing instead upon purely self-interested behaviour. Then it attempts to show that this ultra-hedonism leads to the best possible social outcome: the largest possible number of commodities are delivered at the lowest possible price (efficiency), while incomes are exactly equal to each individual's contribution to output (equity and justice).

What Edwards dubs "the punters'" view of equity and justice instead relates to how we treat each other in the relationships that are embedded in any market economy. As she puts it "economic rationalists are oblivious to there being any value in how things are done ... It is economic rationalism's biggest failure that it does not realise that ... how we organise our economy lies at the heart of our quality of life."(130)

To have a truly ER society, the market for employees should be no different to the market for cars. But Australians workers resent being treated as commodities, since this offends the sense of trust that has become part of our national ethos. Edwards is at her best when arguing that the ER approach to relationships abrogates Australian culture:

Our national commitment to boosting those at the bottom has translated into a culture that assumes that strangers can be trusted ... The current flurry of international academic literature on ... 'social capital' theorises what the Australian Settlement was doing for decades. It points to the role of experiences of successful co-operation, a sense of shared goals and egalitarianism in building robust communities. The world is championing the value of what we have been doing for decades, at the very moment we are throwing it away.(89)

Writing from first-hand experience, Edwards fleshes out the "Yes, Minister" vision of government decision-making with the added clue that, the higher up the tree a decision is made, the more it will be based on a simplistic, qualification-free versions of neoclassical economics: "when the pressure is on and meetings need to be wrapped up and press releases written, the simpler broad assumptions about how the world works tend to be what drives decisions."(36)

In other words, first-year economics fills in the blanks whenever decisions are made, and filters perceptions of the real world. This key "filtering" role, combined with the fact that its proponents fervently believe that ER describes a true utopia, explains why a naive appreciation of economic theory is so powerful in shaping government policy.

Edwards is clearly on the side of the punters in arguing that, at least from an Australian point of view, an ER society is not a utopia but a distopia. So how to stop well-meaning bureaucratic and political utopians from turning Australia into a market-fundamentalist version of 1984?

Here Edwards is less effective, though still worth heeding. She makes the valid point that "exposing the flaws has not been enough to topple the economic rationalists" (97), and then concludes that, in effect, "if you can't beat 'em, join 'em". Rather than rejecting their views entirely, critics should understand ER arguments but use the concept of "market failures" to persuade them to hold off on the full distopia.

Edwards acknowledges that this tactic "gives the economic rationalists a head start" because it concedes that their world view is accurate, and reduces the punters to looking for exceptions. But, she argues, "incorporating new ideas into economic rationalism's own framework will be the most effective way of shifting the paradigm." (109)

It may well be a way to shift the paradigm, but it is not the only way, and I am doubtful whether it is a particularly effective way. Greater minds than the average critic of economic rationalism have attempted just this and failed, if Stiglitz (2002) is to be believed. His Globalisation & its Discontents documents how time and time again, IMF econocrats stuck to a hardline version of neoclassical economics, despite his best attempts to persuade them that the theory of asymmetric information justified a gentler approach. If Stiglitz couldn't succeed with this strategy as economic adviser to the World Bank, what chance does the average punter have?

A major problem with Edwards' strategy is the "all or nothing" nature of neoclassical economic theory, and the impact of bringing any qualifications into play. The simple stock in trade of economic rationalism is clearly anti-union, for example: the price of labour should be set by market forces as with any other commodity. But if there is any market power for employers - if some are large enough to have an impact on the price of labour - then unorganised workers will receive less than their "just" (on Economic Rationalist criteria) wage. If unions enter the fray, the picture becomes indeterminate: there is no necessary "equilibrium" wage, but at least the wage will be set by negotiation somewhere between a level at which workers are exploited and one where the firms are ripped off.

So the more realistic theory argues that there is a justified role for unions, whereas the more simplistic one argues for their abolition. What to do?

Edwards would want persuaded economic rationalists to agree that, in this instance, there is a case for deviating from the strict ER agenda and allowing unions to take part in collective wage bargaining. But I think their more likely response would be to say that "we can assume" that the practical deviations from the theoretical ideal of perfect competition are minor, and therefore we should still deregulate the labour market.

Ditto, I expect, for the proposition that, even if the market system is stable, it will be disturbed by the social and ecological systems in which it embedded. Rather than this persuading ERists to attenuate the market, it is more likely to persuade them that market mechanisms should be applied to social and ecological systems as well. Pricing environmental damage via carbon credits and the like is an obvious (and in many ways beneficial) example of the latter; Gary Becker's writings on marital relations (for which he was awarded Nobel Prize!) are obvious and bizarre examples of the latter (Becker 1973).

The real problem I have with Edwards' preferred tactic relates to her point that the intellectual foundation of economic rationalism, neoclassical economics has been subject to cogent intellectual critiques that have nonetheless failed to dislodge it from either universities or politics. Her pragmatic response is to accept it as unbeatable even if it may be wrong, and simply try to attenuate its impact.

If attenuation alone were enough, I might agree. But as I argue in my Debunking Economics, these critiques establish that neoclassical economics has a seriously misleading perspective on the functioning of a market economy that in particular ignores the central issue of transformational growth (Schumpeter 1936). Conceding centre stage to economic rationalists means allowing them to impose the inane and misleading notions of neoclassical economics on the economy, to its and our detriment. An ER economy would not be efficient, but stagnant and dysfunctional.

The Australian government's obsession with competition policy is a case in point: competition policy attempts to remake our markets in line with the neoclassical ideal of small competitive firms, whereas actual markets have a mix of many small and a few very large firms (Downward & Lee: 2001). Diversity may achieve better results in costs, growth and innovation, but neoclassical economics champions the extreme of smallness.

Edward's book makes a worthy contribution to Australian sociology and politics, but I would encourage critics of economic rationalism to go beyond her recommended tactic. No matter how impregnable economic rationalism may appear, it is intellectually dishonest to concede centre ground to a bankrupt theory.


Steve Keen is Associate Professor, School of Economics and Finance, University of Western Sydney, and the author of Debunking Economics: the Naked Emperor of the Social Sciences (Zed Books in the US and UK; Pluto Press in Australia: 2001). Lindy Edwards, How to Argue with an Economist: Re-opening Political Debate in Australia (Melbourne: Cambridge University Press, 2002).


References

Becker, G. S. (1973), "A theory of marriage: Part I" and other essays in Febrero, R. and Schwartz, P. S., (1995), The essence of Becker, Becker, Hoover Institution Press, Stanford.

Downward, P. & Lee, F., (2001), "Post-Keynesian pricing theory 'reconfirmed'? A critical review of Asking About Prices", Journal of Post-Keynesian Economics, 23: 465-483.

Keen, S., (2001), Debunking Economics: the Naked Emperor of the Social Sciences, Pluto Press, Sydney.

Schumpeter, A., (1936), The Theory of Economic Development, Harvard University Press, Cambridge MA.

Stiglitz, J.E., (2002), Globalisation & its Discontents, Norton, New York.

 

 

Suggested citation
Keen, Steve, 'How to argue with an economist', Evatt Journal, Vol. 2, No. 8, December 2002.<http://evatt.org.au/news/how-argue-economist.html>