There’s an excellent article in The Age today on the mad methods of neoclassical economists. The author is Martin Feil, who was once a director of the Industries Assistance Commission–a previous incarnation of what is now called the Productivity Commission:

The article is entitled We can’t live on moonbeams and air.

I plan to tackle similar issues in my next two Debtwatch Reports. November’s (the 28th, which is also the second anniversary issue–I started the report in November 2006) focuses on the data that neoclassical theory directs the attention of economists to, and the data that the theory causes them to ignore. Crucially, the latter includes private debt–and Feil makes a similar set of observations. On the data that the RBA’s neoclassical economists consider important:

“For more than 20 years the RBA has focused its attention on inflation. This has been regarded by the past three governors of the Reserve as its fundamental task because inflation would result in higher prices, reduced consumer demand and a downturn in economic activity.”

And on the data they ignore:

“Rational market behaviour is a key assumption in free-market theory. The theory is that if consumers act rationally then they will determine, through an unfettered price mechanism, the optimal way of allocating scarce resources in the market.

This theoretical assumption is wrong… Has it been rational to rack up deficits created by the excess of imports over exports for the past 20 years? We owe $700 billion and much of that is in US dollars…”

Feil makes several observations on the attitude to dissent within the economic profession–and particularly to how receptive the official organs of economic policy are:

“The Productivity Commission also employs hundreds of economists in what has become an almost inquisitorial commitment to free-market economics. They have burnt rent-seeking heretics for 30 years. They will not tolerate backsliders in their own ranks.”

At least Universities do provide a refuge of sorts for non-orthodox economists like myself. We–economists who variously describe ourselves as Austrian, Post Keynesian, Marxian, Complexity Theorists, Evolutionary Economists and Econophysicists–are almost always in a minority in academic departments of economics and sometimes under attack. But at least we have a home of sorts, and various non-neoclassical forums exist where we develop our non-orthodox ideas.

One of these, the Society for Heterodox Economics, will have its annual conference this December in Sydney.  There are also several international discussion groups such as the Protest Against Autistic Economics and Fred Lee’s directory of heterodox economics.

For the record, my own approach to economics is a blend of Post Keynesian–especially Hyman Minsky–Complexity/Econophysics/Evolutionary economics, and a very non-standard reading of Marx. I also have more time for the Austrian approach to economics than most members of the other heterodox schools, though my favourite Austrian is not Hayek or Mises but Schumpeter.

This very real financial crisis is in large measure the result of following the fundamentally mythical vision of how the economy operates that neoclassical economics has developed. It is all very well having a theory to defend capitalism against ideological attack, but it is not particularly bright to believe that ideology is reality, and then attempt to manage the economy using its guidance.

This is what economic theory has in fact done, and we are now reaping the whirlwind of its ignorance about the actual functioning of a market economy.

In future blogs I’ll turn increasingly to the topic of economic theory, because the dominance of economics by a flawed and fallacious theory has contributed in very large measure to this crisis. Avoiding a repeat of it, let alone minimising the damage to the economy during this crisis, will involve rejecting this nonsense theory once and for all.

Hats off to Martin Feil for raising this issue in the Australian media.