Fabulous attack on neoclassical economics by Anatole Kaletsky

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Economists are the forgotten guilty men

Academics — and their mad theories — are to blame for the financial crisis. They too deserve to be hauled into the dock”

So begins Ana­tole Kalet­sky’s essay in The Times for Feb­ru­ary 5 2009. He is spot on. Eco­nom­ic the­o­ry played a direct role in this cri­sis, by legit­imis­ing the dereg­u­la­tion of finance and encour­ag­ing the prof­li­gate lend­ing of finan­cial insti­tu­tions. There is much more that is wrong with the the­o­ry that dom­i­nates aca­d­e­m­ic economics–known as “neo­clas­si­cal economics”–enough to fill sev­er­al books. My Debunk­ing Eco­nom­ics : the naked emper­or of the social sci­ences was one such book; in it I tried to explain all the tech­ni­cal flaws in eco­nom­ic the­o­ry to a non-math­e­mat­i­cal audi­ence.

Even at 350+ pages, it was not long enough. There are many mad notions in eco­nom­ics that I did­n’t get time to attack–including for exam­ple the mad­ness behind the the­o­ry of com­par­a­tive advan­tage that sup­ports free trade but com­plete­ly obscures the process of eco­nom­ic devel­op­ment; the absur­di­ty of the con­cept of “Pare­to Opti­mal­i­ty” which is used to block even the most triv­ial attempts to lessen income inequal­i­ty. I sim­ply ran out of time and pages.

Ana­tole’s essay does a great job of point­ing out why what might be thought to be obscure aca­d­e­m­ic the­o­reti­cians have indi­rect­ly done more dam­age to the cap­i­tal­ist econ­o­my than a legion of social­ist rev­o­lu­tion­ar­ies could ever hope to do. I’ll quote the open­ing at length here and then rec­om­mend that you con­tin­ue read­ing the entire post at The Times.

Also, check my “Brick­bats” page for com­ments by Aus­tralian neo­clas­si­cal econ­o­mists War­wick McK­ib­bin (who sits on the Reserve Bank of Aus­tralia board) and Peter Swan, for exam­ples of the sort of non­sense that Kalet­sky attacks here.

In the search for the “guilty men” respon­si­ble for the near-col­lapse of the glob­al econ­o­my, one obvi­ous group of scape­goats has escaped blame: the econ­o­mists.

By “econ­o­mists” I do not mean the talk­ing heads (myself includ­ed) employed by the media and finan­cial insti­tu­tions to “explain”, usu­al­ly after the event, why share prices or cur­ren­cies have gone up or down. Nor do I mean the fore­cast­ers whose com­put­ers churn out sci­en­tif­ic-look­ing num­bers about what will hap­pen to growth or infla­tion, but whose fig­ures are revised so dras­ti­cal­ly when­ev­er some­thing “unex­pect­ed” hap­pens — as it always does — that their fore­casts are real­ly noth­ing more than back­ward-look­ing descrip­tions of recent events.

What I mean by “econ­o­mists” are the aca­d­e­m­ic the­o­rists who win Nobel prizes, or dream of win­ning them.

To see why these seem­ing­ly obscure aca­d­e­mics deserve to be hauled out of their ivory tow­ers and put in the dock of pub­lic opin­ion, con­sid­er why the bankers, politi­cians, accoun­tants and reg­u­la­tors behaved in the egre­gious ways that they have. It may be true that all bankers are greedy, all politi­cians venal, all reg­u­la­tors blind and all accoun­tants stu­pid. But such per­son­al fail­ings do not explain their behav­iour in the past few years. After all, bankers do not like los­ing mon­ey and politi­cians do not like los­ing pow­er. All these “guilty men” behaved as they did because they thought it made sense.

And why did these greedy bankers and stu­pid politi­cians hold beliefs that, in hind­sight, seem so ludi­crous and self-destruc­tive? Why, for exam­ple, did they think it rea­son­able for a bank with just $1 bil­lion of cap­i­tal to bor­row an extra $99 bil­lion and then buy $100 bil­lion of spec­u­la­tive invest­ments?

The answer was beau­ti­ful­ly expressed two gen­er­a­tions ago by John May­nard Keynes: “Prac­ti­cal men, who believe them­selves to be quite exempt from any intel­lec­tu­al influ­ence, are usu­al­ly the slaves of some defunct econ­o­mist. Mad­men in author­i­ty, who hear voic­es in the air, are dis­till­ing their fren­zy from some aca­d­e­m­ic scrib­bler of a few years back.”


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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.