Steve Keen's Debtwatch

In May 1973, dissatisfaction over the teaching of economics at the University of Sydney went from a festering sore amongst the staff only to an outright revolt by a minority of the staff, and a majority of the students.  In 1975, a new Department of Political Economy had its first intake into Economics I(P). Thirty four years later, it is still going. Professor Frank Stilwell, who has lived this dispute since 1970, is launching Political Economy Now!, a history of the dispute, next Tuesday at Sydney University’s Fisher Library (May 5th, 5.30pm, Level 5).

A major impetus here, as I note in Debunking Economics, was a lecture by the then newly appointed Dr Frank Stilwell which explained a concept known as the “theory of the second best“. Developed in the 1950s by Canadian economist Richard Lipsey and Australian-American economist Kelvin Lancaster, this theory argued that a single movement closer to what economic theory described as a better world could in fact reduce welfare rather than increasing it (Lipsey, R. G. and K. Lancaster (1956). “The General Theory of Second Best.” The Review of Economic Studies 24(1): 11-32).

Frank’s explanation of the theory involved a labour market in which a monopoly supplier of labour (a trade union) was negotiating with a concentrated buyer of labour (a major firm or perhaps an oligopolistic cartel). Unqualified neoclassical economics argued that the trade union would reduce welfare by forcing employers to pay a wage that exceeded the (marginal) productivity of the workers.  Welfare would therefore be increased if the union was abolished–and this argument is the major reason that neoclassical economists are so generally anti-union.

But Frank pointed out that the same model that argued that trade unions alone would set wages “too high”–compared to the neoclassical measure of social welfare–led to the conclusion that a monopoly buyer  (or “monopsony”) of labour facing disorganised workers would result in wages that were “too low” compared to that same measure. On the other hand, with both unions and monopsony buyers of labour present, the wage would end up somewhere between these two extremes.

So abolishing the union–or drastically weakening its capacity to bargain while doing nothing to reduce the power of the buyers of labour–would actually reduce welfare. The standard anti-union line that many neoclassical economists (and conservative politicians influenced by them) trot out is therefore not supported by a more general neoclassical perspective.

This caveat to the standard “Economics 101″ anti-union position is not something that students normally encounter until well into their Honours or even PhD education. By then, most students who have delved that deeply into the neoclassical mindset can’t see any other way to think about the economy. They either ignore “curlies” like this one (and many, many others), or they take the zealot’s approach (“we should abolish monopolies as well–hey, let’s form a Consumer and Competition Commission to campaign for just that”), or they accept patently absurd assumptions to sidestep obvious problems in applying neoclassical economic theory to the real world.

Having learnt this particular curly “out of sequence”, I was instead struck with how fragile the theory was: admit one aspect of reality–that there are both unions and concentrated buyers of labour–and a straightforward proposition from the theory is turned on its head. That didn’t strike me as a particularly robust theory: a robust one would instead need just some attenuation of its conclusions as more realism was introduced, not a wholesale “Do the opposite of the advice given in the simplest case if its conditions don’t apply precisely in the real world”.

My disenchantment with economic theory grew as I learnt more, so that I dropped out of the Honours stream in second year, and ultimately played a leading role in the dispute that erupted in 1973. At the year’s end, I was one of two students who were invited to address the Faculty of Economics when it met to consider whether there should be an Inquiry into the Department of Economics (the other was Richard Osborne).

Despite our victory at Sydney University, neoclassical economics grew even more dominant as the years wore on, something that both perplexed and worried me (and many others who developed a career in academic economics while refusing to worship at the neoclassical altar). How could something so wrong be so successful? We knew that the grounds on which its many interventions in public policy–from competition policy to industrial relations to macroeconomic management and monetary policy–were shonky. How come the economy nonetheless seemed to be booming?

The answer, as is now becoming obvious to everyone except diehard neoclassical economists, was that underlying this apparent economic prosperity was a growing pile of debt. Economic prosperity now was being borrowed from the future, as a mountain of debt was accumulated, and the money generated by it spent on an orgy of speculation on share and property markets.

Fortunately, as well as rejecting neoclassical economics, I had also become a fan of Hyman Minsky’s “financial instability hypothesis”. In my PhD I constructed biology and engineering-inspired mathematical models of Minsky’s hypothesis that, unfortunately, proved to be very accurate predictors of what the ultimate outcome of this speculative bubble would be.

In doing this work, I have moved light years away from neoclassical economics, but also some distance from what Political Economy has become. The faux-mathematics practiced by neoclassical economics persuaded a lot of critics that mathematics was part of the problem, but I was always of the mind that neoclassical economics either used the wrong mathematics–algebra and comparative statics versus differential equations and dynamic analysis–or made mathematical errors, or both. Since Political Economy has shied away from mathematics, I therefore stand somewhat outside my old stamping ground these days.

But I wouldn’t be who I am, nor could I have made the contributions that I have to economics, without those beginnings in the stirring days of the early 1970s. So I owe a great debt to Political Economy at Sydney University, one I am happy to acknowledge.

Unfortunately, I won’t be able to attend the book launch next week–I am already committed to attending a workshop with the CSIRO on melding dynamic models of the ecology with the same from economics. But I’ll be there in spirit as Frank Stilwell, Evan Jones, Gavan Butler and many “once-were-activists” ex-students commemorate a proud entry in the larrikin history of Australian economics. If you’re interested in the story, and especially if you were part of it, see if you can make it along to the launch:

• Location: Syney University Fisher Library, Level 5
• Date: Tuesday May 5th
• RSVP: by Friday 1 May 2009 to events@sup.usyd.edu.au or 02 9036 9958
• Start Time: 17:30

Frank invited myself and several other leading activists from that time to write some reflections on Political Economy for the book.  My entry is reproduced below.

From Activist to Associate Professor…

Like many of those who got involved in the Political Economy struggle at Sydney University, I began as a believer in what I simply thought was economics. There is a first year tutorial paper, hopefully long lost, in which I bemoan the existence of both monopolies and trade unions.

Such naivety did not last. In late 1971, one Frank Stilwell drove an intellectual bulldozer through it with an untimely illustration during a First Year of the “theory of the second best” (in a “proper” economics education, such things are really best left to graduate school when the few survivors are fully committed to neoclassisicm). Learning about this wrinkle on the seemingly flawless neoclassical skin shook my world view substantially (with a little bit of help from the Vietnam Moratorium), and the second thing I did after signing on for a vacation job was to join the union.

The following year, along with a newfound radical friend Richard Fields, I organised (if that is the right word!) a “Radical Economics” conference. It was attended by a handful, with the Henry George League making up a sizeable fraction of the audience and only Bruce McFarlane providing any real intellectual spark.

As my “gut-feeling” disgust for economics grew, I became progressively more disillusioned both with economics and with the bulk of my fellow students, who seemed to tolerate this bunk (though they, like me, chatted away all through Professor Simkin’s incredibly boring 2nd Year Macroeconomics lectures). Attempts to challenge the staff on the “hidden assumptions” of economics met with friendship from a minority who would, some time later, form the nucleus of the Political Economy Department, but outright hostility from the majority (notably the main 1st Year Microeconomics lecturer, whom we had long ago nicknamed Mean Mr Mustard Man after his peculiar taste in clothing). It seemed that this mediocre hegemony — that I now knew to call “neoclassical” — would forever dominate economics forever.

All that changed in 1973, when the Philosophy Department at Sydney University initiated a strike over the University’s refusal to endorse a new subject on “Philosophical Aspects of Feminist Thought”. As then President of the Arts Society (my degree was Arts/Law, not Economics) and therefore an ex-officio member of the Faculty of Arts, I took an active role in this at both official and street protest level, and found the vigour of the Philosophy students a welcome contrast to the passivity I thought characterised their Economic colleagues.

All this changed when Gavan Butler informed me that students in Frank’s 1st Year lecture had voted to strike in sympathy with Philosophy. The aura of passivity had only been one of resignation: like me, many were fed up with the pseudo-numerate nonsense that permeated our subjects, and leapt at the chance to do something to change it.

A lunchtime meeting about “The Problem in Economics” drew over 450 students. While we ranted, little direction existed until an until-then unknown Government student, Richard Osborne, sprang to his feet to suggest that we should organise a “Day of Protest”. Over ten per cent of the audience volunteered to help, and though we didn’t quite realise it then, the Political Economy Movement was born.

The Day of Protest was a huge success from the moment that Bill Nichol’s 25 metre banner was strung out across the Merewether Building. The adrenalin rush of the event gave our protest a momentum that pushed through a Faculty vote to investigate the affairs of the Department of Economics. We also developed an alternative economics curriculum that became Political Economy I (in response to a challenge from Professor Hogan to “do better”  if we didn’t like the current syllabus). And, though we didn’t appreciate it at the time, we gave birth to a tradition of student activism that, while it has waxed and waned at times, has lived on for fully thirty years. That is a remarkable achievement.

Looking back on those days from my position as an Associate Professor of Economics & Finance, I think we did only one thing wrong. Because so much of the nonsense of neoclassical economics is dressed up in apparently sophisticated mathematical dress, we identified mathematics and rigorous analysis as at least part of “the enemy”.

Knowing what I know today, I realise that it was not real mathematics but appallingly bad mathematics that clothed this naked emperor of the social sciences. It of course remains true that much of economics cannot be put into mathematical form, as Hugh Stretton’s Economics makes clear with its plea for “barefoot economists”. But truly rigorous mathematics demolishes neoclassical economics, while modern mathematics and computing offer the possibility of a truly dynamic economics that can at least partially explain the behaviour of the unstable economic system in which we live.

Thirty years on, the battle to develop that real economics is still an uphill one. The majority of economists still fall prey to the seductive ideology of neoclassicism, while only a handful of the perhaps 20 per cent of academic economists who are non-neoclassical have the intellectual armory needed to develop an alternative. They struggle on with limited funding while comparative abundance is wasted on those who continue to push the prevailing paradigm forward.

So is the PE struggle ultimately futile? No: we know so much more now about the deficiencies of neoclassical economics than we knew thirty years ago, and perhaps economic circumstances will one day give us the opportunity to shake the hegemony as Keynes tried to do seventy years ago. Until that day, we can at least revel in poking fun at the naked emperor.

A footnote: How true that last paragraph turned out to be

Upon re-reading that last paragraph–”perhaps economic circumstances will one day give us the opportunity to shake the hegemony as Keynes tried to do seventy years ago”–I was curious about when I could have written it.

Some books take a long time to go from idea to hard copy: I penned those lines on January 1st 2003.

The statement itself underscores why this struggle was and is important, and why also it had no chance of success until the economy itself was in crisis. Though there were plenty of anti-capitalist radical amongst those who campained for Political Economy, the unifying theme of the movement was that neoclassical economics was bad theory. Just as following a bad theory of navigation–such as Ptolemy’s earth-centric view of the universe–can lead a ship into disaster, following bad economic theory ultimately had to lead to an economic calamity.

But just as it’s hard to convince a believer that the earth-centric model of the universe is false until his ship is wrecked on a reef that his model says wasn’t there, we couldn’t convince the wider world of the errors in neoclassical thought until the economy itself was in crisis. We have now hit that economic reef, and therefore the opportunity to reform economics is finally with us.

It is an opportunity that I have no intention of wasting–hence the formation of this blog, and the public information and policy campaign I have waged over debt. But it’s one that could pass us by too, as it did in the 1930s, when Keynes’s attempt to reformulate economics without Say’s Law was undermined by Hicks’s reinterpretation of Keynes as a neoclassical “marginalist”. Academic economics is incredibly resistant to reform, and left to their own devices, economics departments will go on teaching neoclassical economics and attempt to develop “a neoclassical Minsky” as they once concocted “a neoclassical Keynes”.

There can be no such creature. Essential aspects of Minsky’s theory–especially his direct incorporation of uncertainty, and his vision of destabilising forces so that no equilibrium will ever persist–are utterly antithetical to the neoclassical way of thinking. But I have no doubt that there will be attempts to reformulate his ideas in a neoclassical guise.

For that reason, my main argument for the reform of academic economists is to remove the monopoly that economics departments currently have over the word “economics”. Let Engineering and Physics and Biology and Sociology and Psychology departments teach Economics as well–and label it as such. With their very different foundations, there is a prospect that in those courses a new, realistic, dynamic approach to economics will finally evolve.