I couldn’t have put it better myself

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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.

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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.