Economists and politicians often portray economics as a science with a single set of truths. But understanding that there are many different schools of economic thought is fundamental to a healthy democratic debate.
President Truman once quipped that he wished he could hire a one-handed economist. He was frustrated with their tendency to equivocate between alternative answers to any given question - “on the one hand…but on the other.”
Over the past few decades you could easily argue that we have had the exact opposite of Truman’s problem. Armies of one-handed economists have promoted one particular school of thought – neo-classical economics - as if it were the only source of truth. In turn this has contributed to a narrowness of economic thinking and debate in politics and policymaking. Any attempt to stray from a defined set of orthodox policies is liable to be labelled ‘economic illiteracy’.
But where has this rigid orthodoxy led us? We face persistent economic problems which the standard economic policy toolkit seems to be unable to help us solve. The theoretical structure of neo-classical economics was poorly equipped to predict the financial crisis, or even diagnose its causes afterwards.
In the RSA’s new Animate, Economics is for Everyone, Ha-Joon Chang mounts a compelling and entertaining case for a diverse approach to economics. Chang outlines nine different schools of economic thought, and points out that you could easily extend this list to identify more variations.
This matters greatly for economics. Economics is a social science that studies systems that are complex and ever adapting to changing circumstances. Its subject matter is people, who have an annoying habit of not necessarily behaving how you expect them to, particularly when they interact with each other. Creating models of the economy can create useful insights, but all models rely on making simplifying assumptions and no model can hope to be comprehensive. We need many different models to help us understand different aspects of the economy.
To make this point, Chang argues that the economically successful city state of Singapore cannot be explained by the orthodox economic theory that dominates global economic institutions and Western economic thinking. In fact, he argues that no single school of thought is sufficient to understand why it works. Orthodox economists emphasise the city’s openness to foreign trade and investment and small government. But they somehow forget to mention that 85% of the housing is provided by the government and 22% of economic output is created by state-owned enterprises.
To switch to a different metaphor, relying on a single tool was never an option for a skilled craftsman. Yet successive UK governments have resorted to repeatedly smashing the economy with a free-market deregulation hammer when they could have been deploying a fuller range of intellectual and theoretical tools to create the market and macroeconomic conditions for much greater success.
The student-led Rethinking Economics movement arose after the financial crisis to demand more pluralist teaching in universities because the students recognised that they needed to leave with more than a hammer in their toolkit. Likewise, the Institute for New Economic Thinking has funded academics whose research hypotheses stray too far from the path of orthodoxy to receive research grants. To their credit, UK research councils have recently responded by inviting tenders for a network to encourage alternative thinking in understanding the economy.
Perhaps we are moving to a more flexible and diverse theoretical approach to economics, but this is not the only point made by Chang. He also passionately believes that any citizen can engage meaningfully in economic debate, and hold valid opinions about the economy, without having any technical training.
You probably have strong views on the Iraq war or climate change without degrees in international relations or climate science. Surely you can have sound judgements on economic issues too?
During the Brexit referendum debate, it seems that politicians succeeded, whether deliberately or not, in dragging experts down with them into a quagmire of disrepute and mistrust. Perhaps experts have contributed to their own downfall and economists should take Chang’s advice to “be humble about the validity of your own economic theory”. The next time you read a newspaper column offering a supposed truth about the economy, why not test it against this yardstick.
But the logic of Chang’s argument is not to ignore experts, nor to dump neo-classical economics. Instead, we need to put expert advice into its proper relationship with democracy.
My take on this can be summarised in three points:
- Let the people decide.
- Let’s hope that the people will listen to (appropriately humble) experts before they decide.
- Even more importantly, given the social fractures revealed by Brexit, let the people talk with each other before they decide.
It is with the final point in mind that the RSA’s Citizens’ Economic Council is convening a series of deliberations around the UK’s economic goals and the policies used to achieve them. By bringing together 50-60 citizens from all walks of life in deep reflection and respectful dialogue we aim to show not just that economics is for everyone, but that economics is for all of us together.
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While sympathising with the sentiment of this video, theview of economics as having only one way of thinking has never been true.
I have often had the impression the everyday press - and dareI say financial market pundits – have contributed to the view of economicshaving only one or two sets of ideas. This could be because it is easier to presentarguments as “true” or “false” rather than describe uncertain and complex trade-offsoften necessary when making economic decisions.
Similar sentiments appear to have been expressed by SimonWren-Lewis who has written about “mediamacro”and for many years previously by Andrew Smithers using the term “stockbrokereconomics”.
Mainstream economics was dominated by a few schools ofthought dominated before the financial crisis but even then these schools wereactively challenged well before the financial crisis.
For example, efficient markets theory was challenged by the collapseof LTCM and the collapse of the TMT dominated equity market of the early 2000s.The Washington consensus was challenged in the late 1990s by the Asianfinancial crisis and the growth success of countries such as China and other countriesin Asia partly by limiting capital flows. Economists in the UK have highlightedmarket failure in UK and its effect on reducing house building for years. The BarkerReview of Housing Supply was published 12 years ago in 2004!
The cries for more relevant economics have been around for along time. The global financial crisis has added urgency to these cries. Thoughtfulsurveys of the variety of ways to think about economic issues are given notonly by Ha-Joon Chang but also by Diane Coyle in her 2009 book, The Soulful Science: What EconomistsDo and Why It Really Matters and Dani Rodrik in his 2015 book Economics Rules: TheRights and Wrongs of the Dismal Science. Many educators have set up the CORE economics programme to “makeeconomics accessible and relevant to today’s problems”.
Economics and economists suffer from overconfidence. Morehumility is needed. Much needs to be done to improve the relevance of subjectto the problems societies face. Much also needs to be done in reportingaccurately what the subject actually says – rather than what some interestedparties think it should say.