Why are we still treating economics as if it were an empirical science that makes reliable predictions?

Robert Skidelsky is an eccentric British economist: trained at Oxford, author of a definitive three-volume biography of Keynes, a Lord who sat with the Tories as their economics critic during the Blair regime, who now sits as an independent who is aligned with Labour's left wing. Back in September, Yale University Press published Skidelsky's latest book, Money and Government: The Past and Future of Economics, a retelling of the history of economics as a discipline that seeks to uncover how economics' failings created the 2008 crisis and have only made things worse since.

David "Debt" Graeber (previously) has written a fascinating and important review of Money and Government for the New York Review of Books, describing how, for decades, mainstream economists have claimed hold over the empirical truth of where money comes from and how it works, despite the catastrophic failure of their theories to perform as predicted in the real world, and how "Britain’s notoriously independent civil service" created a parallel theory of money -- one that does work -- and use that to operate quietly in parallel to the mainstream monetarist orthodoxy.

After the 2008 crisis, the Queen of England famously demanded to know why no one saw the crash coming. Skidelsky (and Graeber) have an answer: because everyone who was in a position to do something about the coming crash refused to adapt their dogma to reflect the facts, and everyone else, who could see the crash coming, was sidelined because they refused to buy into the dogma.

The UK has often led transitions from one economic theory to the next -- certainly, British economists' and their official partners in Thatcher's government led the way on monetarism -- and today, the currents in British economic thought, documented by Skidelsky in his book, could overturn the neoclassical consensus and lead the way again.

How was it possible to justify such a remarkable string of failures? Here a lot of the blame, according to Skidelsky, can be laid at the feet of the Scottish philosopher David Hume. An early advocate of QTM, Hume was also the first to introduce the notion that short-term shocks—such as Locke produced—would create long-term benefits if they had the effect of unleashing the self-regulating powers of the market:

Ever since Hume, economists have distinguished between the short-run and the long-run effects of economic change, including the effects of policy interventions. The distinction has served to protect the theory of equilibrium, by enabling it to be stated in a form which took some account of reality. In economics, the short-run now typically stands for the period during which a market (or an economy of markets) temporarily deviates from its long-term equilibrium position under the impact of some “shock,” like a pendulum temporarily dislodged from a position of rest. This way of thinking suggests that governments should leave it to markets to discover their natural equilibrium positions. Government interventions to “correct” deviations will only add extra layers of delusion to the original one.

There is a logical flaw to any such theory: there’s no possible way to disprove it. The premise that markets will always right themselves in the end can only be tested if one has a commonly agreed definition of when the “end” is; but for economists, that definition turns out to be “however long it takes to reach a point where I can say the economy has returned to equilibrium.” (In the same way, statements like “the barbarians always win in the end” or “truth always prevails” cannot be proved wrong, since in practice they just mean “whenever barbarians win, or truth prevails, I shall declare the story over.”)

At this point, all the pieces were in place: tight-money policies (which benefited creditors and the wealthy) could be justified as “harsh medicine” to clear up price-signals so the market could return to a healthy state of long-run balance. In describing how all this came about, Skidelsky is providing us with a worthy extension of a history Karl Polanyi first began to map out in the 1940s: the story of how supposedly self-regulating national markets were the product of careful social engineering. Part of that involved creating government policies self-consciously designed to inspire resentment of “big government.”

Against Economics [David Graeber/New York Review of Books]

(via Naked Capitalism)

(Image: Images George Rex , CC BY-SA)