[D66] Against economics

[A.OUT]

Against economics – A review of Money and Government by Robert Skidelsky
By
David Graeber
progressiveeconomyforum.com
26 min
View Original

There is a growing feeling, among those who have the responsibility of 
managing large economies, that the discipline of economics is no longer 
fit for purpose. It is beginning to look like a science designed to 
solve problems that no longer exist.

A good example is the obsession with inflation. Economists still teach 
their students that the primary economic role of government—many would 
insist, its only really proper economic role—is to guarantee price 
stability. We must be constantly vigilant over the dangers of inflation. 
For governments to simply print money is therefore inherently sinful. 
If, however, inflation is kept at bay through the coordinated action of 
government and central bankers, the market should find its “natural rate 
of unemployment,” and investors, taking advantage of clear price 
signals, should be able to ensure healthy growth. These assumptions came 
with the monetarism of the 1980s, the idea that government should 
restrict itself to managing the money supply, and by the 1990s had come 
to be accepted as such elementary common sense that pretty much all 
political debate had to set out from a ritual acknowledgment of the 
perils of government spending. This continues to be the case, despite 
the fact that, since the 2008 recession, central banks have been 
printing money frantically in an attempt to create inflation and compel 
the rich to do something useful with their money, and have been largely 
unsuccessful in both endeavors.

We now live in a different economic universe than we did before the 
crash. Falling unemployment no longer drives up wages. Printing money 
does not cause inflation. Yet the language of public debate, and the 
wisdom conveyed in economic textbooks, remain almost entirely unchanged.

One expects a certain institutional lag. Mainstream economists nowadays 
might not be particularly good at predicting financial crashes, 
facilitating general prosperity, or coming up with models for preventing 
climate change, but when it comes to establishing themselves in 
positions of intellectual authority, unaffected by such failings, their 
success is unparalleled. One would have to look at the history of 
religions to find anything like it. To this day, economics continues to 
be taught not as a story of arguments—not, like any other social 
science, as a welter of often warring theoretical perspectives—but 
rather as something more like physics, the gradual realization of 
universal, unimpeachable mathematical truths. “Heterodox” theories of 
economics do, of course, exist (institutionalist, Marxist, feminist, 
“Austrian,” post-Keynesian…), but their exponents have been almost 
completely locked out of what are considered “serious” departments, and 
even outright rebellions by economics students (from the post-autistic 
economics movement in France to post-crash economics in Britain) have 
largely failed to force them into the core curriculum.

As a result, heterodox economists continue to be treated as just a step 
or two away from crackpots, despite the fact that they often have a much 
better record of predicting real-world economic events. What’s more, the 
basic psychological assumptions on which mainstream (neoclassical) 
economics is based—though they have long since been disproved by actual 
psychologists—have colonized the rest of the academy, and have had a 
profound impact on popular understandings of the world.

Nowhere is this divide between public debate and economic reality more 
dramatic than in Britain, which is perhaps why it appears to be the 
first country where something is beginning to crack. It was center-left 
New Labour that presided over the pre-crash bubble, and voters’ 
throw-the-bastards-out reaction brought a series of Conservative 
governments that soon discovered that a rhetoric of austerity—the 
Churchillian evocation of common sacrifice for the public good—played 
well with the British public, allowing them to win broad popular 
acceptance for policies designed to pare down what little remained of 
the British welfare state and redistribute resources upward, toward the 
rich. “There is no magic money tree,” as Theresa May put it during the 
snap election of 2017—virtually the only memorable line from one of the 
most lackluster campaigns in British history. The phrase has been 
repeated endlessly in the media, whenever someone asks why the UK is the 
only country in Western Europe that charges university tuition, or 
whether it is really necessary to have quite so many people sleeping on 
the streets.

The truly extraordinary thing about May’s phrase is that it isn’t true. 
There are plenty of magic money trees in Britain, as there are in any 
developed economy. They are called “banks.” Since modern money is simply 
credit, banks can and do create money literally out of nothing, simply 
by making loans. Almost all of the money circulating in Britain at the 
moment is bank-created in this way. Not only is the public largely 
unaware of this, but a recent survey by the British research group 
Positive Money discovered that an astounding 85 percent of members of 
Parliament had no idea where money really came from (most appeared to be 
under the impression that it was produced by the Royal Mint).

Economists, for obvious reasons, can’t be completely oblivious to the 
role of banks, but they have spent much of the twentieth century arguing 
about what actually happens when someone applies for a loan. One school 
insists that banks transfer existing funds from their reserves, another 
that they produce new money, but only on the basis of a multiplier 
effect (so that your car loan can still be seen as ultimately rooted in 
some retired grandmother’s pension fund). Only a minority—mostly 
heterodox economists, post-Keynesians, and modern money theorists—uphold 
what is called the “credit creation theory of banking”: that bankers 
simply wave a magic wand and make the money appear, secure in the 
confidence that even if they hand a client a credit for $1 million, 
ultimately the recipient will put it back in the bank again, so that, 
across the system as a whole, credits and debts will cancel out. Rather 
than loans being based in deposits, in this view, deposits themselves 
were the result of loans.

The one thing it never seemed to occur to anyone to do was to get a job 
at a bank, and find out what actually happens when someone asks to 
borrow money. In 2014 a German economist named Richard Werner did 
exactly that, and discovered that, in fact, loan officers do not check 
their existing funds, reserves, or anything else. They simply create 
money out of thin air, or, as he preferred to put it, “fairy dust.”

That year also appears to have been when elements in Britain’s 
notoriously independent civil service decided that enough was enough. 
The question of money creation became a critical bone of contention. The 
overwhelming majority of even mainstream economists in the UK had long 
since rejected austerity as counterproductive (which, predictably, had 
almost no impact on public debate). But at a certain point, demanding 
that the technocrats charged with running the system base all policy 
decisions on false assumptions about something as elementary as the 
nature of money becomes a little like demanding that architects proceed 
on the understanding that the square root of 47 is actually π. 
Architects are aware that buildings would start falling down. People 
would die.

Before long, the Bank of England (the British equivalent of the Federal 
Reserve, whose economists are most free to speak their minds since they 
are not formally part of the government) rolled out an elaborate 
official report called “Money Creation in the Modern Economy,” replete 
with videos and animations, making the same point: existing economics 
textbooks, and particularly the reigning monetarist orthodoxy, are 
wrong. The heterodox economists are right. Private banks create money. 
Central banks like the Bank of England create money as well, but 
monetarists are entirely wrong to insist that their proper function is 
to control the money supply. In fact, central banks do not in any sense 
control the money supply; their main function is to set the interest 
rate—to determine how much private banks can charge for the money they 
create. Almost all public debate on these subjects is therefore based on 
false premises. For example, if what the Bank of England was saying were 
true, government borrowing didn’t divert funds from the private sector; 
it created entirely new money that had not existed before.

One might have imagined that such an admission would create something of 
a splash, and in certain restricted circles, it did. Central banks in 
Norway, Switzerland, and Germany quickly put out similar papers. Back in 
the UK, the immediate media response was simply silence. The Bank of 
England report has never, to my knowledge, been so much as mentioned on 
the BBC or any other TV news outlet. Newspaper columnists continued to 
write as if monetarism was self-evidently correct. Politicians continued 
to be grilled about where they would find the cash for social programs. 
It was as if a kind of entente cordiale had been established, in which 
the technocrats would be allowed to live in one theoretical universe, 
while politicians and news commentators would continue to exist in an 
entirely different one.

Still, there are signs that this arrangement is temporary. England—and 
the Bank of England in particular—prides itself on being a bellwether 
for global economic trends. Monetarism itself got its launch into 
intellectual respectability in the 1970s after having been embraced by 
Bank of England economists. From there it was ultimately adopted by the 
insurgent Thatcher regime, and only after that by Ronald Reagan in the 
United States, and it was subsequently exported almost everywhere else.

It is possible that a similar pattern is reproducing itself today. In 
2015, a year after the appearance of the Bank of England report, the 
Labour Party for the first time allowed open elections for its 
leadership, and the left wing of the party, under Jeremy Corbyn and now 
shadow chancellor of the exchequer John McDonnell, took hold of the 
reins of power. At the time, the Labour left were considered even more 
marginal extremists than was Thatcher’s wing of the Conservative Party 
in 1975; it is also (despite the media’s constant efforts to paint them 
as unreconstructed 1970s socialists) the only major political group in 
the UK that has been open to new economic ideas. While pretty much the 
entire political establishment has been spending most of its time these 
last few years screaming at one another about Brexit, McDonnell’s 
office—and Labour youth support groups—have been holding workshops and 
floating policy initiatives on everything from a four-day workweek and 
universal basic income to a Green Industrial Revolution and “Fully 
Automated Luxury Communism,” and inviting heterodox economists to take 
part in popular education initiatives aimed at transforming conceptions 
of how the economy really works. Corbynism has faced near-histrionic 
opposition from virtually all sectors of the political establishment, 
but it would be unwise to ignore the possibility that something historic 
is afoot.

One sign that something historically new has indeed appeared is if 
scholars begin reading the past in a new light. Accordingly, one of the 
most significant books to come out of the UK in recent years would have 
to be Robert Skidelsky’s Money and Government: The Past and Future of 
Economics. Ostensibly an attempt to answer the question of why 
mainstream economics rendered itself so useless in the years immediately 
before and after the crisis of 2008, it is really an attempt to retell 
the history of the economic discipline through a consideration of the 
two things—money and government—that most economists least like to talk 
about.

Skidelsky is well positioned to tell this story. He embodies a uniquely 
English type: the gentle maverick, so firmly ensconced in the 
establishment that it never occurs to him that he might not be able to 
say exactly what he thinks, and whose views are tolerated by the rest of 
the establishment precisely for that reason. Born in Manchuria, trained 
at Oxford, professor of political economy at Warwick, Skidelsky is best 
known as the author of the definitive, three-volume biography of John 
Maynard Keynes, and has for the last three decades sat in the House of 
Lords as Baron of Tilton, affiliated at different times with a variety 
of political parties, and sometimes none at all. During the early Blair 
years, he was a Conservative, and even served as opposition spokesman on 
economic matters in the upper chamber; currently he’s a cross-bench 
independent, broadly aligned with left Labour. In other words, he 
follows his own flag. Usually, it’s an interesting flag. Over the last 
several years, Skidelsky has been taking advantage of his position in 
the world’s most elite legislative body to hold a series of high-level 
seminars on the reformation of the economic discipline; this book is, in 
a sense, the first major product of these endeavors.

What it reveals is an endless war between two broad theoretical 
perspectives in which the same side always seems to win—for reasons that 
rarely have anything to do with either theoretical sophistication or 
greater predictive power. The crux of the argument always seems to turn 
on the nature of money. Is money best conceived of as a physical 
commodity, a precious substance used to facilitate exchange, or is it 
better to see money primarily as a credit, a bookkeeping method or 
circulating IOU—in any case, a social arrangement? This is an argument 
that has been going on in some form for thousands of years. What we call 
“money” is always a mixture of both, and, as I myself noted in Debt 
(2011), the center of gravity between the two tends to shift back and 
forth over time. In the Middle Ages everyday transactions across Eurasia 
were typically conducted by means of credit, and money was assumed to be 
an abstraction. It was the rise of global European empires in the 
sixteenth and seventeenth centuries, and the corresponding flood of gold 
and silver looted from the Americas, that really shifted perceptions. 
Historically, the feeling that bullion actually is money tends to mark 
periods of generalized violence, mass slavery, and predatory standing 
armies—which for most of the world was precisely how the Spanish, 
Portuguese, Dutch, French, and British empires were experienced. One 
important theoretical innovation that these new bullion-based theories 
of money allowed was, as Skidelsky notes, what has come to be called the 
quantity theory of money (usually referred to in textbooks—since 
economists take endless delight in abbreviations—as QTM).

The QTM argument was first put forward by a French lawyer named Jean 
Bodin, during a debate over the cause of the sharp, destablizing price 
inflation that immediately followed the Iberian conquest of the 
Americas. Bodin argued that the inflation was a simple matter of supply 
and demand: the enormous influx of gold and silver from the Spanish 
colonies was cheapening the value of money in Europe. The basic 
principle would no doubt have seemed a matter of common sense to anyone 
with experience of commerce at the time, but it turns out to have been 
based on a series of false assumptions. For one thing, most of the gold 
and silver extracted from Mexico and Peru did not end up in Europe at 
all, and certainly wasn’t coined into money. Most of it was transported 
directly to China and India (to buy spices, silks, calicoes, and other 
“oriental luxuries”), and insofar as it had inflationary effects back 
home, it was on the basis of speculative bonds of one sort or another. 
This almost always turns out to be true when QTM is applied: it seems 
self-evident, but only if you leave most of the critical factors out.

In the case of the sixteenth-century price inflation, for instance, once 
one takes account of credit, hoarding, and speculation—not to mention 
increased rates of economic activity, investment in new technology, and 
wage levels (which, in turn, have a lot to do with the relative power of 
workers and employers, creditors and debtors)—it becomes impossible to 
say for certain which is the deciding factor: whether the money supply 
drives prices, or prices drive the money supply. Technically, this comes 
down to a choice between what are called exogenous and endogenous 
theories of money. Should money be treated as an outside factor, like 
all those Spanish dubloons supposedly sweeping into Antwerp, Dublin, and 
Genoa in the days of Philip II, or should it be imagined primarily as a 
product of economic activity itself, mined, minted, and put into 
circulation, or more often, created as credit instruments such as loans, 
in order to meet a demand—which would, of course, mean that the roots of 
inflation lie elsewhere?

To put it bluntly: QTM is obviously wrong. Doubling the amount of gold 
in a country will have no effect on the price of cheese if you give all 
the gold to rich people and they just bury it in their yards, or use it 
to make gold-plated submarines (this is, incidentally, why quantitative 
easing, the strategy of buying long-term government bonds to put money 
into circulation, did not work either). What actually matters is spending.

Nonetheless, from Bodin’s time to the present, almost every time there 
was a major policy debate, the QTM advocates won. In England, the 
pattern was set in 1696, just after the creation of the Bank of England, 
with an argument over wartime inflation between Treasury Secretary 
William Lowndes, Sir Isaac Newton (then warden of the mint), and the 
philosopher John Locke. Newton had agreed with the Treasury that silver 
coins had to be officially devalued to prevent a deflationary collapse; 
Locke took an extreme monetarist position, arguing that the government 
should be limited to guaranteeing the value of property (including 
coins) and that tinkering would confuse investors and defraud creditors. 
Locke won. The result was deflationary collapse. A sharp tightening of 
the money supply created an abrupt economic contraction that threw 
hundreds of thousands out of work and created mass penury, riots, and 
hunger. The government quickly moved to moderate the policy (first by 
allowing banks to monetize government war debts in the form of bank 
notes, and eventually by moving off the silver standard entirely), but 
in its official rhetoric, Locke’s small-government, pro-creditor, 
hard-money ideology became the grounds of all further political debate.

According to Skidelsky, the pattern was to repeat itself again and 
again, in 1797, the 1840s, the 1890s, and, ultimately, the late 1970s 
and early 1980s, with Thatcher and Reagan’s (in each case brief) 
adoption of monetarism. Always we see the same sequence of events:

     (1) The government adopts hard-money policies as a matter of principle.

     (2) Disaster ensues.

     (3) The government quietly abandons hard-money policies.

     (4) The economy recovers.

     (5) Hard-money philosophy nonetheless becomes, or is reinforced as, 
simple universal common sense.

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.” 
Skidelsky writes:

     A crucial innovation was income tax, first levied in 1814, and 
renewed by [Prime Minister Robert] Peel in 1842. By 1911–14, this had 
become the principal source of government revenue. Income tax had the 
double benefit of giving the British state a secure revenue base, and 
aligning voters’ interests with cheap government, since only direct 
taxpayers had the vote…. “Fiscal probity,” under Gladstone, “became the 
new morality.”

In fact, there’s absolutely no reason a modern state should fund itself 
primarily by appropriating a proportion of each citizen’s earnings. 
There are plenty of other ways to go about it. Many—such as land, 
wealth, commercial, or consumer taxes (any of which can be made more or 
less progressive)—are considerably more efficient, since creating a 
bureaucratic apparatus capable of monitoring citizens’ personal affairs 
to the degree required by an income tax system is itself enormously 
expensive. But this misses the real point: income tax is supposed to be 
intrusive and exasperating. It is meant to feel at least a little bit 
unfair. Like so much of classical liberalism (and contemporary 
neoliberalism), it is an ingenious political sleight of hand—an 
expansion of the bureaucratic state that also allows its leaders to 
pretend to advocate for small government.

The one major exception to this pattern was the mid-twentieth century, 
what has come to be remembered as the Keynesian age. It was a period in 
which those running capitalist democracies, spooked by the Russian 
Revolution and the prospect of the mass rebellion of their own working 
classes, allowed unprecedented levels of redistribution—which, in turn, 
led to the most generalized material prosperity in human history. The 
story of the Keynesian revolution of the 1930s, and the neoclassical 
counterrevolution of the 1970s, has been told innumerable times, but 
Skidelsky gives the reader a fresh sense of the underlying conflict.

Keynes himself was staunchly anti-Communist, but largely because he felt 
that capitalism was more likely to drive rapid technological advance 
that would largely eliminate the need for material labor. He wished for 
full employment not because he thought work was good, but because he 
ultimately wished to do away with work, envisioning a society in which 
technology would render human labor obsolete. In other words, he assumed 
that the ground was always shifting under the analysts’ feet; the object 
of any social science was inherently unstable. Max Weber, for similar 
reasons, argued that it would never be possible for social scientists to 
come up with anything remotely like the laws of physics, because by the 
time they had come anywhere near to gathering enough information, 
society itself, and what analysts felt was important to know about it, 
would have changed so much that the information would be irrelevant. 
Keynes’s opponents, on the other hand, were determined to root their 
arguments in just such universal principles.

It’s difficult for outsiders to see what was really at stake here, 
because the argument has come to be recounted as a technical dispute 
between the roles of micro- and macroeconomics. Keynesians insisted that 
the former is appropriate to studying the behavior of individual 
households or firms, trying to optimize their advantage in the 
marketplace, but that as soon as one begins to look at national 
economies, one is moving to an entirely different level of complexity, 
where different sorts of laws apply. Just as it is impossible to 
understand the mating habits of an aardvark by analyzing all the 
chemical reactions in their cells, so patterns of trade, investment, or 
the fluctuations of interest or employment rates were not simply the 
aggregate of all the microtransactions that seemed to make them up. The 
patterns had, as philosophers of science would put it, “emergent 
properties.” Obviously, it was necessary to understand the micro level 
(just as it was necessary to understand the chemicals that made up the 
aardvark) to have any chance of understand the macro, but that was not, 
in itself, enough.

The counterrevolutionaries, starting with Keynes’s old rival Friedrich 
Hayek at the LSE and the various luminaries who joined him in the Mont 
Pelerin Society, took aim directly at this notion that national 
economies are anything more than the sum of their parts. Politically, 
Skidelsky notes, this was due to a hostility to the very idea of 
statecraft (and, in a broader sense, of any collective good). National 
economies could indeed be reduced to the aggregate effect of millions of 
individual decisions, and, therefore, every element of macroeconomics 
had to be systematically “micro-founded.”

One reason this was such a radical position was that it was taken at 
exactly the same moment that microeconomics itself was completing a 
profound transformation—one that had begun with the marginal revolution 
of the late nineteenth century—from a technique for understanding how 
those operating on the market make decisions to a general philosophy of 
human life. It was able to do so, remarkably enough, by proposing a 
series of assumptions that even economists themselves were happy to 
admit were not really true: let us posit, they said, purely rational 
actors motivated exclusively by self-interest, who know exactly what 
they want and never change their minds, and have complete access to all 
relevant pricing information. This allowed them to make precise, 
predictive equations of exactly how individuals should be expected to act.

Surely there’s nothing wrong with creating simplified models. Arguably, 
this is how any science of human affairs has to proceed. But an 
empirical science then goes on to test those models against what people 
actually do, and adjust them accordingly. This is precisely what 
economists did not do. Instead, they discovered that, if one encased 
those models in mathematical formulae completely impenetrable to the 
noninitiate, it would be possible to create a universe in which those 
premises could never be refuted. (“All actors are engaged in the 
maximization of utility. What is utility? Whatever it is that an actor 
appears to be maximizing.”) The mathematical equations allowed 
economists to plausibly claim theirs was the only branch of social 
theory that had advanced to anything like a predictive science (even if 
most of their successful predictions were of the behavior of people who 
had themselves been trained in economic theory).

This allowed Homo economicus to invade the rest of the academy, so that 
by the 1950s and 1960s almost every scholarly discipline in the business 
of preparing young people for positions of power (political science, 
international relations, etc.) had adopted some variant of “rational 
choice theory” culled, ultimately, from microeconomics. By the 1980s and 
1990s, it had reached a point where even the heads of art foundations or 
charitable organizations would not be considered fully qualified if they 
were not at least broadly familiar with a “science” of human affairs 
that started from the assumption that humans were fundamentally selfish 
and greedy.

These, then, were the “microfoundations” to which the neoclassical 
reformers demanded macroeconomics be returned. Here they were able to 
take advantage of certain undeniable weaknesses in Keynesian 
formulations, above all its inability to explain 1970s stagflation, to 
brush away the remaining Keynesian superstructure and return to the same 
hard-money, small-government policies that had been dominant in the 
nineteenth century. The familiar pattern ensued. Monetarism didn’t work; 
in the UK and then the US, such policies were quickly abandoned. But 
ideologically, the intervention was so effective that even when “new 
Keynesians” like Joseph Stiglitz or Paul Krugman returned to dominate 
the argument about macroeconomics, they still felt obliged to maintain 
the new microfoundations.

The problem, as Skidelsky emphasizes, is that if your initial 
assumptions are absurd, multiplying them a thousandfold will hardly make 
them less so. Or, as he puts it, rather less gently, “lunatic premises 
lead to mad conclusions”:

     The efficient market hypothesis (EMH), made popular by Eugene 
Fama…is the application of rational expectations to financial markets. 
The rational expectations hypothesis (REH) says that agents optimally 
utilize all available information about the economy and policy instantly 
to adjust their expectations….

     Thus, in the words of Fama,…“In an efficient market, competition 
among the many intelligent participants leads to a situation where…the 
actual price of a security will be a good estimate of its intrinsic 
value.” [Skidelsky’s italics]

In other words, we were obliged to pretend that markets could not, by 
definition, be wrong—if in the 1980s the land on which the Imperial 
compound in Tokyo was built, for example, was valued higher than that of 
all the land in New York City, then that would have to be because that 
was what it was actually worth. If there are deviations, they are purely 
random, “stochastic” and therefore unpredictable, temporary, and, 
ultimately, insignificant. In any case, rational actors will quickly 
step in to sweep up any undervalued stocks. Skidelsky drily remarks:

     There is a paradox here. On the one hand, the theory says that 
there is no point in trying to profit from speculation, because shares 
are always correctly priced and their movements cannot be predicted. But 
on the other hand, if investors did not try to profit, the market would 
not be efficient because there would be no self-correcting mechanism….

     Secondly, if shares are always correctly priced, bubbles and crises 
cannot be generated by the market….

     This attitude leached into policy: “government officials, starting 
with [Federal Reserve Chairman] Alan Greenspan, were unwilling to burst 
the bubble precisely because they were unwilling to even judge that it 
was a bubble.” The EMH made the identification of bubbles impossible 
because it ruled them out a priori.

If there is an answer to the queen’s famous question of why no one saw 
the crash coming, this would be it.

At this point, we have come full circle. After such a catastrophic 
embarrassment, orthodox economists fell back on their strong 
suit—academic politics and institutional power. In the UK, one of the 
first moves of the new Conservative-Liberal Democratic Coalition in 2010 
was to reform the higher education system by tripling tuition and 
instituting an American-style regime of student loans. Common sense 
might have suggested that if the education system was performing 
successfully (for all its foibles, the British university system was 
considered one of the best in the world), while the financial system was 
operating so badly that it had nearly destroyed the global economy, the 
sensible thing might be to reform the financial system to be a bit more 
like the educational system, rather than the other way around. An 
aggressive effort to do the opposite could only be an ideological move. 
It was a full-on assault on the very idea that knowledge could be 
anything other than an economic good.

Similar moves were made to solidify control over the institutional 
structure. The BBC, a once proudly independent body, under the Tories 
has increasingly come to resemble a state broadcasting network, their 
political commentators often reciting almost verbatim the latest talking 
points of the ruling party—which, at least economically, were premised 
on the very theories that had just been discredited. Political debate 
simply assumed that the usual “harsh medicine” and Gladstonian “fiscal 
probity” were the only solution; at the same time, the Bank of England 
began printing money like mad and, effectively, handing it out to the 
one percent in an unsuccessful attempt to kick-start inflation. The 
practical results were, to put it mildly, uninspiring. Even at the 
height of the eventual recovery, in the fifth-richest country in the 
world, something like one British citizen in twelve experienced hunger, 
up to and including going entire days without food. If an “economy” is 
to be defined as the means by which a human population provides itself 
with its material needs, the British economy is increasingly 
dysfunctional. Frenetic efforts on the part of the British political 
class to change the subject (Brexit) can hardly go on forever. 
Eventually, real issues will have to be addressed.

Economic theory as it exists increasingly resembles a shed full of 
broken tools. This is not to say there are no useful insights here, but 
fundamentally the existing discipline is designed to solve another 
century’s problems. The problem of how to determine the optimal 
distribution of work and resources to create high levels of economic 
growth is simply not the same problem we are now facing: i.e., how to 
deal with increasing technological productivity, decreasing real demand 
for labor, and the effective management of care work, without also 
destroying the Earth. This demands a different science. The 
“microfoundations” of current economics are precisely what is standing 
in the way of this. Any new, viable science will either have to draw on 
the accumulated knowledge of feminism, behavioral economics, psychology, 
and even anthropology to come up with theories based on how people 
actually behave, or once again embrace the notion of emergent levels of 
complexity—or, most likely, both.

Intellectually, this won’t be easy. Politically, it will be even more 
difficult. Breaking through neoclassical economics’ lock on major 
institutions, and its near-theological hold over the media—not to 
mention all the subtle ways it has come to define our conceptions of 
human motivations and the horizons of human possibility—is a daunting 
prospect. Presumably, some kind of shock would be required. What might 
it take? Another 2008-style collapse? Some radical political shift in a 
major world government? A global youth rebellion? However it will come 
about, books like this—and quite possibly this book—will play a crucial 
part.

This piece is cross-posted with permission from New York Review of 
Books. It can be read on their website here. Photo credit: 
Flickr/fernando butcher.