Start again everybody - all economics is wrong
No, really, scientists tell us so:
Neoclassical economics (NCE) theory and neoliberal economics practice together form one of the principal driving forces of environmental destruction and social injustice. We critically examine ten key hypotheses that form the foundations of NCE, and four other claims. Each fails to satisfy one or more of the basic requirements of scientific practice. Hence, NCE is fundamentally flawed, is irrational in the common meaning of the word, and should not be used as a guide for government policies. Because NCE is socially constructed, it can be replaced with an interdisciplinary conceptual framework that is compatible with ecological sustainability and social justice.
Well, there we are and doesn’t that just tell all of us. That the sort of references they use are the American Prospect, Jason Hickel - one paper of his insists that the population was on less than subsistence incomes in a century when population tripled - Naomi Klein - she who insisted that more expensive Canadian solar cells would increase the installation of solar in Canada - and Steve Keen* could mean that we’re not going to pay much attention to this tripe but we should, in fact, take the idea seriously.
For this is a common enough claim. Some or all of the base claims - rational consumers, utility maximisation say - are not true of all people in all circumstances. As we know any scientific theory is destroyed by just the one ugly fact. Therefore neoclassical economics fails. And Yah Boo Sucks! and the Commissar will tell us when we may nibble our raw turnip.
The failure of this contention is that neoclassical economics is not a scientific theory. Thus it is not something to be proven - or subject to disproof - by the scientific method. As Brad Delong has been pointing out, correctly, for decades neoclassical economics is a toolbox we can use to explore human interaction, human responses to incentives and so on. Often enough it will give us some guidance as to how to achieve a goal. Or, more inconveniently for planners and politicians, the likely result of certain actions. But that is what it is, a toolbox.
Within that toolbox there are models that assume irrational consumers if that’s what we want to study - say, the market for Pet Rocks**. Similarly we can drop the utility maximisation - as many models do, assuming statisficing instead. That is, within the toolbox are many tools, many models, and the trick is to use the screwdriver when dealing with a screw and the hammer with a nail. It’s never “the toolbox is right” it’s “which is the right model right here, right now?”
To put this in terms these social ecological scientists might understand. All physics is wrong. There is no unified theory of everything. Newton’s just great for tracking a cricket ball or getting to the Moon. Using Newton to get to Mercury will have you crashing into it, not landing - at this point we need to use Einstein. As we also do with GPS. Neither Newton nor Einstein are going to get quantum computing working - to be fair, nor might anything else. But, of course, we don’t say that physics is wrong because we have to change models and explanations at times. We say that the models, explanations, are useful at times and not at others - we can track a cricket ball, get to the Moon and Mercury, GPS does work and quantum computing, well…. real soon now no doubt.
Neoclassical economics - neoliberal if you like - tells us that if we tax foreigners who live here really a lot they might leave the country. Or, that some will and some won’t to be slightly more precise. Which means that attempting to tax foreigners who live here really a lot might increase tax revenues by a couple or three billion £, might actually reduce tax revenues by a billion £. Which is a useful thing to know really, as we consider whether to tax really a lot foreigners living here. No, really.
Neoclassical - neoliberal - economics is useful. Which is what we ask of tools and a toolbox after all. The usefulness does not depend - as with models of physics - upon whether it’s a scientific theory which explains all. The usefulness depends upon whether the model is useful.
Tim Worstall
*Keen once insisted to one of us that as we never do have truly infinite suppliers - correct - therefore no supplier is ever a price taker. That marginal production will, marginally, change the world price and so all are price formers, not takers. Thus all markets must be modelled as oligopolies, not free ones. Logically true but of no use whatsoever - for we find that markets with more than 4 or 5 non-colluding producers act more like the free market models than the oligopolistic ones. It’s never is the model wholly and accurately true, it’s is this model useful right here?
**The answer to which is that anyone not noting that humans value a couple of minutes cackling and silly joy is not noting something fairly important about human beings. This also explains Big Mouth Billy Bass - apparently a favourite of our late, lamented, Queen - and The Guardian’s Opinion page - so rumour has it, less of a favourite.