The discipline of economics is in crisis. This according to no less a person than Andy Haldane, Chief Economist at the bank of England. The blatant inadequacies of the subject, exposed by the 2008 credit crunch, brought to a head a growing chorus of criticism. Not only did the vast bulk of economists fail to see the crisis coming, they also struggled to analyse it once it broke.

For good reason the debates since then have been far more than academic. The imperialist ambitions of the discipline and the advice provided by economists have come to profoundly shape ever wider areas of public policy having profound implications for the lives of millions of people. Over the years the neoclassical model has been proposed to have direct relevance to more and more areas of life. The insights of the market and competition have been seen as directly applicable to topics previously thought of as the province of other subjects. Health, education, welfare, policing, no area of life appears immune to the benefits derived from the application of market principles.

Even within the framework of neoclassical economics there is much to argue about given the limitations highlighted by the 2008 crash. The role of finance is one of the areas where the theoretical analysis was weak. However, a more radical attack accuses the neoclassical model itself of obscuring as much as it reveals. What is more, doing this to the benefit of the few at the expense of many. It is suggested the intellectual structure of the subject defines what are legitimate questions for debate and systematically exclude distributional consequences of economic actions as irrelevant, to the advantage of those who currently benefit from those distributional consequences.

Some believe the standard model is basically sound but needs development, others see the model as sound but having been captured to support particular interests, and some see the problems having their roots in the very scientific essentialism of the model itself. This more radical attack rejects what they see as a misguided attempt to make economics a science modelled on physics. A subject purged of moral content, founded on unrealistically simplified assumptions.

It was not always thus. When Adam Smith was writing the “An Inquiry into the Nature and Causes of the Wealth of Nations” his subject was “political economy” a subject with philosophical and moral considerations built in. Smith certainly saw how the operation of the market could translate personal interest into collective welfare. However, he was as concerned in the 18th Century as many are today about how the hidden hand of the market could become handcuffed to the special interests of oligarchs. At the time he was writing his concern was straight forward collusion. As he put it  “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”

Such collusion is still a concern, however the evolution of economics as a subject has created new, more insidious and sophisticated  challenges. Challenges which arise out of how the neoclassical model defines its subject. It is argued those “of the same trade” no longer need to crudely rig the operation of the market, rather the neoclassical definition of the market itself is rigged in favour of their interests.

At the heart of this view is the notion that economics has been elevated to something akin to a science who’s findings are outside the court of political discourse. They are just about the way the world is and challenging them is akin to objecting to the laws of gravity.

This model reifies the market as an independent force which tends towards an optimum outcome if left alone. Political interference with the market, on this view, is almost certain to lead to a worse state of affairs as the natural operation of the market tends to the best of all possible outcomes.

So, if the market creates enormous inequalities of wealth which undermine social solidarity; if it leads to financial speculation which threatens to destroy the whole of the banking system; or even if it promotes the use of fossil fuels transforming the climate and threatening the viability of the planet, regulation should be avoided at all cost. The reason being that such regulation will lead to a worse state of affairs. Quite what is worse than the end of human civilisation is unclear.

This transformation of economics from a broad ranging social and moral area of study into a mathematical science did not happen overnight. It has taken some 150 years to transform Political Economy into Economics. A process involving an understandable if misguided attempt to drive normative judgements out of the subject in the belief this will improve its objectivity and therefore usefulness. 

As moral questions were driven out mathematical ones took their place. WS Jevons, one of the founders of what was to become neoclassical economics put it, “… if it is to be a science at all, it must be a mathematical science.” The aim being to transform economics  into a subject which reveals truths about what is the case as opposed to wishful thinking about what ought to be the case. Hard nosed, if sometimes unpalatable, common sense, over, morally attractive, but ultimately self defeating utopian proposals for improvement.

In order to achieve mathematical purity, economics, like physics, needed to simplify its’ assumptions to discover underlying, generalisable laws. Thus human beings are transformed into rational utility maximisers. They are assumed to have perfect and instantaneous knowledge of all prices within a market. And that market has a natural tendency towards Pareto optimal equilibrium. In other words supply and demand are balanced such that no one can be made better off without making someone else worse off. However, such a pared down model has come under challenge.

Firstly there have been attacks on the abstract model of rationality adopted. Fascinating work by people like Daniel Kahneman into the way human beings make decisions in the absence of perfect knowledge has produced a more accurate model of actually existing human rationality. The non-rational heuristic tools we all use to make, often significant, decisions feels very persuasive.

This new thinking has become incorporated into behavioural economics by people like Robert Shiller who has analysed the “irrational exuberance” of investors when an economic bubble starts to inflate. He asks what is an essentially basic question, “…what ultimately causes all those fluctuations in the price of speculative assets like corporate stocks, commodities, or real estate?” In other words if all these rational agents are operating in a perfect market why does it gyrate around so much?

A moments reflection on how your perspective and attitude is transformed the instant you get behind the wheel of a car and become a “driver” instead of a “pedestrian” should make you doubt any theory which relies on the rationality of human beings. Pure rational choice theory ultimately leads to a definition of rationality being any preference I happen to reveal. By this token of course Donald Trump is rational. Clearly the theory is in trouble.

Others have challenged the weakness of the neoclassical model’s view of the the role of finance in the economy and the tendency toward equilibrium. To some extent finance and the banks were seen as neutral facilitators of economic activity but not players. This was not the position of Hyman Mynsky writing in the 1970’s and 80’s, now regarded as something of a far sighted prophet of the 2008 credit crunch, with his radical critique of financial capitalism.

Rather than seeing markets as naturally tending to Pareto equilibrium with disruptions to this coming from shocks outside of the economic system Minsky saw crashes and booms as inherent features of the system itself. He developed the “Financial Instability Hypothesis” which saw investors behaviours following a cycle with only a shallow anchorage in rationality. After a crash investors are very cautious and adopt a hedging approach to investment decisions. They will only invest where the anticipated return will cover both interest and principal payments. As “confidence” returns to the economy investors take a more speculative position where near-term returns only cover interest charges and not principal. Finally, confidence moves toward hubris and investment decisions become more akin to Ponzi schemes where neither the interest or the capital pays back initially. Such positions require an increase in income flows or reduction of interest rates to avoid collapse.

Another line of critique is that the neoclassical model, irrespective of its theoretical strengths or weaknesses, has been captured by special interests. A critique developed by James Kwak in his work “Economism”. This looks at the basic models learned by students across the world in “Econ 101” and examines how they are transformed from tentative  descriptions with constrained application to immutable laws which shape the economic universe and thereby the social and political realm. 

In essence he suggests the models supplied by Econ 101 are like the models of the atom which show it as similar to the solar system with “planet” electrons revolving around a “sun” nucleus. Such a model is a helpful heuristic device but of course the reality is far more complicated. Public debate about economic policy options however is shaped by the unsophisticated “solar system” models of Econ 101. But why should this be the case?

Kwak points to the role of various foundations in the US such as the Foundation for Economic Education, the American Enterprise Institute and others. All of these bodies endowed by wealthy American businessmen who are very clear about the negative impacts of taxes and regulation on economic growth, and the importance of a flexible labour market unconstrained by the innovation-inhibiting impact of trade unions.

Further evidence for the way in which economics has been captured and weaponised by wealthy individuals in the United States is provided by Jayne Meyer in her excellent book “Dark Money“. This looks at how multi-billionaires have used their economic strength to promote a particular interpretation of economics which supports their radical libertarian political outlook. The neoclassical model is transmuted into a neoliberal model of economics which is created by and yet provides the intellectual foundations for a neoliberal politics. A politics which majors on the scientific pretensions of the neoclassical model and uses it to rule out of court certain questions about the consequence of specific economic policies.

William Davies has chartered the process talking about it as the “disenchantment of politics by economics.” In his work “The Limits of Neoliberalism” he considers how neoclassical economics is supported by and in turn reinforces a neoliberal political agenda. Indeed he defines Neoliberalism as “the elevation of market-based principles and techniques of evaluation to the level of state endorsed norms.” This picture of the way market models have been applied to more and more areas of life is certainly familiar in the UK. 

The 2008 crash was a major shock to the world financial system. It was also a major shock to the subject of economics and the profession of economists. The Queen wanted to know why no one had seen it coming and Economics students around the world started to question the value of complex mathematical models which gave incomplete answers to questions they were not interested in.

Demands for a more relevant economics syllabus resulted in initiatives, such as the on-line, open-access platform coreecon addressing what were seen as critically relevant issues such as innovation, inequality, environmental sustainability and much more. If anything this process is gaining momentum. It may mean that politics is put back into economics allowing distributional consequences to be considered as valid criteria for assessing economic models. The subject may become less scientific but more useful.