Terms of Trade | Economics has a monopoly problem, but possibly not because of Ivy Leagues

An editorial in the Financial Times, for example, pinned the blame for modern economics’ failures on the rising concentration in the field.

“There is certainly a case to be made that narrow gatekeeping and a steep hierarchy of prestige foster groupthink overseen by a self-perpetuating priesthood. After all, economics itself has models — from informational cascades to herding behaviour — explaining how the pivotal influence of a few can entrench inferior outcomes. When career incentives and social pressures concentrate influence in a small group, neither big policy mistakes nor petty personal abuse should surprise anyone”, it said.

Writing for The Atlantic, David Deming, another Harvard economist, went deeper into the problems plaguing modern economics, which he sees primarily as a result of it falling between two stools of trying to be interpretive and objective at the same time.

“Unlike the sciences, the humanities are primarily interpretive, meaning they seek to understand and explain aspects of the human experience. This work is valuable, but it is much harder to judge objectively. Its subjective nature creates a halo effect whereby work written by a well-regarded scholar is widely assumed to be brilliant by default… Economics has long chafed at its association with “soft” fields such as philosophy and history and thus spent most of the 20th century trying to imitate the hard sciences by becoming more mathematically rigorous. But this attempt didn’t work, because trying to explain the world via mathematical models is still fundamentally interpretive, requiring crucial assumptions about which factors belong in one’s formula at all. The shift instead plunged economics even deeper into esoteric theorising and insider jargon”, Deming says, adding that the problem is not quantitative methods per se but the fact that “in economics, professional incentives too often reward theoretical elegance over solving real-world problems”.

To be sure, not all economists are as critical of the discipline as it exists today. In a Bloomberg article, Tyler Cowen, who is an economist at the George Mason University and better known for running The Marginal Revolution blog, has argued that “this lack of novelty does not make economics less scientific”, and it should be seen as a reflection of economics being a “relatively mature science”, which makes it “hard for radical new ideas to come out of nowhere”. The concentration which seems to be worrying everyone is largely a by-product of this stability, Cowen adds. To be sure, Cowen is categorical in saying that the relative rarity of cutting-edge innovations does not make economists a lot always in agreement with each other. “Economists can and do argue about the right mix of those policies in a particular case… The point is not that economists have all the answers. It’s that we have a pretty exhaustive list of possible remedies”.

It is tempting to agree with Cowen’s argument rather than that concentration per se is the primary cause of bad economics theory. Most disagreements about the relationship between economics and the real world are more about whether to do X or Y than not knowing what to do at all. Debates about fiscal conservatism, inflation targeting, free trade, privatisation versus nationalisation, and monopoly versus anti-trust laws are some such examples. What gets or does not get done from these economic ideas, for better or worse, is more a question of political power than scholarship, one can rightly argue.

To be sure, this has been the case with economics ever since its inception. But back then, economists were more willing to partake in political debates than they are now. David Ricardo, for example, chose the side of free trade over entrenched landowner interests by arguing against corn laws in nineteenth-century England. On the other side was Thomas Robert Malthus, who was arguing for the interest of feudal clergy by asserting that the problem was not low production but rising population which was growing faster than food supplies. The poor should be allowed to perish rather than hurting landed interests was Malthus’s basic point.

Karl Marx, another figure among the founders of classical political economy, dedicated his scholarship to the rights of the workers who did not own capital. Marx’s ideas reached their peak with the Bolshevik revolution and coming into being of socialism. They subsequently saw a reversal but have had a profound impact on the balance of power between capital and labour in modern capitalism.

Not all dissenters in economics have been against the larger interests of capital per se. John Maynard Keynes, perhaps the most influential modern economist was dedicated towards saving capitalism from the rentier capitalists and asked for their euthanasia to get rid of cyclical economic downturns.

What has changed in this historical dual in economics and, therefore, capitalism is that the balance of power has shifted significantly in favour of capital and its rentier variant in today’s world. This is a consequence of the neoliberal counter-revolution against the Keynesian revolution, which was followed by the demise of the socialist camp. Almost all economists who are on the opposite side of the neoliberal consensus have seen a significant loss of traction when it comes to their views influencing policy-making in the real world.

To be sure, one should observe caution in proclaiming that this is an arrangement set in stone. The simple reason is that politics seems to be shifting away from the neoliberal consensus once again. The irony is, that this change is coming from within the core of the capitalist system rather than its peripheries because of the democratic revolt against the unequal distribution of the grains of globalisation in advanced countries.

While elite economic practitioners are sounding caution against the return of what they see as failed ideas of the past (industrial policy for example) politicians are increasingly showing a bipartisan consensus in ignoring such advice. One can say with a lot more confidence than one would have been able to marshal in the last five decades that the entrenched neoliberal consensus is facing its most difficult challenge today and the status quo is increasingly becoming more and more untenable.

This does not necessarily mean that the old order will make way for a new one which will be more just and egalitarian. The simple reason is radical rhetoric of politicians might very well be an alibi for protecting the really privileged from the genuine anger of the underclass. A Donald Trump allying with the richest in the US and benefitting them with tax cuts in the name of undoing the injustices of free trade on the poor is one such example. Another reason is political parties in India fielding more and more rich people while bribing voters with so-called freebies which, even in the best-case scenario, sacrifice long-term gains at the cost of short-term comfort by sacrificing scarce resources.

The real reason economics has not been able to make a positive contribution to the real world is not academic gatekeeping by the elite economists but political co-option and gatekeeping by the plutocracy across the world which has hollowed democracy out of its stated goal of representing the interests of the majority. This too is not something which is unknown. Karl Marx had the best description of this problem in his eleventh Theses on Feuerbach. “Philosophers have hitherto only interpreted the world in various ways; the point is to change it”, he writes. Unless the world really seems on the cusp of change, it is unreal and unfair to expect economists to put their eggs in changing the world basket. To reiterate a cliche, they would not see it as a pareto optimal move.

Roshan Kishore, HT's Data and Political Economy Editor, writes a weekly column on the state of the country's economy and its political fallout, and vice-versa