Friday, November 22, 2013

Crackpot economics under fire in Britain

It wasn't much fun watching the crazies take over the economics profession in USA.  At first is was shocking to see that the Chicago boys were going to be able to put their crackpot theories into practice in Chile at the point of a military coup.  But between Watergate and the Fall of Saigon, VERY few Americans had any idea it was even happening.  Then neoliberalism became somehow respectable as Jimmy Carter set about to install the ideas of the Trilateral Commission such as economic deregulation.

During this reversal of fortune, I sort of held out the hope that somehow Britain would be able to mount a defense against the neoliberal tide—after all, Keynes was a Brit and his abilities to make money for Cambridge sort of made it what it was.  Surely they would draw the line in the musty halls of British academe. But with nasty old Margaret Thatcher at the helm, economics in Britain would not only regress to something pre-Keynes, but revert to the ideas of Alfred Marshall and the rest of the Victorian imperialist crackers.

Well, according to The Guardian, a brief flicker of light has emerged in the darkness that is Brit economics.  The spark is being fanned by students who believe, absolutely correctly, that their education is missing a LOT.  Apparently, one can get an advanced degree in economics without learning about the Great Depression, etc., or learning about the alternative thinking from Keynes, the role of heterodox thinking in political economy, or why the economic theories they are learning were not especially useful in predicting or understanding the crash of 2008.  And now that students are having to pay serious money for their educations, they are rebelling against such an inferior (worse than worthless) instruction.

Economics lecturers accused of clinging to pre-crash fallacies

Academic says courses changed little since 2008 and students taught 'theories now known to be untrue'

Phillip Inman, economics correspondent The Guardian, Sunday 10 November 2013

Economics teaching at Britain's universities has come under fire from a leading academic who accused lecturers of presenting "things that are known to be untrue" to preserve theories that claim to show how the economy works.

The Treasury is hosting a conference in London on Monday to discuss the crisis in economics teaching, which critics say has remained largely unchanged since the 2008 financial crash despite the failure of many in the profession to spot the looming credit crunch and worst recession for 100 years.

Michael Joffe, professor of economics at Imperial College, London, said he was disturbed by the way economics textbooks continued to discuss concepts and models as facts when they were debunked decades ago.

He said: "What if economics was based more on empirical studies and empirical evidence? There are lots of studies and economists are often very good at finding the evidence for how things work, but it does not feed into or challenge what's in the textbooks.

"I asked a textbook author recently why a theory that is known to be wrong is still appearing in his book he said to me that his publisher would expect it to be there."

Joffe, a former biologist, called for more evidence in economic teaching in the October edition of the Royal Economic Society newsletter. He said many reformers had called for economics courses to embrace the teachings of Marx and Keynes to undermine the dominance of neoclassical free-market theories, but the aim should be to provide students with analysis based on the way the world works, not the way theories argue it ought to work.

"There is a lot that is taught on economics courses that bears little relation to the way things work in the real world," he said.

The Treasury-hosted conference will debate the state of economics teaching, with leading figures from the profession invited to speak, including Bank of England director Andy Haldane. Sponsored by the Institute for New Economic Thinking (INET), it aims to highlight reforms to address the shortcomings of the core economics curriculum.

Headed by economics professor Eric Beinhocker of Oxford University, the INET has grown into a large international lobby group with the aim of reforming mainstream economic teaching in the world's leading colleges.

The conference comes only a fortnight after Manchester University economics students criticised orthodox free-market teaching on their course, arguing that alternative ways of thinking have been pushed to the margins.

Members of the Post-Crash Economics Society said their course was dominated by models and equations that trained undergraduates for City jobs without a broader understanding of the way economies and businesses work.

Joe Earle, a spokesman for the society and a final-year undergraduate, said academic departments were ignoring the crisis in the profession and that, by neglecting global developments and critics of the free market such as Keynes and Marx, the study of economics was "in danger of losing its broader relevance".

The profession has been criticised for its adherence to models of a free market that claim to show demand and supply continually rebalancing over relatively short periods of time – in contrast to the decade-long mismatches that came ahead of the banking crash in key markets such as housing and exotic derivatives, where asset bubbles ballooned.

Joffe said university economics department were continuing to teach concepts that had been disproved. In one example he said the idea that companies suffer "dis-economies of scale" when they increase production beyond certain capacity was true in only a small number of firms.

The U-shaped curve shows that unit costs are high when production begins and become cheaper as economies of scale allow a company to spread costs over more units. Units become more expensive to produce after a factory reaches capacity.

Joffe said: "We ought to stop teaching the U shape as the typical relationship between costs and scale, for the simple reason that it is false." more
Actually, this debate is FAR more important than a squabble over intellectual freedom or an academic monoculture.  But lord knows you must start somewhere.

Academics back students in protests against economics teaching

Professors argue in letter to the Guardian against 'dogmatic intellectual commitment' to 'orthodoxy and against diversity'

Phillip Inman, Economics correspondent
The Guardian, Monday 18 November 2013 17.10 EST

A prominent group of academic economists have backed student protests against neo-classical economics teaching, increasing the pressure on top universities to reform courses that critics argue are dominated by free market theories that ignore the impact of financial crises.

The academics from some of the UK's most prestigious institutions, including Cambridge and Leeds universities, said students were being short-changed by their courses, and they accused higher educationfunding bodies of being a barrier to reforms.

In a startling attack on the agencies that provide teaching and researchgrants, they said an "intellectual monoculture" is reinforced by a system of state funding based on journal rankings "that are heavily biased in favour of orthodoxy and against intellectual diversity".

The academics said in a letter to the Guardian that a "dogmatic intellectual commitment" to teaching theories based on rational consumers and workers with unlimited wants "contrasts sharply with the openness of teaching in other social sciences, which routinely present competing paradigms".

They said: "Students can now complete a degree in economics without having been exposed to the theories of Keynes, Marx or Minsky, and without having learned about the Great Depression."

The attack follows protests at Manchester University. Students there, who formed the Post Crash Economics Society, said their courses did little to explain why economists failed to warn about the financial crisisand had too heavy a focus on training students for City jobs.

Earlier this month an international group of economists, backed by the New York-based Institute for New Economic Thinking, pledged to overhaul the economics curriculum and offer universities an alternative course.

At a conference hosted by the Treasury at its London offices, they pledged to have a first-year course ready to teach for the 2014-15 academic year that will include economic history and a broader range of competing theories.

The debate over the future of economics teaching follows several years of debate about the role of academics, especially in the US, in providing the intellectual underpinning for the borrowing and trading binge ahead of the 2008 crash.

Levels of private borrowing reached record levels in many countries and trades in exotic derivatives, often funded with debt instruments, soared to a point where few bank executives understood their exposure in the event of a credit crunch.

Many economists, including the 2013 Nobel prize winner Robert Shiller, have argued that mainstream economics wrongly teaches theories based on maintaining openly competitive markets and that well-informed buyers and sellers eliminate the risk of asset prices rising beyond a sustainable level for a prolonged period.

The academics, led by Professor Engelbert Stockhammer of Kingston University, said: "We understand students' frustration with the way that economics is taught in most institutions in the UK.

"There exists a vibrant community of pluralist economists in the UK and elsewhere, but these academics have been marginalised within the profession. The shortcomings in the way economics is taught are directly related to an intellectual monoculture, which is reinforced by a system of public university funding (the Research Excellence Framework and previously the Research Assessment Exercise) based on journal rankings that are heavily biased in favour of orthodoxy and against intellectual diversity," they said. more  
Of course the real problem is that orthodox economics is just thunderingly stupid.

Orthodox economists have failed their own market test

Students are demanding alternatives to a free-market dogma with a disastrous record. That's something we all need
Seumas Milne
The Guardian, 20 November 2013

Ha-Joon Chang, one of the last surviving independent economists at Keynes's Cambridge: 'The supporters of neoclassical economics have an almost religious mentality.' Photograph: Sean Smith for the Guardian

From any rational point of view, orthodox economics is in serious trouble. Its champions not only failed to foresee the greatest crash for 80 years, but insisted such crises were a thing of the past. More than that, some of its leading lights played a key role in designing the disastrous financial derivatives that helped trigger the meltdown in the first place.

Plenty were paid propagandists for the banks and hedge funds that tipped us off their speculative cliff. Acclaimed figures in a discipline that claims to be scientific hailed a "great moderation" of market volatility in the runup to an explosion of unprecedented volatility. Others, such as the Nobel prizewinner Robert Lucas, insisted that economics had solved the "central problem of depression prevention".

Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace. You might even imagine the free-market economists who dominate our universities and advise governments and banks would be rethinking their theories and considering alternatives.

After all, the large majority of economists who predicted the crisis rejected the dominant neoclassical thinking: from Dean Baker and Steve Keen to Ann Pettifor, Paul Krugman and David Harvey. Whether Keynesians, post-Keynesians or Marxists, none accepted the neoliberal ideology that had held sway for 30 years; and all understood that, contrary to orthodoxy, deregulated markets don't tend towards equilibrium but deepen the economy's tendency to systemic crisis.

Alan Greenspan, the former chairman of the US Federal Reserve and high priest of deregulation, at least had the honesty to admit his view of the world had been proved "not right". The same cannot be said for others. Eugene Fama, architect of the "efficient markets hypothesis" underpinning financial deregulation, concedes he doesn't know what "causes recessions" – but insists his theory has been vindicated anyway. Most mainstream economists have carried on as if nothing had happened.

Many of their students, though, have had enough. A revolt against the orthodoxy has been smouldering for years and now seems to have gone critical. Fed up with parallel universe theories that have little to say about the world they're interested in, students at Manchester University have set up a post-crash economics society with 800 members, demanding an end to monolithic neoclassical courses and the introduction of a pluralist curriculum.

They want other schools of economic thought taught in parallel, from Keynesian to more radical theories – with a better record on predicting and connecting with the real world economy – along with green and feminist economics. The campaign is spreading fast: to Cambridge, Essex, the London School of Economics and a dozen other campuses, and linking up with university groups in France, Germany, Slovenia and Chile.

As one of the Manchester society's founders, Zach Ward-Perkins, explains, he and a fellow student agreed after a year of orthodoxy: "There must be more to it than this." Neoclassical economics is after all built on a conception of the economy as the sum of the atomised actions of millions of utility-maximising individuals, where markets are stable, information is perfect, capital and labour are equals – and the trade cycle is bolted on as an afterthought.

But even if it struggles to say anything meaningful about crises, inequality or ownership, the mathematical modelling erected on its half-baked intellectual foundations give it a veneer of scientific rigour, valued by students aiming for well-paid City jobs. Neoclassical economics has also provided the underpinning for the diet of deregulated markets, privatisation, low taxes on the wealthy and free trade we were told for 30 years was now the only route to prosperity.

Its supporters have an "almost religious mentality", as Ha-Joon Chang – one of the last surviving independent economists at Keynes's Cambridge – puts it. Although claiming to favour competition, the neoclassicals won't tolerate any themselves. Forty years ago, most economics departments were Keynesian and neoclassical economics was derided. That all changed with the Thatcher and Reagan ascendancy.

In institutions supposed to foster debate, non-neoclassical economists have been systematically purged from economics faculties. Some have found refuge in business schools, development studies and geography departments. In the US, corporate funding has been key. In Britain, peer review through the "research excellence framework" – which allocates public research funding – has been the main mechanism for the ideological cleansing of economics.

Paradoxically, the sharp increase in student fees and the marketisation of higher education is creating a pressure point for students out to overturn this intellectual monoculture. The free marketeers are now being market-tested, and the customers don't want their product. Some mainstream academics realise that they may have to compromise, and have been colonising a Soros-funded project to overhaul the curriculum, hoping to limit the scale of change.

But change it must. The free-market orthodoxy of the past three decades not only helped create the crisis we're living through, but gave credibility to policies that have led to slower growth, deeper inequality, greater insecurity and environmental degradation all over the world. Its continued dominance after the crash, like the neoliberal model it underpins, is about power not credibility. If we are to escape this crisis, both will have to go. more 

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