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by Thomas Trares
Wednesday, Nov. 30, 2011 at 1:34 PM
Economists with their models could predict the values of economic variables but did not foresee the greatest worldwide economic crisis in 80 years. Mechanical-deterministic neoclassicism is a self-contained theoretical model offering simple answers.
CRITICISM OF ECONOMISTS
By Thomas Trares
[This article published on October 27, 2011 is translated from the German on the Internet, http://www.spiegelfechter.com/wordpress/7102/okonomenkritik. Thomas Trares is an economist and free journalist.]
Since the outbreak of the financial crisis, the guild of economists has fallen into disgrace. The list of reproaches is long and includes unrealistic assumptions, false predictions, model fixation and a naïve market faith. On “Spiegel Online,’ the economist Hanno Beck reacted to the criticism. His apologetic is strange. He rejects the criticism that markets never functioned and that predictions need not always be exact. No one actually made this criticism of economists. Beck does not tackle really important questions of our time about how banks could become “too big to fail.” His explanations reveal the dilemma of mainstream economists. With their ways of thinking, they do not understand, do not want to understand or cannot rightly sort out the truth.
Why is this? Neoclassicism, the doctrine held by most economists, has its roots in the 19th century. Classical mechanics set the tone in physics at that time. The Newtonian laws of movement were its foundation. The Galilean law of falling bodies or the Keplerian planetary laws are also well-known. With these, the movement of bodies in space can be exactly calculated in advance. One thinks of a pendulum or the rotation of planets in the solar system. The formal elegance and exactness of classical mechanics had a great influence on economists at that time. They wanted to create a structure of economic theory with the same mathematical finesse. The British economist William Stanley Jevons once described economics as “the mechanics of benefits and self-interest.” Analogous to a mechanical system that is constantly in movement, the neoclassicists understood the economy as an eternal cycle of production and consumption kept in balance by a flexible price mechanism. The authority of market laws was accepted as universal here and now and in all eternity. The market function as a quasi-natural law, people thought.
Up to today, this mechanical-deterministic view of the world has nested in the heads of most economists. When the price rises, demand falls, unemployment increases and wages are knocked down again. The whole market theory is built according to this mechanical logic. This theory does have some relevance. Markets are efficient under certain conditions. Day after day, many markets function according to this model like “the vegetable markets in thousands of cities,” as Beck writes in his apologetic, the car industry or provision of the population with bread.
But their theorizing becomes dangerous when economists postulate the universal authority of market laws and apply them where they are no longer in effect or were long annulled. The best example is the financial crisis. This should not really have occurred according to neoclassical doctrine. Becks blames politics for this. “Catastrophes often arise through false or misguided regulations, not through deficient regulation. “The example of banks that are everything other than unregulated demonstrates this,” the professor writes. He does not mention that the failure of the financial markets could also be referred back to destabilizing herd conduct, lack of transparency, information asymmetries, market manipulation and market power.
Their mechanical-deterministic view of the world makes it impossible for mainstream economists to recognize abnormal trends in the course of time. Time in neoclassicism is ahistorical and plays no role since the system always functions according to the same rules. Therefore economic growth is always the same economic growth with the same quality in the 19th and 21st centuries. But that is obviously a fallacy. 200 years ago the world was still “empty,” goods production was low and the population poverty-stricken according to today’s standards. Ozone hole, climate change and resource scarcity were unknown terms at that time. Today the economic system glaringly strikes its limits. But a fundamental criticism of the growth paradigm does not occur in the guild. A little group of ecological economists is an exception but gets hardly any hearing.
There is also a deficient evolutionary perspective to economists in financial market theory. They ignored what dangers could start from an inflated financial sector that banks were “too big to fail.” Why must the balance sheet of big banks be greater than the output of whole industrial states? How did it happen that the financial markets have more power than democratically elected governments? To economists, their market fixation blocks their view beyond their own plate. Thus the chaos theory could provide an explanation for the financial crisis. As the flapping of the wings of a butterfly in Brazil triggers a tornado in Texas, the sale of a toxic security in the US could unsettle big banks in Europe.
Belief in the market has assumed religious characteristics. Whoever does not share them does not have the faintest idea. This perspective is also clear in Beck’s article. He reproaches critics for never sticking their nose in an economics book. Therefore they erroneously assume that everything for economists turns around money or profit, Beck concludes. To economists, maximization of benefits, the question “what improves my well-being?” is central. Aha! That may be true but are these really the earth-shaking questions that people want economists to answer now? No, one does not need to read an economics book to identify the real contradictions. Economists in their models could predict the values of economic variables to several digits beyond the decimal point but did not foresee the greatest worldwide economic crisis in 80 years. This failure is manifest without reading economic treatises.
How can a theory with serious slips be held stubbornly? One point is certainly that neoclassicism is a self-contained theoretical model offering simple answers. Whoever has once understood market theory can always prescribe the eternal medicine: liberalization, privatization and deregulation! Clearly the market laws are universally valid. Malformations can always be explained as market-non-conformable conduct. The culprits are always quickly at hand, mostly politicians or unions. In addition, neoclassicism serves the interests of capital and big corporations, interests that are well-organized and financed.
Perhaps the current crisis will be the turning point that the economy will again take an example from physics. Physics has developed further since the 19th century. One thinks of thermodynamics, quantum mechanics and the theory of relativity. However neoclassicism persists in its thinking from 200 years ago.
RELATED LINKS – FREE INTERNET BOOKS
Jackson, Andrew, “Toward a Wages-Led Recovery,” November 2011
“Needs and Limits,” 2010
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