FOR A FUNDAMENTALLY DIFFERENT ECONOMICS


By Jakob Hafele


Business as usual or the status quo is impossible in economics. The problems of humanity demand solutions, not ideology


[This article published on November 13, 2014 is translated from the German on the Internet, http://www.capital.de. Discussion on the state of economics enters the next round. The German Plural Economics network decries the “one-sidedness of theory.”]


A state of emergency prevails in economics. Professors are divided on the basics. Students protest and partly organize their lectures themselves. A discussion breaks out around economic truth and academic honesty. In this discussion, Axel Dreher, professor at the University of Heidelberg, defends the status quo of economics. Criticism is outdated. There has long been variety. We thank you Professor Dreher for entering this long overdue discussion.


Economists are criticized everywhere for their one-sidedness, their focus on markets and their inability to deal with the burning problems of our time. Youth unemployment in Spain recently reached a new all-time high at 44 percent. Environmental problems are becoming ecological catastrophes. More and more people are malnourished and starving worldwide. At the same time an enormous wealth is accumulating while the unequal distribution soars. The recommendations of economists seem irrelevant. This is not a situation where economists should say: “All is good; let us simply continue as in the past.”


ECONOMICS IS ONE-SIDED


The state of economics is very alarming – marked by a shocking one-sidedness that is hardly recognized. So-called neoclassicism that could be described as today’s mainstream economics dominates research and teaching. Only the themes of this school and its deductions are regarded as economic foundations while other approaches are marginalized. The alleged variety mentioned by Professor Dreher only exists within this neoclassical system of thought. Different themes are investigated with the same assumptions and methods. That is not diversity.


This one-sidedness is very explosive since it is not academically neutral as often claimed. Normative assumptions about the world underlie every economic school including neoclassicism. “More is better” or the assumption that markets on principle lead to an efficient distribution are only two examples. From these assumptions, a perspective on the world results that sets efficiency above justice and maximization of material prosperity above protection of the environment.


Not only have the assumptions prevented neutrality. The decisions which questions are investigated and what instruments are used are normative. Thus mainstream economics is not a value-neutral instrument for analyzing the real economy. On the contrary, it is loaded with ideology through the one-sided choice of the assumptions, methods and investigated subjects.


THE WORLD IS TOO COMPLEX FOR ONLY ONE PERSPECTIVE


The continuing complaints from the real economy on the inadequate training of economists show clearly how little students of economics learn about the economy.


Human interaction is very complex. From other sciences, we could learn no theory about human conduct is always and absolutely true. A situation can often only be explained from many different perspectives. Some perspectives are very good at explaining certain aspects. Other theories explain other aspects better.


Neoclassicism asks how scarce goods can be distributed as efficiently as possible and therefore has its legitimate existence in economics. On the other hand, ecological economics sets the preservation of our foundations of life as a goal above efficiency; post-Keynesian economics sees low wages as a central problem and money as a powerful factor in economic cycles. There is more sense for power relations in the political-economic system. We need many perspectives to do justice to the complex world. This is also true for economics.


NOT FORGETTING THE REAL PROBLEMS OF HUMANITY


People are involved and not only knowledge and scientific logic! Economists are occupied with the development and distribution of resources. For a long while, all people on the planet have not been supplied with the vital necessities. The Euro crisis made thousands in Europe homeless and the resource-hungry economies of our time strain our environment at the expense of future generations. Mr. Dreher’s description of an economics in a good condition contrasts with a world economy that cannot solve the enormous problems and must force economists to find solutions for these problems. However they lean back satisfied on their neoclassical easy chairs instead of seeking new answers to these vexing challenges with the intellectual riches of all the economic theories and methods.


We demand plurality to dissolve this narrowed and one-sided perspective of economics, a plurality that sees the economy from different perspectives with fundamentally different assumptions and themes.


Students bringing projects into the curriculum is not enough. Universities must be a driving force of change. The foundation must be renewed in the current state of economics! Students filling a gap cannot be the solution.


ECONOMIC THEORIES IN THE ECONOMIC DEBATE


By Jakob Hafele, Frederick Heussner and Janina Urban


[This article published on November 23, 2014 is translated from the German on the Internet, http://www.sueddeutsche.de.]


[Hans-Werner Sinn, one of the best-known German economists and president of the ifo-Institute for Economic Research, thinks critics of the dominant theory do not understand economics. Critics counter the professor from Munich is misguided. He oversimplifies many things.]


Stimulated by the debate in the Sueddeutschen Zeitung newspaper, a public discussion has finally broken out on the state and future of economics. The essay by the ifo president Hans-Werner Sinn titled “The Great Error” in which he vehemently defends current teaching and research has provoked passionate reactions.


Economic theories greatly influence politics and society and therefore are fought for. The American Nobel Prize winner Paul Samuelson once said: “I don’t care who makes the laws of a country – as long as I can write the economics textbooks.” Therefore it is problematic that economics only knows one single approach. The focus on the market and efficiency dominates a discipline that could make important contributions to the acute problems of our world.


THE ONE-SIDED PICTURE OF THE ECONOMY


Sinn is one of the best-known German economists. What he says finds an enthusiastic response in the general public. Now he reproaches critics of the dominant theory for not understanding economics. Economists should admit their mistakes and not believe in perfect markets. However that is the problem of current economics. It is constantly oriented in the ideal of the market and only looks at the economy from one perspective.


This begins with the first lectures in the study of economics. Students learn that the welfare of all people increases when they act selfishly on markets. That is the core of the neoclassical theory that has deeply influenced our understanding of the economy. “The price affects supply and demand” and “as much market as possible and as much state as necessary” are only two of the many platitudes we owe to neoclassicism.


The current situation in economics is like a non-functioning convertible sofa that does not pull out any more. If one only looks at this couch from the front, one would nev3er notice a rusty screw in the back blocks the pullout. The couch must be examined from the other side. Translated this means: important discoveries about our economy are simply lost through the one-sided approach of economics focused on the market.


ECONOMISTS AS PHYSICIANS?


The one-sided and problematic ideal of the market is clear when Hans-Werner Sinn compares economists with physicians. This comparison pains a positive picture. Crises are equated with sicknesses and are the exception, not the norm. Their causes are clear and undisputed. The economist as physician appears as a friend in need who knows what is good for the patient.


However this picture if very problematic. That the economy is equated with the market and understood as a basically healthy organism and ideal of social health is hidden. Complex economic realities like the financial crisis when a teamwork of the most different factors nearly led to the collapse of the organism are reduced to individual partial aspects like capital holding rates. A more comprehensive treatment that explains sicknesses by referring to diverse causes and their interplay disappears from view.


A more fundamental criticism that understands the crisis as a symptom of a much more far-reaching sickness of the whole organism is not undertaken. The causes and solutions of crises are much contested. The one truth about the financial crisis does not exist. When economists like physicians only “prescribe” a single kind of solution as without alternative, the problematic and one-sided nature of current economics is obvious.


This is clear in the case of austerity in south Europe where human suffering is described as a side-effect of a bitter pill that must be given to the patient even against his will if necessary.


IS CRITICISM OF SINN JUSTIFIED?


Critics reproach the economist Hans-Werner Sinn for a one-sided picture of the economy that is incompatible with the complex reality. Instead of helping solve the acute problems of the world, the focus is on the market and efficiency. Is this criticism justified?


THE MANTLE OF OBJECTIVITY


Economists are not neutral observers, even if Hans-Werner Sinn wants to persuade us of that with the physician comparison. Economic analyses and political recommendations are always normative since certain assumptions about human conduct and our world underlie the applied methods. When it is assumed as a general statement that a market leads to an optimal distribution, that is not a value-neutral assumption. In neoclassical theory, the goal is attaining an efficient distribution.


Whether such a distribution is just cannot be settled. Efficiency is set above justice. In other words, that all products on the market find their purchaser and the ever greater gulf between poor and rich is only of marginal interest.


With that, mainstream economics has become the representative of a certain worldview. This is highly explosive since it sells itself as an objective science. It does not openly reveal its normative elements in the classroom, research or political consultation. Thus the influence of economic norms on our economic reality occurs under the mantle of objectivity.


PLURAL ECONOMICS


The theories of the economic mainstream are normative and one-sided and have a great influence on politics. Our criticism is by no means refuted when Hans-Werner Sinn in his apology admits that modern mainstream economics knows cases of market failure or understands environmental problems as cost-factors.


On the contrary, all these objections are only varieties of the abstract basic idea that markets automatically lead to the greatest possible prosperity. Many other schools of thought exist alongside neoclassical mainstream economics – like complexity economics, the Austrian school, post-Keynesianism or Marxian economics.


These schools choose other perspectives and focus for example on complex system dynamics, system dynamics, distribution justice or the role of power in a society. They mostly come to completely different conclusions than neoclassicism.


All these perspectives could help us understand the complex reality in which we live and find appropriate answers to economic problems. Therefore we need a pluralist turn in economics. A diversity of methods and theories and an interdisciplinary approach are needed to reasonably counter the economic crises and challenges of the present time, not one theory that can explain everything.


Problems like high unemployment, the Euro-crisis or climate change must be considered from different perspectives. Only in that way can we come to a picture that does justice to the complex phenomenon “economy.”

Jakob Hafele, 26, Frederick Heussner, 26 and Janina Urban, 25 are members of the Network for Plural Economics (www.plurale-oekonomik.de).



REBELLION AT GERMAN UNIVERSITIES


The study of economics runs on well-trodden paths. Diversity of theories and methods is lacking


By Benedikt Weihmayr


[This article published on July 22, 2014 is translated from the German on the Internet, http://www.capital.de.]


[The financial crisis has shaken economics. Its models are too unrealistic or out of touch with reality according to the current reproach. This conflict has long reached the German lecture halls. In May 2014, 40 student groups from different countries launched a call in which they denounced the “one-sidedness of theory.” The German network Plural Economics was one of the groups. Its activist Benedikt Weihmayr explains its criticism.]


Economic theories are themes in the first semester in the study of economics. What did Smith, Ricardo and Marx, Jevens, Walras and Marshall, Schumpeter, Hayek and Mises, Keynes, Samuelson and Minsky, Friedman, Lucas and Mankiw say and think? Regarding academic work, how do I do research in the academic literature? How do I structure homework? What is a model and what is a theory? On methodology, how do I gather data, evaluate statistics and conduct an interview with an expert? On economic foundations, how does a bank function, who makes the political-economic decisions and how large are the sectors? Two classes are seminars; a lecture is given in one and the other is completed with homework and an exam. This is a rather intuitive approach. Students are introduced to the breadth and beauty of economics this way.


However reality looks different. Many themes do not occur in most courses of study whether Bachelor or Master. Whoever wants to focus on theories outside the mainstream must do this on his or her own initiative. Even the partly stirring debates within neoclassical research are not discussed in the courses of study. Methodology is limited to quantitative approaches and models and their validity is not critically examined. Instead of working out one’s questions in homework or discussing in seminars with fellow students, the subjects are presented in lectures and parroted on examinations. In this way, students get into shape and regurgitate one-sided conclusions instead of developing solutions.


The demand for diversity is not revolutionary but a foregone conclusion or matter of course.


WE NEED PLURALITY


Together with student initiatives from 30 other countries, the Network for Plural Economics champions plurality in economics. In our International Call of May 5, 2014, we urge three forms of pluralism: variety of theories, different methods and inter-disciplinarity.


Theoretical diversity means adopting other perspectives in study alongside the dominant neoclassical approach. In some courses of study, behavioral economics is explored. However, from our perspective, Schumpeter’s or Hayek’s theories should be discussed in every introductory course as well as Keynes, Marx and Minsky.


Each of these theories has its area of application and its strengths. One theory explains innovation very well, another the importance of information on markets, another power and distribution and still another economic and financial crises. If this diversity existed in teaching and research, there would be a competition for the best ideas and solutions.



WE NEED INTER-DISCIPLINARITY


Methodological pluralism makes a considerable contribution. The neoclassical tradition presents the uses of different goods and consumer articles in graphs and expresses this in functions. This is often a good approach for understanding the general functioning of markets. However these quantitative methods are much less helpful in investigating culture, identities or the genesis of markets. For that, the researcher must know how to conduct an interview or grapple with archival data. If one wants to explore the collapse of a bank like Lehman Brothers – an obvious economic research theme – one should also tackle Ben Bernanke’s academic background, Henry Paulson’s professional career and the influence of laws and agreements on the conduct of financial markets along with econometric models.


The example of the financial market crisis makes clear economic phenomena are insufficiently understood when they are torn out of their sociological, political, legal or historical contexts. Therefore we need inter-disciplinarity. Inter-disciplinarity gives increased knowledge and sensitizes students to understand the social effects and ethical implications of economic decisions.


Economic themes penetrate our daily routine. Pluralism is a social question. Diversity in economics is more than an academic necessity.


Therefore we revolt out of academic passion and social consciousness and turn against intellectual monotony. We urge the defenders of the mainstream, the silent critics of neoclassicism, students, politicians and corporate leaders to enter in the discussion. The crisis of economics is a social affair and must be tackled socially.