THUS Magazine

Neoclassical econometricians with their mad scientist dreams have debased economics. That is why, even though many of its specific mechanical and behavioural insights remain valid, the metatheory of neoclassical economics should be consigned to the scrapheap, argues Thus counter cultural anti-economist Chris Gilchrist. Now pay attention . . . . . 

Most of us suspect that current economic theories played a part in getting us into this mess, and it’s obvious that those theories don’t show a way out. If they did, we’d have some sort of consensus about the actions governments and international institutions like the IMF should be undertaking: but we don’t. The road map that directed us into the swamp doesn’t show an exit route. Terrific. So what are world leaders doing? Relying on the same old economics and economists and their failed multi-factor models. Central bankers talk soothingly about injecting money into the system. Politicians claim that more  - or less – fiscal stimulus will do the job. They maintain the pretence that the models and tools they’ve been using for the past forty years are adequate to the task. But independent economists who foresaw the crunch are pretty well unanimous that no western government has yet sorted out the problems of the banks, which are still essentially bust. If that’s the case, how can we have any confidence in other measures? Even someone with no knowledge of economics can intuit that it’s hard to get an economy going if the banks are broken.

It’s also easy to see why politicians are ducking the bank issue. Almost certainly the banks need far more capital than they’ve been given so far by taxpayers, but America has already seen a taxpayer backlash against bailouts. So the Obama administration’s current policy is to create programs that help the banks with hidden taxpayer subsidies – which is what the Treasury Secretary Tim Geithner‘s latest toxic asset plan amounts to.

As a result of such evasions, uncannily similar to those of the Japanese in the 1990s, it looks more and more likely that we’ll follow the same path, from a credit crunch into a ‘lost decade’ in which politicians repeatedly fail to confront the real issues, the most important being the overweening primacy of banking and finance in the failed economy. It’s time to stop waffling about minor ‘reforms’ and to throw a lot of the failed theories overboard. We should be questioning the whole ‘metatheory‘ of neoclassical economics, for this was the basis of a big set of policy decisions, many of which have proved disastrous. Its tenets justify huge disparities in income and wealth, restriction of competition, and the creation of giant ‘enterprises’ that are de facto quasi-states. Big corporations and banks are today’s over-mighty subjects; like the robber barons constrained by the first English constitution, they threaten our common weal. The trade and financial systems are designed in their interests, not those of citizens – tellingly now almost universally labelled consumers – or small independent producers.

Above all, the theories insist on freedom of movement of capital, one of the prime causes of the mess we’re in. One reason for that is that economists work for banks or universities, and those who work for universities often work for banks as well. If the banks have been whores – and that’s certainly how they’ve behaved – economists have been their pimps. Most people fail to recognise that in the ‘social sciences’, theories do not, as in physics or biology, primarily aim at increasing the sum of human knowledge: they serve those with power and money. This is a governance problem we’ve had for a half-century and that only a few academics have the courage to talk about.

The defenders of the neoclassical faith  - mainly professors with tenure – admit shortcomings but say the system we’ve got is the least bad alternative. Really? Is a system that generates crises like these, with grotesque rewards for the creators of the misery of others, the best we can come up with? Maybe it’s time we gave other explanations and theories some airtime. If we’re going to question neoclassical economics, we could turn to Marx, whose dislike of financial capitalism is reflected in French and German distaste for ‘the Anglo-Saxon model‘ (on display at the recent G20 summit). Marx predicted that financial capitalism would destroy capitalism, which today looks a pretty good call. Greedy and unprincipled banks making money from manipulating money in incomprehensible ways without adding anything to productive wealth certainly looks like capitalism eating itself. That’s fine, but Marx’s labour-versus-capital war isn’t so credible today.

There’s another strand of economic thought, hugely popular at the turn of the twentieth century but written out of history by the neoclassical profs, the school founded by Henry George, whose ‘Progress and Poverty‘ remains the best-selling economics book ever written – click here for a free free download. However, it is not a book about economics but about social justice – which is why the mathematisers of economics, who took over the profession from the 1940s have eliminated it from the agenda. That’s why it is so relevant today.

George’s key insight was that there are not two factors of production, as classical and neoclassical economics claim – labour and capital – but three: labour, capital and land. By ‘land’ George meant all the gifts of nature, which notoriously enter neoclassical economic theory with no price tag (in neoclassical theory clean air or water have no value as common resource). George saw that the owners of ‘land’ could extract ‘rent’ – a payment over and above the economic value of the assets they commanded. And the basis of his theory was that the role of the state was to tax these rents, which did not represent a return on capital or labour but were simply a result of monopolisation. His followers (who today include resources such as radio frequencies and patents in rent-commanding assets) claimed that all taxes could be replaced by taxes on rents, making everyone better off except the owners of ‘land’- which did of course include landowners, the group that eventually sunk his proposals.

George’s ideas were anchored in those of Ricardo, the second greatest economist after Adam Smith. Ricardo created the theory of rents, still part of economics but now consigned to a dusty corner of neoclassical theory and ignored in most modern economic discussions. Ricardo saw this in terms of land and farming; George, who saw wealth being created in America’s frontier economy, widened its application. In his most famous and telling narrative, George describes settlers arriving on the empty plains of the American West. The first settler chooses a spot that seems good. Where does the next one settle? Near the first; and so a community comes into being, eventually causing land at the centre of the community’s town, then city to be worth far more than land at the periphery. Who had created this value? The community, so the community should benefit from it, said George, through a tax on the ‘rent’- the value over and above the economic value – accruing to the owner.

Georgists promoted the idea of a ‘land value tax’ as the first and easiest way to take rents for the community, but the idea was constantly misrepresented and distorted by apologists for the landowning classes. Today, for example, the land value tax on a suburban home could plausibly be around the same level as the council tax – but the tax extracted from offices and shops, and from huge mansions in central London, would be enormously greater – maybe 100 times greater, in the case of £100 million Knightsbridge apartments – than they pay now.

In the 1890s, the Liberal Party under Lloyd George adopted Henry George’s ideas but when the Liberals fell apart after World War 1 these ideas vanished from the UK – though the UK’s Liberal Party is now again trying to put them on the agenda, with a little help from people like the eminent former FT editor and economist Sir Samuel Brittan. George’s ideas remained powerful in America, where several states enacted a land value tax – California’s land taxes financed the vital investments in water that turned its desert into farmland – but voters were seduced into abolishing these taxes in the mistaken belief they would be better off. Local sales taxes, now common in the US, are more regressive (hit the poorest hardest) while the real beneficiaries of the abolition were a small minority of large landowners.

Put Henry George’s ideas together with those of another great non-economic economist, Ernst Schumacher, author of ‘Small is Beautiful,’ and we could head in the direction of a libertarian human-scale economics in which human/moral values take precedence over material ones. And this is really the core of the argument: neoclassical economists want a ‘value free’ system, and fantasise about an economics that is like physics in formulating precise ‘laws’: the result is an authoritarian (increasingly fascistic) system that protects the interests of the haves and permits them to seize public goods (‘intellectual property’, bandwidth, resources) and extract ‘rents’ from the have-nots. But human beings live -and die – by values, so eliminating values from ways of theorising about the way we organise ourselves and the resources we use is probably one of the twentieth century’s greatest mistaken experiments. Frontier thinking even within the neoclassical camp – behavioural finance, imperfect knowledge – implicitly acknowledges the importance of non-material values, yet denies them a place in the theories.

The great economists of the past – Smith, Ricardo, Mill, George, Marx, Keynes, Galbraith – recognised the necessity of a moral dimension and were political economists. Until the 1970s the subject was taught in universities as Political Economy. Neoclassical econometricians with their mad scientist dreams have debased economics. That is why, even though many of its specific mechanical and behavioural insights remain valid, the metatheory of neoclassical economics should be consigned to the scrapheap.