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One of the most pressing challenges to the global economy has been the global financial crisis of 2007 – 2009 which morphed into a prolonged recession and sovereign debt crises in many countries. Understanding this crisis, integrating it into academic thinking and acting on this knowledge – especially creating meaningful policy solutions, address the current crisis and prevent future ones – poses an important challenge to the social sciences. This article argues that the academic discipline of economics failed at these tasks and argues that the reason for this failure is the development of an intellectual monoculture that is unable, and to some degree also unwilling, to understand the crisis as the discipline is trapped by its core assumptions that it guards ferociously.
After explaining the differences between academic mono- and polycultures, I trace how economics became an intellectual monoculture, starting with the transition from political economy to economics at the end of the 19th century. As a consequence the discipline became incredibly rigid, focusing only on a few core axioms and discarding alternative perspectives. The outcome of this condition is represented by the inability of the mainstream to properly understand the global financial or sovereign debt crises and integrate these into existing models as the discipline is blinded and trapped by the focus on these core axioms. Concluding, the article points to possible benefits of polycultural academic disciplines which are more open and receptive to change and better equipped to understand the current crises and point us towards more fruitful policy directions.
Academic mono- and polycultures
Over the last decades, economics has developed into an intellectual monoculture. Intellectual monocultures are scientific fields where only one theoretical perspective, ontological position, and method are used which can result in a degeneration of the academic field with severe blind spots that – if this discipline falsely informs policy – can lead to catastrophic failures and an inability to address the problems that occurred. In other words, an intellectual monoculture has a monopoly on agenda setting, progress and explanatory success of its field.
By contrast, intellectual polycultures progress slower than monocultures, conducting trial and error cultivation and spending time debating the right path that the discipline should take. They have advantages in providing multi-perspective analyses and can thereby develop rigorous scientific research, for instance through triangulation. In a way, when comparing it to governance systems, while polycultures are more deliberative, monocultures are more similar to authoritarian regimes.
By contrast, intellectual polycultures progress slower than monocultures, conducting trial and error cultivation and spending time debating the right path that the discipline should take. They have advantages in providing multi-perspective analyses and can thereby develop rigorous scientific research, for instance through triangulation. In a way, when comparing it to governance systems, while polycultures are more deliberative, monocultures are more similar to authoritarian regimes.
The consequence of economics becoming an intellectual monoculture manifested itself through a rigidity of the academic field which only focuses on a few core axioms and discards alternative perspectives. Economics is stuck because of the very core that defines the self-conception of the discipline. Lakatos defines the hard core of a discipline as a negative heuristic that constitutes a conventionalism in the way research is conducted and that is shielded by a protective belt of auxiliary assumptions. The characteristics of neoclassical economic theory that constitute the hard core of economics are: methodological individualism; deductivist modelling (formalisation); and a detachment from social, political and historical context. The outcome of this condition is represented by the inability of the mainstream to properly understand the recent crisis, integrate it into existing models and hence its inability to give meaningful policy advice. The discipline is blinded and trapped through the focus on its core axioms and its narrow definition results in the unquestioned promotion of free markets.
Losing touch with the real world: from political economy to economics
Economic science nowadays has very little in common with its origins in classical political economy (and moral philosophy). Classical political economists explained economic relations in terms of processes of production that were part of broader social relations, taking into account the embeddedness of economic activities, multiple explanations and also normative questions on the distribution of power and wealth that were discussed by the great political economists of their time such as Adam Smith, David Ricardo or Karl Marx. These days, economists are mainly concerned with exchange and efficiency but not with equity, considering economics as a rigorous objective scientific endeavour.
After the classical political economy period 1790-1870, political economy split into different disciplines and each had their views of how to analyse the economy. This first separation between the historical school (Roscher, Schmoller, Weber) and the marginalists (Jevons, Walras, Menger, Marshall) marked the disciplinary bifurcation between economic history and economic theory. Whereas, the historical school thought that economies had to be analysed within their particular context and stages of historical development, the advocates of the marginal revolution, heavily influenced by Bentham’s utilitarism, claimed that economics was about individual maximization of utility and the need to formalize economic relations. After 1900, as the discipline separated itself from its social and historical contexts, the term political economy was increasingly replaced by the term economics.
Aiming to transform economics into a proper science and avoid value-laden analyses of production concerned with politics and morality, mathematical economists like Pareto imported concepts from the physical sciences (particularly from mechanics) such as equilibrium and optimisation into their models, attempting to construct a universally-valid theoretical corpus irrespective of social and historical context and focusing increasingly on “objective” analyses of individual choices and general equilibrium; the laws of supply and demand were meant to be able to explain all economic interactions in the same way that the laws of physics explain the natural world. Until the interwar period, mathematical economics was gaining ground but there was still plurality within economic thought.
After World War II, through the rise of anticommunism, interventions in the economy were increasingly viewed as problematic. Hence, in the 1960s, Marxist, but also Keynesian and institutional economists, were increasingly sidelined in economics departments. While Keynesian economic policy was at its heyday, this development lay the intellectual groundwork for the shift from more interventionist to neoliberal economic policies in the 1980s. Additionally, institutional approaches were harder to teach than neoclassical economics and could not be that easily translated into policy recommendations. Finally, Keynes’ economic theory – the greatest threat to neoclassical economics – lost much of its radical aspects (for example, his analyses of animal spirits or disequilibrium) after being formally integrated into (or rather absorbed by) neoclassical theory in Hick’s IS/LM-model, Samuelson’s neoclassical synthesis and stochastic modelling on expectations. These processes mutually reinforced themselves and by the 1960s most economics departments and journals were occupied by neoclassical economists: they have been awarded more than 90% of the Nobel prizes for economics,, attract most funding and occupy prestigious jobs in governments, influential think tanks and the financial sector.
Increased mathematisation and the emerging narrative of economists as “an elite group of masters of an arcane craft” attracted many people that were less interested in understanding how the economy actually worked but who wanted to formulate evermore sophisticated models and be part of this top league of academics. Colander emphasises in a study of major doctoral programmes in economics, that only 3% of new students thought that knowledge of the “real” economy would lead to good results whereas 57% believed that being good at maths was key to success.
As a result of this close-mindedness, economists became increasingly blind to the real world: attempting to modify reality according to their models, miming laboratory conditions of natural science experiments and creating “useless but true” economic models as Paul Krugman called them. To make his point, he wrote a “theory of interstellar trade” which is valid according to economic theory but quite useless. The mantra of this new economic science was soon: “if it’s not modelled, it’s not economics”. Convinced of the scientific objectivity of their theory, economics like Gary Becker started adapting their theory to other social sciences, a phenomenon that opponents called economic imperialism.
Transcending the purely academic realm, advocates of free markets, such as Friedrich Hayek, Milton Friedman or the Mont Pellerin Society, soon gained incredible political support. And as the Keynesian post-war compromise came into a deep crisis in the 1970s, free-market politics became the new policy paradigm, advocated by the likes of Ronald Reagan and Margaret Thatcher or international institutions such as IMF, World Bank or OECD. By the 1990s, neoclassical theory and its promotion of free markets was the (almost) unquestioned hegemonic idea that transcended societies and the economics discipline.
Facing a black swan: the financial crisis and the failure of economics
The financial crisis of 2007-2009, represented a “black swan” event for economics as a discipline: an enormously consequential event that was not supposed to happen and that existing models were not able to explain or even integrate into their analyses. For one, the restrictive and normatively-loaded character of economic models prohibits the economics discipline to acknowledge something such as market failure or even a systemic flaw in the financial (or economic?) system. Eugene Fama, the economist who developed the efficient market hypothesis and is widely recognised as the father of modern financial theory, argued during an interview that asset bubbles do not exist – that was after the crisis. When asked if he could clarify this, he argued that: “they [bubbles] have to be predictable phenomena”. But as his theory states that bubbles cannot exist as asset prices always reflect all information and no one can beat the market, they are not predictable and therefore also not possible. According to this logic, legendary investors like Warren Buffet do not exist either.
Second, the discipline even creates pathologies itself through the performative effects of its models, like the Black-Scholes-Formula for derivative pricing, which underplayed the riskiness and volatility of derivatives. By the mid-2000s, during the Great Moderation orchestrated by Alan Greenspan and his disciples, most economists believed that their models enabled the financial industry to increase financial profits and simultaneously decrease financial risk. This turned out to be completely wrong. In fact, they increased profit by increasing risk without noticing it. Hence, the crisis occurred.
More flawed economic policy advice: The sovereign debt crisis
As a consequence of the financial crisis, public debt exploded after the bailout of banks. Ironically, through rescuing the financial sector, states have become victims of the markets. But the solution to this sovereign debt crisis addresses few of the following contradictions that underlie the crisis. These were that the European Monetary Union had a crucial design failure, as the ECB had control over monetary policy but not over fiscal policy, the opposite holds true for member states; that differences between export-led Northern and demand-led Southern growth models contributed to economic imbalances, with the ECB’s monetary policy favouring the former at the expense of the latter; that after the Euro introduction, interest rates converged and Northern banks lent cheap credit to Southern Europe at low interest rates; and that the financial crisis contributed immensely to the rise of public debt. This does not mean that domestic problems (indebtedness; corruption; tax evasion) did not exist in the South (although the individual countries’ problems were far from homogeneous) – but it was the combination of these contradictions that created the conditions for a “perfect storm”.
However, from the perspective of economics, the only possible solution to the crisis was internal devaluation – austerity and labour market flexibilisation. Most notably this opinion was represented by Carmen Reinhart and Kenneth Rogoff’s study “growth in a time of debt” which stated that countries with public debt exceeding 90% of GDP basically cannot grow. This 90%-threshold was very often referred to by advocates of austerity such as Manuel Barroso, Christine Lagarde, David Cameron, Wolfgang Schäuble or Angela Merkel. But in fact, the scientific foundations of such a “growth-through-austerity” approach are heavily disputed and a PhD student debunked this myth, finding that Rogoff and Reinhard have either been incredibly sloppy with their dataset or deliberately omitted data to reach their neat conclusion. In hindsight, even the IMF agreed that the focus on austerity to solve the sovereign debt crisis was probably more harmful than good for economic growth.
When not solely focusing on a few economic indicators but taking into account the wider social implications of such austerity measures, it becomes clear that these have severe social repercussions. As a major cause to social hardship and precarious working conditions for a large number of people, the crisis solutions proposed by economists contributed a lot to the rise of radical and populist parties and movements which thrive on such developments. Especially in a time where European societies are faces with the challenge of integrating millions of refugees, the rise of right wing populists and outright racism is a serious problem that can at least partially be attributed to failed economic policy.
Polanyi, one of the last classical political economists, already observed the disastrous social consequences that economists’ ideas about the rule of free markets have in the 1930s where fascism was also born out of the social hardship created by free markets and the Great Depression which they had caused. While it is too speculative to make this point about contemporary society, there are too many parallels to dismiss such arguments. The dilemma for economists, and simultaneously the reason why they are unlikely to change, is that they would have to abandon the core that constitutes their discipline to understand these problems.
Concluding remarks: polycultural disciplines in the study of the global economy
Intellectual monocultures are scientific fields where only one theoretical perspective, ontological position, and method are used which can result in a degeneration of the academic field and enable the catastrophic failure in the face of some newly emergent threat, as with economics and the financial crisis. Resisting adaptation, the monoculture altered some auxiliary variables of its protection belt, but its core remained intact and even tried to ignore these failures. This is possible because one hegemonic paradigm dominates the discipline’s discourse, acts as gatekeeper to important academic journals and conferences and advises politicians on the object of study.
In a nutshell, economics creates an elegant and clean economic model that has few similarities with the real. By contrast, intellectual polycultures create multiple detailed and messy portraits of the world we live in, adjusting their theories to reality. Polycultural disciplines such as heterodox economics, economic sociology, comparative or international political economy significantly differ from economics as they analyse the economy in their political, historical and social context as well as offer a variety of possible explanations, each based on different assumptions and methodologies. Hence, they are more likely to develop and adopt new concepts to analyse the changing global economy.
The fundamental difference to economics is that there is a plethora of “legitimate” approaches in polycultural disciplines that do not share the same assumptions and methods. Ignorance or dismissal as in neoclassical economics is no option because approaches have to compete with another. What many have often seen as the weakness of polycultural approaches – that they do not have one coherent unifying theory – is their very strength. A plurality of approaches provokes a competition between different ways to analyse the financial crisis and either invokes adaptation to changing realities or induces the development of new theories. As has been shown, these approaches have been far more successful in predicting and analysing the crisis.
To be clear, this article does not argue against scientific rigour and quantitative methods or for all-in-research, but against the unchallengeable dominance of one approach in the economics discipline that seems superseded and shows many signs of disease. It is ironic that precisely the academic discipline that above all else promotes competition, is in itself a deeply flawed monopoly.