How Modern Economics Still Serves the Plutocrats

Relativism, agnotology, and the scuttling of economics

If like me you’re a non-economist who’s nevertheless appalled by economists’ frequent glorifications and obfuscations of the natural realities of capitalism, “neoclassical economics” likely doesn’t mean what you or I think it means. At least, it doesn’t mean only what we think it does.

You see, what irritates us is the duplicity involved in any one-sided academic defense of so-called “free-market” capitalism. Such a defense could only be so much disingenuous propaganda. Thus, when we discover that the “neoclassical” models are mainly elaborations of how that kind of idealized marketplace works, we throw up our hands and charge anything comparable to those models as being in the pocket of the plutocracy that capitalism tends to generate in the real world.

But until we investigate further into the history of economics, we likely won’t be aware that within economics, “neoclassical” technically refers to a particular research program that was completed decades ago and that’s since been left far behind by the even more modern economic endeavour of exploring a welter of different, more empirical (statistical) models.

The History of Neoclassical Economics

This is clear, for example, from Landreth’s and Colander’s A History of Economic Thought (2001). Those authors show how “neoclassical” is rather like the word “atheist” in that both were once terms of abuse levelled by critics. Thorstein Veblen coined “neoclassical” to boost his criticisms of Alfred Marshall’s theory. Thus,

When Veblen coined the term, it was not a description of mainstream economics in the United States. In the early 1900s, economics was divided, and, in the United States at least, institutionalism was far more embedded than neoclassical thought. But by the 1930s Marshallian economics had won in the academic setting and had set the research agenda for the profession. Marginalist concepts of individually based, constrained optimization were being explored in detail. As that exploration took place, there were major changes in approach; the profession switched from the Marshallian approach to the Walrasian approach, but the research agenda was set around marginalism, supply and-demand equilibrium models, and rationality. Economists who questioned that research agenda were heterodox, not mainstream.

In the 1940s, that “cutting-edge exploration of marginal concepts” culminated in some work that put the pieces together, which was then succeeded by a shift in focus on “logic and set theory.” Those “new tools led to the next step in neoclassical theory: Arrow and Debrue’s general equilibrium work, which formally explores the existence and stability proofs of general equilibrium of a competitive economy. By the late 1950s that work was done, and the broad theoretical exploration of the neoclassical vision was complete.”

All of which was happening alongside the aftermath of the Keynesian revolution of the 1930s, which “introduced a fundamentally different, macroeconomic approach to problems. Rather than building up [in line with the neoclassical’s methodological individualism], it started with aggregates and then added microeconomic foundations where it saw fit. In Keynesian macroeconomics the aggregate relations were central. This violated the neoclassical approach and caused major resistance to Keynesian models, but by the early 1960s Keynesian macroeconomics was established and politicians were saying that we are all Keynesians now.”

That is, in Keynes’ model, “aggregate [overall or top-down] demand controlled the level of income in the economy, and the government had to control aggregate demand through monetary and fiscal policies.” By contrast, the neoclassicals had limited their models to the solipsistic, quasi-monadic calculations of individual, idealized rational agents.

Yet the Keynesians failed to predict the inflation of the 1970s, which “caused a second revolution in macroeconomics, the new classical revolution.” That revolution took its guidance from microeconomics and thus superficially returned to the neoclassical’s focus on individual utility. But “in the late 1990s and early 2000s, there was no generally accepted approach to macroeconomics. It was a field in chaos.”

In any case, the interest shifted from the Keynesian and neoclassical conflicts about the business cycle, to the importance of economic growth. More importantly, there was a shift then from “common-sense empiricism to statistical analysis to modern econometrics.” That is, roughly when neoclassicism as a research project was essentially completed, “the cutting edge of the profession shifted from neoclassical to formalistic and eclectic model-building economics.” To be sure,

Economists have always modeled, but what distinguishes the modern [post-neoclassical] approach is its rigid and almost exclusive focus on approaching problems through formal mathematical models, rather than through heuristic models, for example. Whereas Alfred Marshall advocated burning the mathematics underlying the model and expressing the ideas in words, modern economics often seems to take the position that we must discard the idea if it can’t be translated into a mathematical model.

The problem is that ‘The majority of the profession lags those on the “frontiers” by decades, however, so neoclassical work continued through the twentieth century. Undergraduate textbooks lag even more. Much of what one learns in undergraduate textbooks still reflects the neoclassical format, because the modeling approach is difficult to teach. That is why undergraduate texts are quite different from graduate texts.’

The upshot is that if you tell an economist that he or she should reject “neoclassical economics,” the economist is likely to say only, “So what?” or to suspect that you’ve just stepped out of a time machine from the obsolete past. Technically, the neoclassical formulations are old hat in economics. Indeed, there’s no longer the hat, as it were. Or rather there are countless hats, worn by a variety of economists lent to them by neighboring disciplines such as game theory, cognitive science, and dynamic systems theory.

What unites post-neoclassical economics isn’t the content of the models, but the method by which economists bother to produce so many of them:

Clearly, much of modern economics is highly empirical and quantitative, involving, as it does, a particular modeling approach to problems — look at a problem, reduce it to a simple model that in principle is empirically testable, and then analyze that model. Having accomplished this one must add back the elements abstracted in creating the model and apply the information thus gained to the problem at hand.

Narrow and Broad Neoclassicism

Of course, like any other word, “neoclassical” can have more than one meaning. Economists have their technical definition, as reflected in the above summary. In addition, there’s the outsider’s sense in which the neoclassical audacity indicates the wider phenomenon of capitalism’s infiltration of the academy, so that what are supposed to be independent, humanistic endeavours are often stalking horses of powerful forces from the private sector. Scientific scholarship degenerates into so much propaganda in something like the Marxian sense, into an ideological superstructure that preserves the base, material reality of certain class conflicts.

In other words, there’s “neoclassical” in the technical, narrow sense, given by internal economic usage, and then there’s how “neoclassical” can stand roughly for any propagandistic tendency in economics, the paradigm of which is the brazen cheerleading from the narrow neoclassical research program. The broader propaganda would be “neoclassical” in spirit.

Still, if you’re inclined to level the kind of sociological charges I level at the pseudoscientific aspects of economics, you have to face the contrast between these two senses of the term. Specifically, there’s the challenge of explaining what could be so propagandistic about the new, eclectic model-building approach. If economics is no longer overtly ideological in the content of its plethora of models, how could economists still be in the pocket of plutocrats? Mustn’t that be just a wild caricature at best?

For me the interesting question isn’t about the intentions of any economist. Economists may see themselves as social scientific explorers of various terrains, and that’s fine. But often we’re not doing what we think we’re doing. Ask the psychologists and therapists. Ask the philosophers who recognized long ago how hard it is to know ourselves. Or ask the literary critics who understand that the last person you want to consult about the meaning of his or her writing is the author.

So while economists are obviously entitled to their interpretation of what they’re doing, that doesn’t negate the possibility that in hindsight or from an outsider’s vantage point, economics will one day seem to have had a rather different societal function. In short, there may be an important difference between what economists intend to do, and the social effect of what they’re doing.

In just the same way, while medieval Christian theology may once have seemed like cutting-edge wisdom, in the Age of Reason Christendom came to look like a holding pattern that protected garbled transmissions of perennial philosophies and religious practices, a pattern that resulted in grotesque betrayals of Christianity’s foundational, Jesus-centered message.

The future often laughs at the naivety and hubris of the past. What we might want to do is to minimize our embarrassment and to get ahead of the game by trying to grasp where we stand from that broader perspective. That’s what philosophy is for.

The Pseudoscience of Economists’ “Empirical Models”

We can begin by discrediting the economist’s pretense that her “empirical model-building” is scientific enough to make for a firewall that resists the inevitable temptations to sell out her scientific and philosophical principles and to resort to sophistries that are all-too convenient, given the Washington consensus.

Landreth and Colander are no less clear on the dubious scientific merits of even the most cutting-edge macroeconomics:

The reasons for the criticism of the macroeconometric models were similar to the reasons economists objected to earlier work. First, the validity of classical statistical tests depends upon the theory being developed independently of the data. In reality, however, most empirical economic researchers “mine the data,” looking for the “best fit” — that is, the formulation of the theory that achieves the best r2, t, and F statistics (statistics that measure the likelihood that the theory is correct). Data mining erodes the validity of the statistical tests. Second, even where statistical tests are conducted appropriately, the limited availability of data makes it necessary to designate proxies, which may or may not be appropriate. Thus, the validity of the tests depends upon the appropriateness of the proxy, but there is no statistical measure of the appropriateness of a proxy. Third, almost all economic theories include some immeasurable variables that can be, and often are, relied upon to explain statistical results that do not conform to the theory. Fourth, replication of econometric tests generally is impossible, because economists can seldom (if ever) conduct a controlled experiment. This makes any result’s reliability unknown and dependent upon subjective judgment.

Regarding the deficiencies of macroeconomic models, the pair of authors quotes Robert Solow, the Nobel Prize-winning macroeconomist (with my emphasis):

I do not think that it is possible to settle these arguments econometrically. I do not think that econometrics is a powerful or usable enough tool with macroeconomic time series. And so one is reduced to a species of judgment about the structure of the economy. You can always provide models to support your position econometrically, but that is too easy for both sides. One was never able to find common empirical ground.

Landreth and Colander go on to say, “Cynicism toward econometric testing has led many researchers to take a cavalier attitude toward their statistical work. The result is that many studies cannot be duplicated, much less replicated, and that mistakes in published empirical articles are commonplace.”

Mind you, the replication crisis affects all the social sciences, and even theoretical physics is beginning to look dogmatic and cult-like, as Lee Smolin, Sabine Hossenfelder, and Alexander Unzicker argue. And some of the shortcomings of economics as a bona fide science are comparable to those of the other social “sciences” in that the failings look like ways to cut corners in the business of the academic profession. Academics must adapt to the marketplace, which means they need to publish enough arcane pronouncements to justify their social standing. If all they had to offer were commonsense, who would flock to the lectures or who would defer to the professor’s authority?

Still, the economists’ pretenses are supremely dangerous because economics deals so directly with the material layout of society, with businesses, jobs, money, wealth and poverty, taxes and private property, and competition for survival in the marketplace. The irony is that economists came to talk so abstractly about such profoundly concrete matters.

Ideally, the data from the experiments would speak for themselves, but as Landreth and Colander observe, macroeconomists can’t conduct rigorous experiments because they deal with whole markets and economies. These can be simulated in a computer, but then the “proxies” in the programming can be questioned for being subject to political bias.

Moreover, there might as well be an entire field devoted just to cataloguing the misuses of statistics. The pitfalls are plentiful. You can prove whatever you want with statistics by fudging the number or with loaded questions, biased samples, false causality, data mining, or misunderstandings of the error margin or of the null hypothesis.

And to return to the Solow quotation, the formality of mathematical precision is evidently neither necessary nor sufficient for scientific inquiry. This is because you can formalize even pure fantasy, and indeed mathematics is littered with such fantasies that may or may not one day be scientifically useful. Mathematical language is supposed to maximize the chances of objectivity, by leaving the subjective associations from natural language out of the picture. But just because you can analyze a problem so objectively, doesn’t mean the problem has any bearing on reality.

For example, you can formalize the pattern of how crewmen wearing red shirts tend to die in old Star Trek episodes. Or you might extract the formula that’s used to produce generic romantic comedies or action movies, and you can treat that formula as a mathematical object, as having certain free parameters and constant values. But that kind of analysis isn’t enough for science. You can study fiction at that meta level, but this would be pseudo-empiricism in that you’d be treating a fiction or a game as though it were real. This is precisely what fan clubs do with respect to their favourite fictional world.

Capitalism’s Shifting Needs for Propaganda

Having dispensed with that pretense, the next move is to show how this eclectic model-building could fit into the broader plutocratic capture of economics.

The first point to note here, then, is one that hides in plain sight. By analyzing capitalism so rigorously and by calling the models “scientific,” using all the mathematical bells and whistles, economists present capitalism as though this system were natural and indeed as inevitable as physics. By literally borrowing concepts from physics in their study of capitalism, modern economists treat capitalism as though it weren’t a human invention sustained by choices and power dynamics but were an evolving system like the orbits of planets or like the natural selection of species.

Second, we should recognize that the need for propaganda may change as the situation warrants. There were two main crises faced by capitalism. The first was the rise of Marxism, as explained by William Barber in A History of Economic Thought (1967):

No less important is the stamp Marxian analysis has left on the subsequent development of other traditions in economic thought. Marx insisted that economic events could not be understood in isolation from their historical and sociological dimensions. The very sweep of his claims has meant that those who have rejected his conclusions and have wished to give economics a ‘purer’ and more restricted interpretation have been obliged to define their positions more precisely than would otherwise have been the case. In fact, much of the analytical shape of neoclassical economics was conditioned by an attempt to divert economic discourse from Marxian channels [my emphasis].

The neoclassical focus on capitalism rather than on what would likely emerge from capitalism due to its internal contradictions and to the sweep of history, and the neoclassical’s resort to mathematical formalities rather than to a concrete engagement with history were instrumental in downplaying the Marxian critique. It was a question of shaping economics as a viable profession. Economists had to seem neutral and scientific to become part of the establishment in a capitalist society. Radicals are naturally marginalized.

(Note that Marx’s pseudoscientific treatment of the “material logic” of history did the same for communism.)

But once the free-market content of the neoclassical discourse cemented economists’ place as high priests of capitalism, they were met with a second crisis, which was the Great Depression that sparked the Keynesian revolution as well as the New Deal under Franklin Roosevelt. The free-market rhetoric and surreal formalities of how capitalism is supposed to evolve were rudely interrupted by reality in the US, and they made way for hybrid approaches in economics.

As soon as the free-marketeers outside the academy saw their opening in the 1970s, they pounced on Keynesianism, and the Powell Memo of 1971 launched a full-scale laissez-faire assault on government protections of society from the ravages of unfettered capitalist competition, an assault that flourished under Ronald Reagan and Bill Clinton.

In the economics departments themselves, as we saw from the above summary of the history, there was chaos. Yet there was also no more need for overt free-market propaganda from economists because the damage had already been done. Decades of mythmaking from classical and neoclassical economists — with such highlights as Adam Smith’s “invisible hand” and the fantasy of Homo economicus, the independent maximizer of utility — had already established the cultural narrative in the US that greed is good.

In the Gilded Age, the monopolists controlled the discourse by buying off regulators and by enlisting the police or the military to physically assault unions. But by the 1980s, Big Business could take the more humane approach of pushing the capitalist propaganda themselves with a torrent of slick advertising on various media platforms.

The point is that in that context — after these crises and counterrevolutions had taken their course, after consumer society was in full swing, soviet communism had collapsed, and even Democratic presidents like Bill Clinton and Barack Obama picked free-market proponents for their economic advisors — the economist’s imperative of adapting to the prevailing culture might have entailed not that she add to the sea of laissez-faire messages but that she fall on her sword.

Economics departments might have remained viable especially if they lacked the resources to systematically challenge consumerism.

Relativism and Agnotology

Here the eclectic model-building takes on a new light. The more varied and even random their subject matters, and the more arbitrary and unreliable their statistical assessments, the less relevant economics became as a potential counterweight to the engines of American plutocracy.

If economists could show in unison that, under the conditions of consumers’ infantilization and the looming ecological catastrophe, wholesale “deregulation” of a capitalist economy would be not just reckless but insanely disastrous, they could easily prove that their profession is a true science. They could do so by opposing the business community that permanently lobbies for such deregulation.

As it is, of course, a book like Thomas Piketty’s Capital in the Twenty-First Century fades into the ether, despite the wide praise it may initially receive. If economists only pursue a wide variety of models, there’s no accumulation of economic knowledge, but just a series of fads.

Thus, modern, post-neoclassical economics contributes to the subject matter of agnotology, to the mass production of ignorance. Each fad generates the appearance of knowledge, but when one is knocked down by the next, one pundit cancelling out the other or one model negating its neighbour, the net cognitive result is null.

The wider cultural problem here is relativism, which means it’s especially unhelpful and suspicious for economists to seize that opportunity to turn their discipline into an industry for generating the widest possible variety of models and solutions. It’s almost as though the burgeoning eclecticism in post-neoclassical economics were useful in masking the partisan divide between conservative and progressive economists, a division that threatens the discipline’s scientific status.

Again, this isn’t to say there’s a conspiracy or that economists are setting out to deceive people. But these seem like some effects of how economics has evolved. The imperative of thriving academically in a capitalistic/plutocratic society shifted from supplying overt myths and propaganda to stepping out of the way of autonomous sources of cheerleading within the business community.

Economists were like Doctor Frankenstein: once you help to create the monster, the monster goes its own way and no longer needs you. If you still cheer for the model or for the monstrosity in that case, your task may be to confuse the mob of angry townspeople so they drop their torches and pitchforks.

Whether these new functions of the economics profession should be called “neoclassical” is only a semantic question. What’s more important is whether modern economics has ever been genuinely scientific, from its classical to its econometric phases, or whether these economists have always functioned, one way or another, mainly as apologists for the plutocracy that capitalism tends to produce.