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PENGUIN BOOKS

THE ECONOCRACY

‘Economics has become the organising principle, the reigning ideology, and even the new religion of our time. And this body of knowledge is controlled by a selective priesthood trained in a very particular type of economics – that is, neoclassical economics. In this penetrating analysis, the authors show how the rule by this priesthood and its disciples is strangling our economies and societies and how we can change this situation’ Ha-Joon Chang

‘An interesting and highly pertinent book’ Noam Chomsky

‘This book is badly needed, looking at academic economics afresh: clear, well-written, well-researched, non-doctrinaire. It makes the case for “pluralistic” economics to address such questions as financial instability and climate change. Every economist and citizen should get a copy’ Vince Cable

‘A rousing wake-up call to the economics profession to rethink its mission in society, from a collective of dissident graduate students. Their double argument is that the “econocracy” of economists and economic institutions which has taken charge of our future is not fit for purpose, and, in any case, it contradicts the idea of democratic control. So the problem has to be tackled at both ends: creating a different kind of economics, and restoring the accountability of the experts to the citizens. The huge nature of the challenge does not daunt this enterprising group, whose technically assured, well-argued and informative book must be read as a manifesto of what they hope will grow into a new social reform movement’ Robert Skidelsky

‘If war is too important to be left to the generals, so is the economy too important to be left to narrowly trained economists. Yet, as this book shows, such economists are precisely what we are getting from our leading universities. Given the role economists play in our society, we need them to be much more than adepts in manipulating equations based on unrealistic assumptions. This book demonstrates just why that matters and offers thought-provoking ideas on how to go about it’ Martin Wolf, Chief Economics Commentator at the Financial Times

‘Economics, as practised in university economics departments, regurgitated by policy makers, and summarised in the mainstream media, has become a form of propaganda. This superb book explains how dangerous ideology is hidden inside a mathematical wrapper … essential reading for anyone who wants to know about the con – that includes everyone concerned with the future of democracy’ Jonathan Aldred, author of The Sceptical Economist

‘This book is for the many students who want to study economics because they want to help society solve its problems: a critical introduction to contemporary economics, written by a new, post-2008 generation of economists … There is no better vaccination against the economic disease than this immensely readable book’ Wolfgang Streeck, author of Buying Time: The Delayed Crisis of Democratic Capitalism

‘Is economics too important to be left to the economists? The authors marshal a powerful case … An important and timely book’ Andrew Gamble, Professor of Politics at the University of Cambridge

Foreword

I am writing this Foreword in the immediate aftermath of the referendum in which the UK voted to leave the European Union. That vote by the general public came against the advice of professional economists, the vast majority of whom believed that the economic costs of exit would be high. If ever there were a battle between ‘econocracy’ and ‘democracy’, this was it. It is also pretty clear who won. Time alone will tell whether there was greater wisdom among crowds than among experts. But if nothing else, this episode lays bare the distance the economics profession needs to travel if it is to win heads, to say nothing of hearts.

Perhaps that should come as no surprise. The past few years have witnessed an economic and financial crisis as great as any in anyone’s lifetime. It is a crisis whose aftershocks are still being felt, whose wounds are still weeping. Some of the enormous collateral damage from that crisis has been felt, not unreasonably, by the economics profession. Indeed, it would not be too much of an exaggeration to say that the financial crisis has spawned a crisis in economics and finance. At root, this was every bit as much an analytical crisis as an economic and financial one.

And this is not the first time. Much the same occurred after the Great Depression of the 1930s. Back then, catastrophic intellectual error gave rise to catastrophic policy error, with catastrophic economic consequences. This time’s crisis may not have torn the economic and social fabric quite as violently as the one in the 1930s. But it was sourced in intellectual and policy errors every bit as great. It took Keynes’s leadership to diagnose and remedy those mistakes after the Great Depression, establishing him as the most influential economist of the twentieth century. Crisis offered the opportunity of a great leap forward. Thus far at least, the present crisis has yet to spawn a Keynes for the twenty-first century. And nor have we witnessed any great leap forward analytically. Perhaps it is simply early days. Revolutions, especially analytical ones, take time to build and grow. Indeed, they tend to proceed obituary by obituary. New brooms are needed to sweep clean. That means that salvation for the economics profession probably lies not among existing academic and policymaking dinosaurs, like me, but among the new generation of students of the discipline.

That makes this book – written by students drawn to the economics profession by the crisis and then frustrated by the failings of that same profession to make sense of this very crisis – poignant and relevant. It is telling that the number of students applying to study economics has shot up over recent years. For them, crisis appears to have spelled opportunity every bit as much as threat: the opportunity for another great intellectual leap forward, to reshape twenty-first-century economic thinking as Keynes did in the twentieth. This is one of the silver linings from the dark cloud of the crisis. And no profession could ask for a better endowment.

But this endowment, if it is to renew and refresh the profession, needs to be invested wisely. That goes to the very heart of this book’s critique. This critique goes beyond the narrowly technical – that the workhorse neoclassical model of the economy was found to be lame when it came to running a real crisis race. The deeper critique is that these models, and the technical language that accompanies them, have played a role in policy and in society that has been disproportionate in two senses. First, disproportionate relative to our state of knowledge. Existing economic frameworks have shouldered a policy weight that is simply too great for them to bear, given the degree of uncertainty and fragility that surrounds them. Second, disproportionate because these frameworks placed an excessive degree of policy power in the hands of the technocrats wielding them. This is what the authors call ‘econocracy’. Their contention is that this econocracy has been both too narrow in its technical focus and too broad in its societal impact.

When assessing the potency of this critique, it is important to prise apart its trace elements. Part of the critique is technical. Mainstream economic models have sacrificed too much realism at the altar of mathematical purity. Their various simplifying assumptions have served aesthetic rather than practical ends. As a profession, economics has become too much of a methodological monoculture. And that lack of intellectual diversity cost the profession dear when the single crop failed spectacularly during the crisis. This monoculture, it is argued, has also narrowed the economics curriculum in universities. This has generated an ever greater focus on the mathematical gymnastics of optimising models and too little focus on the everyday aerobics of how the economy functions. Accompanying this has been neglect of disciplines that abut and illuminate economics: economic history, moral philosophy, money and banking, radical uncertainty, non-rational expectations. In short, neglect of the very things that make economics interesting and economies important.

My personal view is that this is a fair cop. Indeed, I think this particular element of the critique is no longer a source of great controversy, except within some academic cliques. And since the crisis, although progress has not been rapid, plenty has been made. Some of the impetus for change has come from a global network of universities, gathered together under the umbrella of Rethinking Economics. I have myself been a supporter of student efforts to widen and deepen the curriculum and wrote (another!) foreword for the 2014 report on curriculum reform by students at the University of Manchester. But there is progress, too, within academe. Notable here have been the efforts of Wendy Carlin at University College London and colleagues, who together have drawn up a new interactive economics curriculum called CORE. This is an attempt to adapt and augment the existing macro-economic toolkit to better match real-world features, features all-too-apparent during the financial crisis. It is a notable achievement, one that appears to be gathering momentum and that deserves support.

A second element of the critique in this book, one which really flows from the first, is that the language used by economists has served as a barrier to entry, certainly for members of the general public. Indeed, it could be argued this has been a deliberately erected barrier. If so, economics and finance are hardly exceptions in this respect. Every profession has its own lexicon, in part at least intended as a barrier to entry. Language is one way in which experts can preserve the rents associated with their subject-specific human capital. So, if every subject is guilty as charged, why pick on economics? The argument is that economics is, in a way, a victim of its own success. Economic principles and frameworks have found their way into every nook and cranny of public debate and discourse. They are the frame through which virtually all public policy debates are viewed these days. If economics is affecting so many in society in so many different ways, it may have a particular and peculiar responsibility to be clear and intelligible to all those it serves.

I believe this critique has considerable force. As one example, I have looked at the linguistic complexity of the Bank of England’s own communications, including my own speeches. These rank well above the levels of a broadsheet newspaper, and way beyond the levels of a tabloid. In other words, the vast majority of the Bank’s communications are lost on the vast majority of the public. The various reports into the economic costs of the UK leaving the EU most likely fell at the same hurdle. They are written, in the main, by the elite for the elite. Yet there is no inherent tension between technical prowess and simple communication. There are few activities more technically complex than weather forecasting. This involves taking huge volumes of data and processing it via highly complex models using heavy-duty information technology in close to real time. Yet the outputs from this process need to be readily accessible to everyone, using simple words and graphics. Meteorologists ensure they are. Economists often at present lack those same skills.

It would be easy to suggest that redemption lies in improved programmes of public understanding of economics. And doubtless they have their part to play. But just as important will be programmes that improve economists’ understanding of the public. That may include, for example, seeking ways to involve the profession in practical projects within companies or charities, putting their skills to work in the front line in real-world situations. As one example, the charity I helped co-found, Pro Bono Economics, does just that.

The third and final element of the critique is the link from economics to politics, from the technical to the social. The contention here is that unelected technocrats, armed only with an economics degree and an ability to differentiate quadratics, are being left to make what are essentially social choices. In other words, political choices are being handed over inadvertently to faceless technocrats, thereby giving rise to a democratic deficit. One example often quoted, one close to my own heart, is Quantitative Easing or QE by central banks. This is intended, by design, to inflate asset prices. Yet these wealth gains do not accrue equally. They are skewed towards the already wealthy. QE is thus a distributional act, albeit an inadvertent one, yet carried out by unelected technocrats. Some of the same critique could be aimed at low levels of interest rates, which cause a distributional skew towards borrowers and away from savers.

We need to place these arguments in context here. The fact is that pretty much every public policy act, central bank or otherwise, has distributional consequences. By definition, public policy shifts resources between people at a point in time or between generations over time. As monetary policy shifts resources between savers and borrowers, fiscal policy shifts them between rich and poor, between this generation and the next. They all aim to lift as many boats as possible. But rarely, if ever, are they able to lift all boats by the same amount.

The inability to do this does not, however, imply that all policy decisions should lie in the hands of politicians or that they should be delegated to the public through referenda. Expertise, exercised at arms-length from the political process, has for me a key role to play in making decisions that are in the long-term interests of society, unconstrained by political cycles and populist surges. That is why operational independence in the setting of interest rates is seen, pretty much universally, as best practice among central banks.

Technocratic institutions have an important role in the policy infrastructure. That is why they have been found historically to be a key, sometimes the key, ingredient for national success. When these acts of delegated policy authority do occur, however, they come with a heavy responsibility for the unelected technocrats put in charge. These technocrats, including myself, are there by the grace of God – or, failing that, a Parliamentary Committee. This means that technocratic institutions require the continuous consent, not just of Parliament, but of the wider public. Big steps forward have been take on that front over the past couple of decades at public institutions, including at the Bank of England. Those institutions have been subject to degrees of public scrutiny previously unimaginable, through reports, minutes, transcripts, speeches, parliamentary appearances and the like. This is little short of a revolution in transparency and accountability. And it has been essential.

But could and should more be done to improve accountability and transparency, in particular to the general public? It must. Public trust in public institutions has been dented, in some cases significantly, by the crisis. Repairing that dent will take more than a quick respray of the bodywork. It will require those institutions to seek new and wider ways of engaging, explaining and educating about their actions and intentions. As importantly, it will require new and wider means of listening to, and learning from, societal stakeholders.

I do not know whether we live in an econocracy, much less whether this is good or bad news for society. What I do know is that society is likely to be the loser if technical expertise and knowledge somehow become distrusted or ignored. Great humility about that expertise, and a desire to make it accessible to a wider set of societal stakeholders than ever previously, would be useful steps towards avoiding that outcome. This book encourages us to take those steps. For economists, they would be giant ones.

Andrew Haldane

Chief Economist at the Bank of England

July 2016

Acknowledgements

This book is an attempt to express the arguments of a movement of economics students around the world; we would therefore first like to thank members of that student movement and to recognise all the hard work done by students around the world in campaigning for better economics education. We have attempted here to articulate their worries and frustrations about the current state of modern economics; the hard part was building the movement that allowed that message to be expressed in the first place.

We would also like to thank some people in particular for input into this process. Special thanks goes to Louis James for invaluable help in some of the research for this project and to Cleo Chevalier for helping us to present that research lucidly. The copy-editing of Gail Matthews is to be credited for what we hope is a coherent piece of writing; any problems that remain are our own fault entirely. We would also like to thank Will Horwitz, Gemma Wearing, Emma Hamilton, Yuan Yang, Rafe Martyn, Ben Glover, Andrew McGettigan, Victoria Chick, Ha-Joon Chang, Daniel Chandler, Jonathan Aldred, Claire Jones, Cameron Murray and Philip Pilkington for providing such detailed and constructive feedback. That long list is still too short to fully summarise everyone who has had input into this book and we thank everyone who has contributed to the process. Thanks also goes to Diane Coyle, Martin Wolf, Diane Elson, Pat Devine, Anne Booth and all the others who so kindly agreed to be interviewed (some will remain anonymous), and to Aashish Velkar for responding to our call for a historian’s opinion in Chapter 4. We would also like to thank all the staff at Rethinking Economics for their continued fantastic work and Diana García López, Kiryl Zach, Olivia Wills, Severin Reissl, Isaac Stovell and Eleanor Baggaley Simpson for all their help with research for this book. Andy Haldane deserves huge thanks for agreeing to write the foreword for this book and for his support of the student movement more broadly. He is the kind of economist we would be proud to be.

The publication of this book would not have happened without the Friends Provident Foundation and their generous support of Rethinking Economics, and we would like to extend particular thanks to Andrew Thompson for his personal support. We would also like to thank everyone at Manchester University Press who has worked to make this book a reality, rather than a just a jumbled assortment of thoughts in our heads.

Finally we would like to extend thanks to two groups of people. Firstly to the editors of this series, Karel Williams and Mick Moran, for having belief in us and for cultivating and nurturing many of the ideas contained within the book (and also for introducing us to the work of James Scott, who deserves a mention of his own for his influence on our thinking). Lastly we would like to thank our friends and family, and in particular Andrew, Jessie, Ruby, Rachel, Richard, Ben, Bryan and Kate for their continued support and faith in us.

Introduction

The perils of leaving economics to the experts

Each generation doubtless feels called upon to reform the world. Mine knows that it will not reform it, but its task is perhaps even greater. It consists in preventing the world from destroying itself.

Albert Camus¹

The authors of this book are of the generation that came of age in the maelstrom of the 2008 global financial crisis. It was a crisis that came as if from nowhere, interrupting our teenage years and sending shockwaves reverberating around the world. On the news we saw worry and confusion about debt overhangs, credit default swaps and sub-prime mortgages. It was a first glimpse for us into a whole new world and a strange rite of passage.

These experiences made it increasingly clear that economics was at the heart of the society we were growing up in: the driving instructor who lost his house and then his marriage when interest rates spiked following Black Wednesday; our teachers hammering home the need to get qualifications valued by the job market; and the constant sparring over economic credibility in politics. The economy made its presence felt almost everywhere.

The centrality of the economy in the world sat uncomfortably with the apparent unease many of our friends and family felt talking about it. We can each remember numerous occasions on which conversations have run dry when they have reached economics. Someone asks ‘Who do we owe all the money to?’ or states ‘We can’t do that because it will ruin the economy.’ There is a silence, shrugs all round and the conversation moves swiftly on.

A few people did not seem to have this hesitation. Economists, politicians, journalists and policymakers regularly appeared in the media giving opinions about the health of the economy and predicting how this event or that policy would affect it. These men (and it is mostly men) were confident and authoritative and their opinions were respected. They conversed with each other using jargon, graphs and statistics which made them difficult to understand. We felt that to understand and shape the world we needed to speak their language and that’s how we all ended up studying economics in the same year at the University of Manchester in 2011.

After that it felt like we had swapped sides. Now, when discussion turns to the political issues of the day and someone launches into their opinion, often they finish by looking over at us, as if to say, ‘Does that all make sense, you know, economically speaking?’ Sometimes, it’s even more explicit – ‘You’re an economist, what do you think?’ As economics students we have somehow ended up with a strange authority to judge the merits of political arguments.

These situations leave us feeling uncomfortable. Having graduated now we are all keenly aware that our economics education has not equipped us with the knowledge or skills to justify any authority we are given. In fact we were so frustrated with how little our education was helping us understand the world that midway through our second year at university we began a campaign to reform economics education. While we were memorising and regurgitating abstract economic models for multiple choice exams, the Eurozone crisis was at its peak, with Greece and Italy on the brink of disaster. This wasn’t mentioned in our lectures and what we were learning didn’t seem to have any relevance to understanding it. The elephant in the room was hard to ignore.

This was in early 2013. Little did we know it but other students were starting similar campaigns across the world and in time we linked up with them in a network called Rethinking Economics. Amazingly, what united us across different continents and languages was the shared feeling that there was a deep malaise at the heart of economics and that as a result we were being sold short as students and as citizens. While we were supposed to be on the road to becoming economists, we could also see economics with the eyes of outsiders. We saw the ramifications of this flawed education stretched far beyond the confines of university lecture theatres. We became aware that a degree in economics was a gateway to many important positions in society, whether it prepared you for them properly or not.

From this vantage point we can see that all those people who feel locked out of economics have an important point. When someone says ‘I just don’t understand economics’ or ‘economics is not for me’ they are highlighting one of the defining features of society in the modern world. We have coined the term econocracy to describe the kind of political system that has spread across much of the world today. An econocracy has all the formal institutions of a representative democracy – like political parties and regular elections – but the goals politics seeks to achieve are defined in narrow economic terms and decisions are made without significant public oversight. Of course some areas of politics, like war and national security, aren’t justified in terms of their effect on the economy, but the overall trend of reducing politics to economics is clear.

It is estimated that there are about 7,000 languages in the world. The language of economics is one of the newest and least well known, but it is rapidly becoming one of the most important. The result is that citizens increasingly live in a world that they cannot shape. Without being able to speak economics it is hard to have a meaningful voice in how the economy or political system is run. We are in a very real way disconnected from important political institutions and processes, and struggle to hold experts and politicians accountable. It seems that many people have this feeling to some extent. In a poll we did with YouGov we asked 1,696 respondents their view of how politicians and the media talk about economics – only 12 per cent said it was done in an accessible way that made it easy to understand.²

As the economy has become central to politics and policymaking, economics has become highly influential but it has also become highly technical. In this world economics is not for most people and little effort is made to discuss it in such a way that non-experts can join in. This leads to it being seen as a technical subject not a political one, and as a result democratic culture and debate are undermined. Such a democratic deficit leads to a system where some people have economic authority without public oversight. Every year 10,000 economics students graduate and go on to become regulators, civil servants, consultants, journalists and traditional economists. These people are society’s economic experts and we rely on them to manage the economy on our behalf. Currently they are being trained (not educated) to speak a language no one else can understand and to slot in unquestioningly to a system in which they have considerable authority while citizens do not. They are imbued with a confidence that it is possible to have the knowledge and tools to understand, measure and manage the economy without input from the public.

And yet the problems of economics education mean that many of the most important issues facing the world today, such as environmental catastrophe, soaring inequality and financial crises, are either absent from most syllabuses or taught in a way that grossly oversimplifies their depth and complexity. The result of this education is that we, as the next generation of economic experts, are grossly underprepared to use effectively or responsibly the power we are given.

Economics has been labelled ‘the dismal science’ and has developed a jargon so dense it even confuses economists. But at its core economics is really just the story of seven billion people’s individual and collective choices. We are all embedded in the economy: when we work we contribute to production and when we buy things we contribute to consumption. When we’re born, educated, unemployed and ill the cost is recorded in government spending. We rely on the economy, whether through income or wealth, to survive, and the behaviour of the economy depends on our decisions.

It is during times of crisis – when individuals, families, classes and whole sections of society are torn up and reconfigured – that it becomes clear just how interconnected our individual circumstances are with events in the wider economy. Whether we want to or not, we cannot escape the power of economics. The financial crisis of 2008 is the most obvious recent example, and John Lanchester expressed it perfectly when he wrote:

There’s a huge gap between the people who understand money and economics and the rest of us. Some of the gap was created deliberately, with the use of secrecy and obfuscation; but more of it, I think, is to do with the fact that it was just easier that way, easier for both sides. The money people didn’t have to explain what they were up to, and got to write their own rules, and did very well out of the arrangement; and as for the rest of us, the brilliant thing was we never had to think about economics. For a long time, that felt like a win-win. But it doesn’t any longer.³

Economics is for everyone precisely because it affects everyone. It is therefore too important to be left to the experts.

The gap between experts and citizens has not been created on purpose. Economic experts are not part of a shadowy cabal running society behind the scenes. Instead, the state we are in is the result of a particular set of historical circumstances. In this book we show how the history of economics as a discipline, the political events of the twentieth century and reforms to higher education have combined to create a world where economic decision making is delegated to experts who are not fit for purpose. This book is not about blaming anyone; it is about recognising the situation we find ourselves in and all taking responsibility to address it.

In this book we open up the discipline of academic economics to scrutiny, criticising it strongly at times. However, we also recognise that the discipline has much to offer and is a vital part of the change we want to see. We believe that it is important for people to know more about how economic experts think about the world, how their tools do (and do not) work and where their expertise is limited. By understanding better the knowledge that underpins our societal understanding of the economy, citizens can begin to engage with experts and politicians as equals, scrutinising their economic arguments and holding them accountable.

Most importantly we set out a positive vision for how academic economics could become a bridge, not a barrier, to increasing public participation in economic discussion and decision making. At Rethinking Economics our aims are to reform economics education so that tomorrow’s experts are better equipped to understand the economy and engage with society. We are also trying to democratise economics because we believe that at its core economics should be a public discussion about how to organise society. There is an important role for experts here, but this role is as a humble advisor not a detached authority figure.

Albert Camus’s generation had to prevent ‘the world from destroying itself’ in a nuclear war. Our generation has a choice of existential threats from financial meltdown to global warming and food and energy insecurity. To prevent these catastrophes and build sustainable, stable and prosperous societies our generation must have the ability to reimagine the economy. And to be able to do that it must reclaim economics from the experts, transforming it from a technical discipline into a public dialogue.

Rethinking Economics

The authors of this book are all active members of Rethinking Economics (RE). At the time of writing RE consisted of over 40 groups in 13 countries. This book is our interpretation of the history and arguments of the student movement to reform economics and features the voices of students from all over the world. However, we could not hope to speak on behalf of the movement in its entirety. Some members of RE will feel that our arguments are too bold while others will want them to go further.

Our movement calls for more openness, diversity, engagement and reflection in economics and so it has a place for all of these views. We hope that this book reflects those principles and in doing so is part of the change we want to see. Thank you for reading this book and not leaving economics to the experts! If you want to know more about Rethinking Economics or get involved all the relevant information is available at: http://www.rethinkeconomics.org/.

Joe Earle, Cahal Moran and Zach Ward-Perkins

THE ECONOCRACY

On the Perils of Leaving Economics to the Experts

PENGUIN BOOKS

Contents

THE BEGINNING

PENGUIN BOOKS

THE ECONOCRACY

ABOUT THE AUTHORS

List of exhibits

Foreword

Acknowledgements

Introduction

The perils of leaving economics to the experts

Rethinking Economics