What’s Wrong With Economics?

Robert Skidelsky—

The need for economists to think about economics became apparent after the global financial crisis of 2007–2008. Few economists predicted the crash; more damningly, few envisaged the possibility that such a collapse could occur, any more than the crash of an algorithmic system. Students of economics asked: what is the point of studying economics if it can’t tell you what is going on, or offer policies to prevent bad things from happening? For what happened was the worst economic crisis since the Second World War. Terms to describe it go from the Lesser Depression to the Great Recession.

The roots of this failure do not lie with the incompetence or inattention of individual economists, but deep within the way economics is done – its methodology. This may sound dry and boring, but the methods of economists are key to understanding how and why economics goes wrong. Neoclassical economics has developed a peculiar method for studying the economy, and the use of any other method is not regarded as economics. In other words, the subject matter of economics is defined by the neoclassical method. Models based on this method allow for only a limited range of possibilities. Events which might occur outside this range are not picked up on economists’ radar screens. Models which show financial markets to be efficient – as most of them did – will not give you the collapse of 2008. The spate of papers offering explanations of the crash came after the crash. We now learn that, with a bit of uncertainty, ‘multiple equilibria’ can be ‘endogenously’ generated. But there was no ‘uncertainty’ before the crash, only insurable risk. So, this book aims to discover why the most influential discipline for making public policy is so often cut off from reality.

Economists usually scorn the study of methodology. ‘Those who can, do science’, said Paul Samuelson (1915–2009), ‘Those who can’t, prattle on about methodology.’ Frank Hahn (1925–2013) similarly claimed, ‘I want to advise the young to avoid spending too much time and thought on methodology. As for them learning philosophy, what next?’ In other words, these eminent economists didn’t see the need for students of economics to think about what they were doing. Their message was not how to think, but what to think.

If economics were a natural science, this would be good advice. Natural scientists don’t spend their time agonising about their methodology. They believe, with good reason, that the methods they have evolved for understanding physical matter are adequate for discovering the truth. (In fact, reflections on method have always intertwined with developments in physics from Descartes to Einstein. But for all practical purposes, the methodology of the natural sciences is fixed.) Most economists take the same line. Their world is peopled with human robots and they aim to establish ‘laws’ about the behaviour of these machine-like creatures. A complete set of laws is not yet to hand: but they will catch up with the natural scientists in the end, perhaps after the neuroscientists have completed their work on the brain. They are loathe to admit that the material they study and try to understand does not behave with the law-like regularity of natural phenomena. Humans are, uniquely, inventive animals. They are aware of who they are, reflect on their experiences, set themselves goals, relate to each other and their environments in complicated ways, puzzle about the morality of their actions, adapt creatively to new situations. By the exercise of their minds and imaginations, they modify the future – their own, and the world’s. Their games cannot be ‘sussed out’. The most secure laws of economics are tendencies at best.

From What’s Wrong With Economics by Robert Skidelsky. Published by Yale University Press in 2021. Reproduced with permission.

Robert Skidelsky is emeritus professor of political economy at the University of Warwick. He is the author of many books, including Money and Government: The Past and Future of Economics.