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The time for a new economics is at hand

The crises we now face illustrate the limits of neoclassical orthodoxy

March 8, 2015 3:00AM ET

In early January I passed out a leaflet to my colleagues at the annual meeting of the American Economic Association in Boston, which brought together more than 11,000 economists and social scientists. The leaflet pointed out the profession’s failure to predict the 2008 financial crisis and challenged economics professors to incorporate new ideas into their teachings. As a self-proclaimed Marxist-feminist-anti-racist-ecological economist and economics professor, I was glad to take this opportunity to protest the lack of pluralism in the profession as well as the weaknesses of mainstream neoclassical economic theory, especially in the currently dominant free-market form.

The leafleting was part of an action organized by the kick-it-over campaign of Adbusters, the anti-consumerist Canadian nonprofit headed by Kalle Lasn, whose call to “occupy Wall Street” sparked the movement that swept the U.S. in the fall of 2011. Just as Occupy Wall Street aimed at exposing the failures of the financial industry, the kick-it-over campaign aims to expose the failures of the economics profession. The recent rise of Rethinking Economics and the International Student Initiative for Pluralism in Economics, with groups in more than 20 countries, is part of this heartening trend.

One of the biggest weaknesses of U.S. economists and economics these days is the inability to think creatively. Almost all introductory economics classes taught in the United States — and core theory courses for economics majors and Ph.D. students — teach a school of economic theory that historians of economic thought call neoclassical economics (opposed to the earlier, classical economics of Adam Smith, David Ricardo and Karl Marx). Neoclassical economists take the capitalist market economy as a given and focus on its allocation of scarce resources among competing individuals. They build models based on assumptions of narrowly self-interested, materialistic utility maximization by consumers and profit maximization by firms. Sharing this foundation, their liberal and conservative camps disagree about the type and extent of government intervention required to respond to market failures. Neoclassical economics provides a wealth of insights into capitalist market economies. The problem is that it represents itself as economics, per se.

The important insights of other forms of economics — which tend to be more historical, critical and visionary — are thereby banished. For example, radical and Marxist economics, which focus on the class inequality and power, bring crucial warnings about economic injustice and the corruption of political power by the wealthy and large corporations as well as visions of possible superior economic systems. And feminist economics, by foregrounding gender difference and inequality, elucidates the problems resulting from the nonpayment of reproductive labor and the banishment of feminine caring values from the goals of capitalist firms. These and other heterodox specialties exist in professional associations and journals, but they are almost never mentioned, let alone represented, in core economics classes at the undergraduate or graduate level. Students who question the narrowness of neoclassical assumptions and models are told to think like an economist — i.e., a neoclassical economist — or else. This narrowness of perspective is reproduced when students who were taught only neoclassical economics become professors who teach only it. 

The rise of neoliberalism

The hegemony of neoclassical economics and the relative power of its left (interventionist) and right (free market) wings have varied with the political economic climate of the country and the world. In the U.S. by the late 1960s, popular and student activist movements for civil rights, labor, feminism and environmentalism had reconnected to and revitalized the Marxist theories that had been suppressed during the McCarthy era. Students like me were drawn to economics because of their concern with the pressing economic problems of poverty, inequality, racism, gender inequality and environmental destruction and found that heterodox theoretical frameworks — which foregrounded power, class inequality and the role of economic institutions and culture in reproducing them — were more amenable to the kind of critical analysis they were looking for.

In this way, the radical social movements of the 1960s were able to gain a foothold in the economics profession. They revived and transformed theoretical traditions more critical of capitalism than neoclassicism. They formed an active left wing of the profession and engaged in healthy dialogue and alliances with left-leaning, Keynesian neoclassical economists who were convinced of the necessity of government spending to counteract unemployment and of other forms of market interventions such as anti-poverty programs, environmental regulation and anti-trust laws. Economists played a key role in creating the climate within which President Richard Nixon proposed the Environmental Protection Agency to Congress in 1970 and President Jimmy Carter signed the Full Employment and Balanced Growth Act in 1978. 

With capitalism beset by multiple interconnected crises, the hegemony of neoliberalism appears to have peaked.

The 1980s saw what can only be described as a counterreaction, both in the political economy and in academia. Building on the earlier work of conservative, Chicago School economists such as Milton Friedman and funding by conservative think tanks such as the American Enterprise Institute, new theories and fields expounding the ineffectiveness of government regulation rose to prominence and came to be known by heterodox economists and other outsiders as neoliberalism or free market fundamentalism. Prescribing deregulation, the weakening of the social safety net, free trade, privatization and tax cuts for the wealthy, they quickly gained political ascendancy, thanks to President Ronald Reagan and British Prime Minister Margaret Thatcher. Neoliberalism has maintained the upper hand in policymaking ever since, contributing directly to the 2008 financial crisis through its disastrous undoing of post-Depression financial reforms and to the prevalence of budget-cutting austerity programs in the U.S. and Europe.

As neoliberalism gained ascendency, the center of gravity of mainstream, neoclassical economics moved to the right. Meanwhile, discrimination against Marxists and other critics has increased. We are ignored, ridiculed and told we’re not economists. There are very few job openings for us, mostly at liberal arts colleges rather than at universities with Ph.D. programs. This is the climate within which an interesting and sobering new form of McCarthyism occurred last spring. Six hundred liberal economists, including seven Nobel laureates, were red-baited by the Employment Policy Institute, a shady think tank funded by the restaurant industry, in a full-page New York Times advertisement because the letter they sent to President Barack Obama supporting increases in the minimum wage was also signed by eight radical/Marxist economists (including me).

New economics

But now, finally, economic change is afoot. With capitalism beset by multiple interconnected crises, the hegemony of neoliberalism appears to have peaked. The looming climate crisis and the power of the petroleum industry to corrupt governments and prevent a shift to a sustainable, carbon-free path reveal the oligarchic nature of unregulated free market capitalism. The intractable problem of poverty amid ill-gotten, empowered wealth, which sparked Occupy Wall Street, continues to draw attention, undermining neoclassical claims of the efficiency of labor markets. Last spring Pope Francis spoke forcefully for the “[rejection] of the absolute autonomy of markets and financial speculation” and for structural solutions to poverty and inequality. In January the Dalai Lama proclaimed that because of Marx’s focus on the alleviating the gap between the rich and the poor, “as far as social-economic theory is concerned, I am still a Marxist.” January also saw the widespread public outcry against the crippling austerity programs usher the leftist Syriza party, with Marxist Finance Minister Yanis Varoufakis, into power in Greece. The Spanish anti-austerity Podemos party looks as though it will follow in Syriza’s footsteps.

Change is also bubbling in the profession. One sign is the attention given to French economist Thomas Piketty’s best-seller “Capital in the 21st Century” at the American Economics Association meeting, including a webcast session in which Harvard conservative economist Greg Mankiw commented and Piketty responded. While Piketty is not a Marxist, he focuses on the unequal distribution of wealth (i.e., class) and chides mainstream economists for their “childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences,” as he puts it in his book. Another sign of change is that three of the 10 most influential economists, as ranked by The Economist, are vocal critics of neoclassical economics, neoliberal capitalism or both: Paul Krugman (No. 2), Thomas Piketty (No. 5) and Joseph Stiglitz (No. 9).

It is time for the economics profession in the U.S. to open itself to the new thinking that the current systemic economic crisis requires. We don’t need to start from scratch. There is a wealth of Marxist and heterodox ideas, Piketty’s among them, that can be drawn on to create healthy dialogue about the blind spots of neoclassical theory and about the failings of the capitalist system in its current form. Varoufakis has put forward a “radical pan-European green New Deal,” which includes “centralized funding for large-scale green energy research projects with decentralized assistance to small cooperatives that create local, sustainable development in cities and rural areas.” A growing body of solidarity economy research identifies, evaluates and advocates for existing economic practices and institutions animated by postcapitalist values — social responsibility, cooperation, equity in all dimensions, community and sustainability. Cooperatives of all types figure prominently as well as social entrepreneurship, the sharing economy, the commons and economic human rights.

The time for a new economics is at hand. The field must seek out and welcome a diversity of views and engender substantive debate about economic theory and the solutions to the crises we are facing. It’s not a moment too soon. 

Julie Matthaei is a professor of economics at Wellesley College and a co-founder of the U.S. Solidarity Economy Network.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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