Rarely in the Field of Human Endeavour Has One Rather Small Profession Caused So Much Harm to Humankind as Neoclassical Economists Do Now
Yves here. Richard Murphy provides a fine takedown of the pernicious role neoclassical economists have played by overstating the risk of inflation and using it as a pretext to cruch wages. However, Murphy, no doubt due to space constraints, understates the scope and nature of damage done by neoclassical economics, which has become the foundation of mainstream thinking, Neoclassical economics tells a huge lie, that economies have a natural propensity to arrive at stability and full employment. As we wrote in ECONNED:
In 1776, Adam Smith published The Wealth of Nations. In it, he argued that the uncoordinated actions of large numbers of individuals, each acting out of self-interest, sometimes produced, as if by “an invisible hand,” results that were beneficial to broader society. Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.
Smith’s ideas were cherry-picked and turned into a simplistic ideology that now dominates university economics departments. This theory proclaims that the “invisible hand” ensures that economic self-interest will always lead to the best outcomes imaginable. It follows that any restrictions on the profit-seeking activities of individuals and corporations interfere with this invisible hand, and therefore are “inefficient” and nonsensical.
According to this line of thinking, individuals have perfect knowledge both of what they want and of everything happening in the world at large, and so they pass their lives making intelligent decisions. Prices may change in ways that appear random, but this randomness follows predictable, unchanging rules and is never violently chaotic. It is therefore possible for corporations to use clever techniques and systems to reduce or even eliminate the risks associated with their business. The result is a stable, productive economy that represents the
apex of civilization.This heartwarming picture airbrushes out nearly all of the real business world. Yet uncritical allegiance to these precepts over the last thirty years has produced a world in which corporations, especially in finance, are far less restricted in their pursuit of profit. We show in this book how this lawless environment has led the financial services industry to pursue its own unenlightened self-interest. The industry has become systematically predatory. Employees of industry firms have not confined their predation to outsiders; their efforts to loot their own firms nearly destroyed the industry and the entire global economy. Similarly destructive behavior by other players, often viewed through a distorted lens that saw all unconstrained commercial behavior as virtuous, added more fuel to the conflagration.
Some economists have opposed this prevailing ideology; indeed, comparatively new lines of inquiry focus explicitly on how economic actors can fool themselves or others into making poor, even destructive, choices. But when the economics profession has used the megaphone of its authority to dominate discussions with policymakers and the public, it has spoken with one voice, and the message has been the one described here.
Back to the current post. One issue that does not get the attention it warrants is despite the Fed and other central banks being vocal opponents of inflation, they are even more eager to avoid deflation, which hurts everyone but cash holders and the owners of extremely safe investments. The cost of servicing debt rises in real terms. That along with the with the typically depressed economic conditions that generate deflation, leads to business and consumer defaults and then potentially a self-reinforcing contraction in activity.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Tax Research
Chris Giles, the FT’s main economic commentator has said this morning has said this morning:
There is a fair chance that by the time the trees come into leaf in Washington, Frankfurt and London, this decade’s inflation crisis will definitively be over.
He added:
In the six months between May and November last year, for example, the annualised rate of consumer price inflation was only 0.6 per cent in the UK and 2.7 per cent in the eurozone. Excluding volatile energy and food prices, annualised core rates of inflation were 2.4 per cent in both economic areas over the same period.
And then he said this:
It goes without saying that the rapid demise of inflation on both sides of the Atlantic in the second half of 2023 was as surprising as its prior increase. Last summer, the Fed, European Central Bank and Bank of England all expected inflation to remain above target until 2025 at the earliest.
At which lint, I groaned with dismay that someone in such a position can have been s9 unfamiliar with the evidence. As I wrote in August 2022:
Danny Blanchflower had a longish discussion yesterday in which we agreed that the inflation that is dominating economic discussion about our economy at present is a passing phase. That does not mean it is not important. Far from it, in fact. But what it does mean is that when discussing inflation we have to remember that this is a temporary phenomenon, and what is just as important is to discuss what happens after it.
There is a lot of evidence to support this opinion. First, take this St Louis Fed chart which summarises data from the Bank of England on inflation trends in first England and then the Uk over a period of more than 800 years:
After a period of inflation there has, historically, always been been deflation, and even if the latter has been rare of late, there is always a return to more normal rates. Inflation does not persist.
The evidence is unambiguous. There never was going to be a struggle to bring inflation under control. Its return to mean, low, rates was always inevitable, and it is happening.
In that case the question is, what has been the cost of the mistaken belief of the likes of Chris Giles and the world’s cohort of central bankers who believed otherwise, contrary to all available evidence, and who have demanded and then unleashed economic mayhem on the world via totally unnecessary and utterly destructive interest rate rises in the meantime?
Rarely in the field of human endeavour has one rather small profession caused so much harm to humankind as neoclassical economists do now.