Extract - economic debates at the centers of power
Economics is a broad but divided discipline, comprising dozens of schools of thought covering almost every aspect of human existence and spanning the political and philosophical spectrum. However, this rich diversity of analysis and insight is seldom visible in the economic debates at the centres of power.
For much of the twentieth century, two such schools, the neoclassical and the Keynesian, battled for intellectual supremacy and for the ear of decision-makers. In recent decades, the neoclassical school has been in the ascendant. Within the neoclassical school, there have been many thoughtful efforts to engage with the deep nuance and complexity of development, but in practice, economic policy making is often dominated by a much cruder, ‘dumbed-down’ version that argues for simplistic solutions to complex problems (liberalise, privatise, avoid a fiscal deficit at all costs). While some economists undoubtedly pander to this need for simple messages, others squirm. The International Monetary Fund’s disastrous response to the Asian financial crisis of the late 1990s drove an exasperated Joseph Stiglitz (Nobel laureate turned World Bank chief economist) to lament the ‘third-rank students from first-rate universities’ who were running the Fund.
The dominance of this version of the neoclassical school rests not solely on the frequently inquisitorial attitude it takes toward other approaches, but also on the simple, compelling, yet deeply flawed picture it offers of the world: that of people and institutions as individual actors relentlessly pursuing their own self-interest. Assuming human society to consist of atomistic, utility-maximising individuals with fixed preferences enables neoclassical economists to develop the complex mathematical models that give their discipline the appearance of an ‘objective’ science. Such models in turn allow policy makers to make predictions – implement policy and the economy should grow by X – which then justify the allocation of scarce resources, although economists themselves often place heavy health warnings on any effort to predict the future.
The assumptions behind these models often ignore the complexities of real life, in which attitudes, beliefs, and social and political relations influence behaviour as much as does individual self-interest. Markets are often assumed to be natural, when in fact they are governed by detailed rules on contracts, access to credit, competition, collective bargaining, and so on. Such rules are not arrived at in a political vacuum: they reflect the relative strength of those involved in, or excluded from, negotiating them. Prevailing attitudes about the value of particular work are also fundamental, and are often unquestioned by conventional economic thinking.
By making income a proxy for utility (or happiness), the neoclassical approach views development primarily as being about generating rising incomes, and sheds little light on how markets can achieve development in the broader sense, based on rights and dignity. Even within the realm of income, the conventional view focuses on absolute rather than relative incomes, either at a national or individual level, thus often downplaying issues of equity. In this view of the world, poverty reduction takes place as a spin-off of wider economic growth and redistribution, as an afterthought rather than as a central tenet of economic policy making.
Two essential shortcomings of the use of mainstream economics in development are, first, its failure to measure and value unpaid work in the home, rearing children or caring for the sick and elderly; and second, its tendency to downplay environmental degradation. Both failings spring from a reluctance to engage with the non-monetary economy, and both must be remedied if policies are to achieve environmental and social sustainability.