ECONOMISTS AS ADVOCATES

By Hazel Henderson and - - Reprint | | Print |

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ST. AUGUSTINE, MIAMI, Feb 1 2005 (IPS) - At last, the public debate over corporate social responsibility has been fully joined by the mainstream financial press. However, to properly context this debate, the enduring myth that economics is a science must be dispelled, writes Hazel Henderson, economist and author of Beyond Globalization and other books. In this article, Henderson writes that in truth, economics is a profession — one with rather poor quality control. Economists are advocates, not scientists. In 1969 the Central Bank of Sweden, put up USD 1 million to create a prize to confer scientific status and legitimacy on the academic discipline and policy advocacy of the economics profession. Economists need not be embarrassed by this unmasking of their field as a profession rather than a science. Economists have always been advocates of various government policies, regulations or deregulation, and of the interests of their clients (most often bankers, financial firms and corporations in general). All that is necessary is clarity on the part of these professionals and all other advocates – so that the public is fully informed – and the issues are argued honestly.

At last, the public debate over corporate social responsibility has been fully joined by the mainstream financial press. However, to properly context this debate, the enduring myth that economics is a science must be dispelled. In truth, economics is a profession — one with rather poor quality control. Economists are advocates, not scientists.

Since the 2004 Nobel Prize awards, there has been increasing public attention paid to demands by scientists that the Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel be clearly differentiated from the Nobel awards. This seemingly arcane row among scientists is a major embarrassment to economists.

Political economy studies, as they were originally termed, rose to academic prominence after the publishing in 1776 of Adam Smith’s “An Inquiry Into the Nature and Causes of the Wealth of Nations”, which invoked the scientific knowledge of the day. Economists of the early industrial revolution based their theories not only on Smith’s work but also on Darwin’s research on the survival of the fittest and the role of competition among species as additional foundations for their classical economics of “laissez faire” — the idea that human societies could advance wealth and progress by simply allowing the ”invisible hand” of the market to work its magic. In class-ridden Victorian Britain, this led economists and upper-class elites to espouse theories known as “social Darwinism”.

Echoes of these theories are still heard today and propounded in mainstream economic textbooks as theories of “efficient markets”, rational human behaviour as “competitive maximising of individual self-interest”, “natural” rates of unemployment (codified as the NAIRU rule of central bankers) and the ubiquitous “Washington Consensus” formula for economic growth (free trade, open markets, privatisation, deregulation, floating currencies, and export-led policies). Lately, the US Federal Reserve Board’s use of “neutral interest rates” has been exposed by the Levy Institute as favouring asset owners above workers’ wages (www.levy.org).

All these theories underpin today’s economic and technological globalisation and the rules of the World Trade Organisation, the International Monetary Fund, the World Bank, stock markets, currency exchange and most central banks. Since the 1980s and the waves of global deregulation and privatisation unleashed by Britain’s Margaret Thatcher and the US’s Ronald Reagan, central banks have lobbied for freedom from political control – even by democratically-elected governments. Even Britain’s labour government under Tony Blair conceded this autonomy to the Bank of England.

How was this quiet “coup” by central bankers and their advocates in the economics profession achieved? Certainly not by achieving their targets of non-inflationary economic growth and fuller employment — instead, we saw financial crises, booms, busts, bubbles, un-repayable debt, and un-employment. But the central bankers were sustained by the policy drumbeat of economists and market players, who in turn were buttressed by their claims that economics, with its increasing use of mathematical models, had matured into a science.

Enter the Central Bank of Sweden, which in 1969 put up USD 1 million to create a prize to confer scientific status and legitimacy on the academic discipline and policy advocacy of the economics profession. The bank named its economics prize “in memory of Alfred Nobel” and lobbied this designation past the Nobel Prize Committee. As Nobel’s descendant Peter Nobel put it, “The Bank of Sweden, like a cuckoo, laid its egg in the nest of another very decent bird.” Since then, most of the Bank of Sweden Prizes in Economic Science have been awarded to US economists espousing the Chicago School policies of laissez faire “free markets” of its most prominent prize-winner, Milton Friedman (often erroneously described as a “Nobel laureate”). Peter Nobel added, “These economists use models to speculate in stock markets and options – the very opposite of the humanitarian purposes of Alfred Nobel.”

Fast forward to December 2004 and the revolt of scientists, including members of the Nobel Committee and Peter Nobel himself. They all demanded that the Bank of Sweden’s economics prize either be properly labelled and de-linked from the other Nobel prizes, or abolished. The reason for this sudden outburst, which had been brewing for some time, was the awarding of the economics prize to two more Chicago School economists, Edward C. Prescott and Finn E. Kydland, for their 1977 paper purporting to prove by use of a mathematical model that central banks should be freed from the control of politicians — even those elected in democracies.

The mathematicians pounced, pointing to the many mis-uses of their models by Prescott and Kydland and other economists to “dress up” their questionable theories and unscientific assumptions.

As this news spread around the world the usual heralding of the new economics prize winners in the mainstream financial press was strangely muted. Editors and spokesmen (sic) for market fundamentalism fell quiet in their citing of their favourite policies as backed by some “Nobel laureate” in economics.

Economists need not be embarrassed by this unmasking of their field as a profession rather than a science. Economists have always been advocates of various government policies, regulations or deregulation, and of the interests of their clients (most often bankers, financial firms and corporations in general). Many honourable professions are content with this term.

All that is necessary is clarity on the part of these professionals and all other advocates – so that the public is fully informed – and the issues are argued honestly. (END/COPYRIGHT IPS)