The Narrowness of Mainstream Economics Is About to Unravel

by Richard Wolff Truthout Nov 13, 2018

Recent extreme volatility and sharp drops in US stock markets underscore the instability of capitalism yet again. As many commentators now note, another economic downturn looms. We know that all the reforms and regulations imposed in the wake of the Great Depression of the 1930s failed to prevent both smaller downturns between 1941 and 2008 and then another big crash in 2008.

Capitalism’s instability has, for centuries, resisted all efforts to overcome it with or without government interventions. Yet mainstream economics mostly evades an honest confrontation with the social costs of such economic instability. Worse, it evades a direct debate with the Marxian critique that links those costs to an argument that system change would be the best and most “efficient” solution.

In economics courses these days, most US professors praise the “free market.” They insist that its outcomes (prices, incomes, interest rates, and so on) flow from self-interested individuals bargaining freely over their economic interactions (buying, selling, borrowing, lending, working, and so on). Market outcomes, they teach, are uniquely stable, efficient and, indeed, optimal in some overarching social sense (or at least in Vilfredo Pareto’s sense). The economy works well if we let markets work their magic, according to this ideology.

Good teachers explain that many assumptions are required — about social conditions that need to be in place — for free markets to have these wonderful outcomes. But the vast majority of students walk away from their economic courses with little more than free-market ideology. They walk away believing that the market works badly when governments interfere by influencing prices, incomes, interest rates and so on.

Free-market ideology took a big hit in the 1930s. That was because the years before the 1929 crash had seen that ideology in full bloom taking credit for the “Roaring Twenties.” The horrendous Great Depression that followed for over a decade after 1929 saw blame replace adulation. Private, unregulated capitalism was seen as the problem for which government intervention was the necessary solution. A new economic paradigm pioneered by John Maynard Keynes displaced the free-market ideology from the 1930s to the 1970s. (My graduate professor of macroeconomics, James Tobin, was an enthusiastic Keynesian. He peppered his lectures with hard jabs at free-market “orthodoxy” and its doctrinaire proponent, Milton Friedman.)

The whole second half of the 20th century in economics was an endless rehashing of the free-market ideology (or “neoclassical” economics) versus Keynesian economics (or the necessity of government intervention ideology). Both sides in these debates often became acrimonious about the other. Often proponents of one side would block appointments of professors from the other side, where and when they could.

Yet both camps also agreed on several basic points. First, each side said that its formulations were important to serving and saving capitalism. The neoclassicals denounced the Keynesians for justifying an interventionist state that would inevitably slide into socialism. The Keynesians mocked that criticism, pointing out that following free-market ideology would cause more Great Depression-style downturns driving the mass of people to turn against capitalism itself.

Second, both sides insisted that the debate between them was the major debate of the science of economics. Third, both sides agreed that Marxian economics was simply wrong, irrelevant to “modern economics” and therefore that Marxian professors could and should be denied college and university teaching positions. Their agreements accommodated the Cold War politics of the time.

Together, the two sides deprived two generations of Americans of any sustained schooling in any basic critique of capitalism. The teachers, journalists, and politicians taught by those two generations had no grasp of the Marxist critiques of capitalism (themselves evolving across the 20th century), no ability to consider or apply their insights to economic analysis or policy. Across these two generations, Marxist theory was shaken by and reacted profoundly to the USSR’s economic rise to 1975 and then decline and dissolution in 1989, the Soviet-China split and Mao’s importance, the rapid post-1990 economic rise of China, and the rise of Euro-communism in western Europe, among other major influences. Basic concepts of Marxian analysis – class and class struggle, values and prices, and so on – were subject to criticism and debates eventuating in new concepts applied to problems of economic development, post-capitalist enterprise organization, the role of democracy in socialist economies, and so forth.

Events since the 2008 crash have impacted formal economics education in the US, but so far only slightly. The simplest reason for the lag is that economics professors are provided with tenure at a fairly young age. Most then settle into long-term faculty positions that accrue power over curriculum and hiring decisions. The crash shifted some neoclassicals to Keynesian positions and strengthened both the relatively weak Keynesian and Marxian academic communities. But as a whole, the profession has so far held on to its predominantly neoclassical dispositions. It continues to do so in the face of the Trump government’s large interventions in the economy with immense tax cuts, budget deficits, tariff impositions, trade wars and so on.

The situation is starkly different in the mass media, informal education and the world of social media. In these spheres, capitalism is now far more widely criticized and rejected than at any other time in the past half-century. Advocates for socialism have likewise returned. The Occupy Wall Street movement in 2011, then Bernie Sanders’ campaign in 2016, and now the fast-growing number of explicitly socialist candidates in US elections embody a surge of economic thought sharply different from the neoclassical economics mainstream holding on in academia.

Yet, that mainstream is already having increasing difficulties holding students’ attention, let alone loyalty. It is, after all, the political establishment in economics: the entity that did not see the 2008 crash coming and now proceeds as if it never happened and as if it didn’t yield a “lost decade” for millions.

In the 1960s a similar disjuncture occurred. Then the Keynesians were dominant within many economics departments across the country. Their students were caught up in civil rights activism, Students for a Democratic Society, and related movements that opposed the War in Vietnam, took seriously Michael Harrington’s exposé of the “other” America of the poor and marginalized, and launched modern feminism. For them, Keynesian economics was old and bland, concerned merely with unemployment when the burning issues concerned what kinds of jobs, powers, relationships and lives a new generation could expect or achieve.

Young economics students in significant numbers lost patience with the old Keynesians and their narrowly (Cold War) limited social concerns and critiques. Those students formed study groups and the Union for Radical Political Economics (as an alternative to the staid, old American Economic Association). Many found their way to Marx and Marxism, defying the Cold War prohibitions accepted and enforced by the liberal Keynesians. (Professor Tobin warned me personally not to jeopardize my career by pursuing “this Marxian stuff.”)

In recent years, students have undertaken a so-far limited set of actions against the neoclassical orthodoxy in their schools. Harvard students, for example, protested Professor Gregory Mankiw’s introductory economics course for its grossly one-sided presentation of the field. As US capitalism’s extreme inequality deepens, it provokes more challenges. So, too, does the profession’s subordination to a government that mocks the free-trade orthodoxy spun by the neoclassicals and proudly pursues the protectionism neoclassicals taught us to reject.

The shrinkage of public supports for higher education also undermines what little independence public universities had ideologically. Public colleges and schools now depend on grants from and contracts with business, and on donations from wealthy alumni in multiple ways that support the neoclassical mainstream and reject all alternative perspectives. Scandals recur around the Koch brothers’ strings-attached “gifts” to academic economics departments.

The decisions by many excellent economics students in the 1960s and 1970s to break from the neoclassical orthodoxy occurred without a mass disaffection from capitalism. And that was a very profound problem. The distance of the critical students from average people and especially urban, liberal workers proved to be a serious obstacle to sustaining, let alone deepening, the students’ criticisms. It also blocked possibilities of a student-worker alliance that might have grown into a powerful left political force.

The situation is quite different this

time. Economics students have been provoked not only by the economic reality around them but also by a mass movement of people outside academia. That movement finds the traditional Democratic Party woefully inadequate as a vehicle for the changes its members see as necessary. In its gathering around Bernie Sanders and others, it is recognizing that its size makes it already a political-power-in-the-making. There is, in short, an ally for students breaking away from neoclassical orthodoxy to approach and work with. As a result, there are perhaps greater possibilities for left political breakthroughs now than there were in the 1960s.

Within the broad Marxian tradition, some strands offer both analyses and policies that differ sharply from anything offered by either neoclassical or Keynesian economics. To take perhaps the clearest example, many Marxists focus on the undemocratic position of capitalists within enterprises (individual owners and corporate boards of directors). Their decisions on whether and how to invest net revenues determine the shape of the macroeconomy for all.

A minority focused on enterprise profits as “the bottom line” makes decisions impacting the jobs, incomes, debts, etc. of a majority to which it is not democratically accountable. This minority’s expectations, desires and “animal spirits” (as Keynes put it) causes instability, in the Marxian view. The policy suggestion emerging from that view focuses on a program to “democratize the enterprise” as a solution to instability.

Replacing hierarchical undemocratic capitalist enterprises with democratically organized worker cooperatives – where each enterprise member has one vote in deciding key matters, such as investment decisions – is a way forward that neither neoclassical nor Keynesian economists have yet allowed to be debated in public and academic forums. We will all be better off when the current narrowness of economics is opened up to include more basic proposals for change adequate to the depth and scope of capitalism’s current problems.

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