Reflections on the Epistemological Malady of the Discipline of Economics

Economics: Where the Shoe Pinches?

People pursue any scientific study as Karl Popper puts it, ‘… to learn something about the riddle of the world in which we live and the riddle of man’s knowledge of that world’ (Popper, 1959, p. 23). As a scientific pursuit, the discipline of economics obtains its relevance and rationale from the human problems of provisioning and allocation. Modern economics as it evolved in the eighteenth century tried to explain the wealth-getting and wealth-using activities of human beings following the Industrial Revolution. The monumental work of Adam Smith, the father of modern economics, was An Enquiry into the Nature and Causes of the Wealth of Nations (1776). Through the interplay of basic forces of self-interest of individuals, categorised as buyers and sellers, working through the invisible hand of the market which ‘promotes the general good’, humans generate economic activities. In the well-known words of Smith: ‘It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest’ (1776, 1937, p. 14).

Self-interest rationality has come to be accepted as the basic economic behaviour of human beings by the discipline. Following the Smithian tradition, two leading classical economic thinkers, Ricardo (1817) and Mill (1848), tried to advance the basic ‘principles of the political economy’ keeping laissez faire fully in view. They, in particular, Mill, endeavoured to tie economics to social philosophy and politics. The Austrian school, however, struck a different note. By the 1870s, Leon Walras perfected his general equilibrium theory; Jevons (1862) produced his mathematical theory of political economy and utility, and several others joined them in the conceptualisation of marginalism and utilitarianism. Their arguments were conspicuously dressed up in a mathematical garb. ² In the latter part of the nineteenth century, political economy became ‘Economics’, probably after the publication of Marshall’s Principles of Economics in 1890. Economics has today come to be accepted as a professional decision science that seeks optimal solutions to allocation problems. Lionel Robbins’ Nature and Significance of Economic Science published in 1932 could be considered a good summary of the way neoclassical economics has been viewed in the profession.

Robbins defines economics as, ‘The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’ (1932, p. 15). A critique of the Robbinsian definition, familiar to teachers and students of economics in India and in other parts of the world, is given below to put the discussion in perspective. First, Robbins’ approach, which affirms the existence of a set of ahistorical, asocial and universally valid economic principles, is a questionable proposition. Projecting economics as a ‘pure’ science, Robbins does not want his discipline to be ‘a happy hunting ground of charlatans and knaves’ and takes it out of its social and cultural contexts (Robbins, 1932, p. 83).

Second, the basic affirmation in all neoclassical works is that in a competitive economy composed of rational agents economic activities (and via that, all social activities) are related to one another through a system of prices. It is forgotten that the consequences of reducing social life into exchange value calculus are far-reaching. Karl Polanyi noted the dire consequences of this: ‘To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society’ (Polanyi, 1944, p. 76).

Recently two social scientists have demonstrated the intimate relationship between economics, politics and history in understanding vital economic problems. To quote them: ‘Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.’ The economist Abba Lerner too noted in the 1970s, ‘Economics has gained the title Queen of the social sciences by choosing solved political problems as its domain’ (Acemoglu & Robinson, 2013, p. 68).

By creating an economy virtually dissociated from society, it became logical to exclude social costs, depletion of natural resources and properties of future generations from accountancy and balance sheets of business corporations. Indeed every business or economic activity should evaluate its impact on the surrounding natural capital which represents the value of all biodiversity and all ecosystems. But today you can omit this as a natural and logical act. Along with the modern principles of commerce and accounting, emerged the acceptance of labour as a commodity in the market governed by the application of the principle of the freedom of contract.

Third, Robbins’ argument that the theory of value which is based on exchange of commodities is universally relevant and applicable equally well in a Robinson Crusoe economy as well as in a communist society ³ (Robbins, 1932, p. 19) is untenable. Certainly, he forgets, like all major text book writers in economics, that societies differ in their valuation of goods and resource allocation. For example, when a tribal chief in Africa divides the hunter’s kill of the day by giving the biggest share to the female head of a family with the largest number of children in the community, he is virtually following the principle, ‘from each according to her abilities and to each according to her needs’. In short, as seen in this example, resource allocation need not always be via a price mechanism and can have alternative principles of allocation.

Fourth, it is important to interrogate the assumption of unlimited wants on which the so-called ‘scarcity’ definition of economics—scarcity is inevitable given the assumption—and much of neoclassical edifice is grounded. The dominant ideology that economic growth is the symbol of progress is derived and legitimised on the basis of this assumption. Though wants can be unlimited, basic needs are not. Conceptual categories to ensure fair allocation of basic needs got out of the scope of mainstream economics (Kurien, 1978). Based on the assumption of scarcity of resources, economics became a science of choice between alternative ends. Robert Fogel, a 1993 Nobel laureate, along with Stanley Engerman, in their book, Time on the Cross, the Economics of American Negro Slavery, legitimises slavery on the basis of efficiency in reducing inequality. Modern economics as a discipline is the outcome of industrial capitalism. But we cannot forget that economic activities originated from the pursuit of human beings for food, shelter, clothing and other necessities of life. By valuing means above ends the freedom of human beings to choose the ends they favour is undermined. The development of means dictates the choice of ends (Schumacher, 1979). Amartya Sen’s Development as Freedom (1999, Chapter 2) and the evaluation of social progress by Stiglitz, Sen and Fitoussi (2009) could be mentioned here as important contributions that help to remove the confusion between ends and means.

Fifth, the assertion of Robbins that economics is ‘neutral between ends’, strictly speaking, rules out a wide range of relevant items of development economic analysis which should arguably deal the Socratic question: how should one live? Several such normative questions cannot be wished away and have to be reckoned with in evaluating individual and collective well-being. Several economists like Sen have endeavoured to bring economics closer to ethics and justice because such a hiatus is not only an epistemological incongruity but also a developmental deficit. Sen rescued welfare economics from its narrow orientation and gave social choice theory a better logical and ethical dimension. If you accept the old welfare economics criteria as self-interest maximisation, you embrace the narrow Pareto world (1897). Pareto and all others of the mainstream persuasion since his time argued for efficiency-based resource allocation which again is based on self-interest maximisation. The Pareto world is a social state which is optimal if, and only if, no one’s welfare/utility can be raised without reducing that of someone else. As Sen (1987) rightly points out a state can be Pareto optimal with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the opulence of the rich. Indeed here one cannot disturb a happily fiddling Nero even while Rome is burning. It is interesting to recall Akerlof and Shiller who said: ‘For graduate students, the conclusion is presented as a mathematical theorem of some elegance—elevating the notion of free market optimality into a high scientific achievement’ (Akerlof & Shiller, 2015, p. 5).

The Neoclassical Paradigm: Not an Innocent Artefact

Whatever the criticisms, it is important to underscore that the neoclassical paradigm—paradigm understood as standardised example—a la T. S. Kuhn (1962, 2012) occupies the central place in the text books notably by Paul Samuelson, ⁴ Samuelson and William Nordhaus (2009) (the latest being the nineteenth edition), Gregory Mankiw and several others belonging to eminent universities. Interestingly, most of the fundamental principles are presented in non-falsifiable terms. But as Popper (1959) argues all scientific propositions must be presented in falsifiable terms.

In 1980, when I visited some universities in the Soviet Union as part of the University Grants Commission’s Exchange Programme, I was told that Paul Samuleson’s Economics was compulsory reading for economics graduates in all universities. In 2000, when I visited China to participate in a conference on globalisation organised by the Chinese Ministry of Foreign Affairs, I raised a question to the then Professor of Economics at Beijing University whether Marxism was taught in economics courses, the reply was a strong no, but I was told that Samuelson’s text book was prescribed reading for graduate courses in economics.

Not only in the academic world, the neoclassical paradigm is equally strong in shaping state policies as well as that of international lending agencies. The theoretical underpinning of policy prescriptions and policy choices made by the IMF, World Bank (1991) and the US Treasury, or what has been referred to as the Washington consensus, are rooted in the neoclassical economic paradigms. It has legitimised poverty, unemployment, inequality, colonialism and conquest. The theoretical postulates governing the so-called structural adjustment polices employed to manage and manipulate the loan receiving countries of Asia, Africa and Latin America, which virtually ruined many of them, were derived from neoclassical economics. It will be interesting to quote Kaushik Basu, currently a Vice President of the World Bank and formerly India’s economic adviser: ‘The free market proposition is a powerful intellectual achievement and one of great aesthetic appeal, but its rampant misuse has had huge implications for the world in particular in the way we craft policy, think about globalisation and dismiss dissent’ (Basu, 2010, p. ix).

Now let me raise a fundamental question: has the discipline of economics through a self-imposed restriction limited the great possibilities of building development theories and policies relevant to human well-being? This is briefly discussed in the next section.

Has Development Economics Made a Difference?

Although development is a comprehensive concept, disciplinary specialisation and division of labour is needed to facilitate a deeper understanding of social reality and human flourishings in their various dimensions. Development economics is one branch of economics that has avowedly grown out of a concern to prescribe some way out to the problems of poverty and underdevelopment of the post-war/post-colonial world. Its popularity was so high that innumerable development study centres sprang up in all parts of the world, including India. The Massachusetts Institute of Technology (MIT) and Harvard, which have been widely hailed as the intellectual capital of the world, plunged straight into generating theories, tools and techniques ‘to develop’ the less developed part of the planet. Have they succeeded? What were the most prominent alternative development thoughts that emerged? Although 77 economists have been awarded the Nobel Prize in economics till 2016, it is somewhat puzzling to note that most of them avoided developmental issues and treaded the path of mathematical formalism as the most suitable technique of reasoning in matters of development. The Harrod–Domar model, the Solow model and several others, including the Mahalanobis model in India, enjoyed considerable intellectual sex appeal and found a respectable niche in the teaching of economics in various universities around the world. It is interesting to listen to Solow’s (1987 winner of the Nobel Prize) conclusion of his model. ‘Everything above is the neoclassical side of the coin. Most especially it is full employment economics in the dual aspect of equilibrium condition and frictionless, competitive, causal system’ (Solow, 1956, p. 91).

Ronald Coase, winner of the 1991 Nobel Prize, argued for ‘rational development’: all what is needed is to provide individuals in the economy with information about the consequences of different policies and that rational parties will make use of that information to arrive at an efficient solution (Coase, 1960). Several such models, most of them Nobel awardees, failed to address development issues directly. They were mostly abstractions from structural inequalities and social injustices. The situation up to 1970 is summed up by Amartya Sen thus: ‘Much of modern growth theory is concerned with rather esoteric issues. Its link with public policy is often very remote. It is as if a poor man collected money for his food and blew it all on alcohol’ (Sen, 1970, p. 9). Here, Sen is referring to the professional tragedy of the discipline which continues to this day.

John Nash, a great mathematician, shared the Nobel Prize in 1994 with John C. Harsanyi and Reinhard Selten ‘for their pioneering analysis of equilibrium in the theory of non-cooperative games’. Kenneth Arrow (winner of the Nobel Prize in 1972) and Gerard Debreu (winner of the Nobel Prize in 1983) are honoured for their contribution to the application of the mathematical theory of convex sets to the general equilibrium theory. The very first chapter of Debreu’s (1959) Theory of Value: An Axiomatic Analysis of Economic Equilibrium is captioned ‘Mathematics’. My simple question is: can physics (economics has borrowed heavily terms from physics evidently to appear scientific) or for that matter any other science where quantitative calculations are involved start like this and then earn a Nobel Prize?

The building of economic theories on deductive methods (use of mathematical scaffolding makes them look more profound) can be axioms, but not necessarily a scientific procedure. Given the rigorous assumptions on which economic theories based on deductive methods are constructed they are not falsifiable. They are self-evident truths with no immediate relevance to people. But all scientific statements as Popper has famously argued must be falsifiable. How long and how far can the discipline ‘live’ like this? may appear to be a cheeky question especially because it has the intellectual support and academic underpinning of Nobel laureates. What Robert Solow (Nobel Prize in 1987) while probing ‘inside the minds of 12 Nobel laureates’ observed recently (2014) is worth citing: ‘The fundamental goal of economics as a discipline is to bring organized reason and systematic observation to bear on both large and small economic problems (and to have some intellectual fun on the way).’

Can we take the creation of ‘intellectual fun’ and game as the vocation of a social science? To be sure, social sciences have some obligation to the transformation of the society in which they live. The knowledge that you produce and the intellectual and empirical basis that you build must be useful to human beings.

Economics and the Challenges Posed by Piketty

At this point, I wish to introduce Thomas Piketty because he is very relevant to the context of this presentation for a variety of reasons. First, a PhD in economics based on mathematical theorems from MIT at the age of 22 years, Piketty has strongly questioned the excessive use of mathematical tools. Economics certainly is not mathematics. Let me quote Piketty somewhat elaborately:

To put it bluntly, the discipline of economics has yet to get over its 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. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in. … Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything. (Piketty, 2014, p. 32)

Second, several economists like Solow who received the Nobel Prize in economics for their mathematical skills have praised Piketty for the quality of his work. The historical evidence he produced, his falsifiable inferences and above all his accent on relevance rather than elegance should make many a Nobel pundit in economics to sit back and reflect on the future of her discipline.

Third, Piketty acquired world fame for producing historical evidence for nearly 300 years in 20 countries to show that the private capital accumulation unless strongly controlled inevitably lead to the concentration of wealth in fewer and fewer hands a prophecy which Karl Marx made in the nineteenth century more in an apocalyptical fashion rather than relying on solid data. Many professors of economics in the past derived comfort in the Kuznet’s bell-shaped curve and naively hoped for a less unequal world to unfold. Piketty’s work has upset the apple cart of mainstream economics and has endeavoured to show that the balancing forces of growth, competition and technological progress in the past have not succeeded in reducing inequalities and promoting social harmony. The world has before it incontrovertible evidence of widening inequality and its dangerous consequences (Oxfam, 2014; Stiglitz, 2012, 2015; Wilkinson & Pickett, 2010, among others). Undoubtedly, growing inequalities are threatening the existence of democratic societies and democratic values.

Fourth, Piketty sees ‘economics as a sub-discipline of the social sciences, alongside history, sociology, anthropology and political science and prefers the term political economy as it conveys the only attribute that sets economics apart from the other social sciences viz., its political, normative and moral purpose’ (Piketty, 2014, pp. 573–574).

To conclude, economics is not neutral between ends and research to understand social reality has to be done on a multi-disciplinary canvas. It is high time economists venture to rethink the content, goals and tools of their discipline. In the context of this presentation, I would like to pose a challenge to the economic teachers of India to critically examine their syllabus and curriculum. The following words of Joan Robinson are more relevant today than when she wrote them seven decades ago:

Academic teaching for the last hundred years … has been concerned with propagating the ideology of laissez-faire and of the free play of the market forces; it has done to distract attention from the actual operation of the capitalist economy than to illuminate them. Yet it does not consist merely of slogans; it has an intellectual structure which has fascinated generations of students and provided generations of professors with position and with reputation for the brilliance with which they expound and elaborate it. (Robinson, 1947, p. 167)

Piketty in a way is only asserting what Robinson said long back. Will economists pay heed and ponder over this and work towards a more relevant syllabus for the economics students of Indian universities? I strongly believe, along with Paulo Freire, that the ontological vocation of the academic community is to transform the world handed down to them. In this task I believe economists have a vital task to perform. But who will take up the gauntlet?