When the Global Financial Crisis hit in 2008, the economics profession was shaken. The world looked on as economic models became obsolete and useless and asked: how did the vast majority of economists not see it coming? Even the Queen (in)famously asked on her visit to the LSE: “why did nobody notice it?”
The Crisis also provided the economics profession with a huge cohort of students (myself included) eager to understand the workings of the great machine which just went catastrophically wrong. The enthusiasm of the new students was welcomed by the old guard, but many students are dissatisfied with what they are taught. The International Student Initiative for Pluralism in Economics wrote an open letter in 2014 stating that they are “dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades”. Though they won’t be winning any catchy-name awards, the ISIPE are symptomatic of the general frustrations economics students have with their courses. They say economics programmes are not up to date with 21st-Century challenges, from “financial stability, to food security and climate change”.
It’s not just students who have criticised economists. In 2009, in the wake of the Crisis, economic heavyweight Paul Krugman wrote a now-famous New York Times article in which he said: “the economics profession went astray”. The question is: where did it stray from?
The past: the rise of ‘economics’
Originally, in the days of Adam Smith, Thomas Malthus and David Ricardo, what we now call ‘economics’ was ‘political economy’. These writers saw themselves not as ‘economists’ (a label which would only come into existence much later), but as much more general moral philosophers and political thinkers. They wrote about the workings of households, firms, markets and governments, and called their subject political economy.
This continued for over a hundred years until around the turn of the 20th Century, when ‘economics’ began to become the dominant term for the young discipline. This coincided with its increased mathemetisation: Alfred Marshall’s Principles of Economics in 1890 was a major force in this process, as was logician Stanley Jevons, who called for ‘economics’ to become “the recognised name of a science”. It was therefore a drive for ‘political economy’ to become a mathematical science which led to its transition to ‘economics’.
Return to the modern era, and to Paul Krugman: “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” The view of economists was too narrow; too focussed on well-functioning markets to see the possibility of a financial crisis which hit as hard as in 2008. In retrospect, much of the blame has been placed on lax regulators. Economists were too concerned with perfect markets to see the role of such political institutions.
Krugman was correct: the economics profession did go astray. But the point at which it went astray was not during the 1980s or 1990s, when enticing bank bonuses led to short-run thinking and when the good fortune of a few stable years led to complacency. It went astray when the economic abandoned the political. Economists desperately wanted to be scientists and have been thumbing their noses at the fallible humanity of politics ever since. If economists had appreciated the flawed politics of regulation, they would have avoided the trap of seemingly perfect markets.
The future: the rebirth of political economy
‘Political economy’ does still exist. It generally refers to the interactions of political systems and institutions with the economic system (there is an undergraduate Political Economy course here at the LSE; EC302 for those interested). This, however, is not enough. Political economy should not be just some part of economics. Political and economic systems interact constantly; they are intertwined. The study of economic processes which does not account for political processes should be the exception, not the rule.
All hope is not lost. Although sluggishly, the economics profession is changing. Development economics is a branch of economics which has a much keener appreciation of political factors than most. Amartya Sen helped spark its huge expansion which has occurred since the 1980s. Also, student demand has increased focus on market failures – this allows the study of phenomena such as the Financial Crisis and climate change. These topics lead naturally to the study of government policy, an inherently political subject. Overall, economics is moving in a direction which necessarily leads to politics.
This should be welcomed. ‘Political economy’ should be re-introduced as the dominant term for the discipline. That does not mean a de-mathematisation – the application of mathematical models has certainly enriched economic analysis. It means a re-politicisation. Economists must realise that they cannot ignore the workings of governments if they are to provide useful, important work. Economics has failed us; political economy can save us.
