G8 Economists in Retreat, June 2003

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© Hazel Henderson, June 2003
www.hazelhenderson.com
(885 words)

G8 ECONOMISTS IN RETREAT

The G8 Summit is no longer just about economics. The economics profession still bestrides national policy, as it has since the Great Depression. The activist pump-priming theories of UK mathematician John Maynard Keynes helped create the New Deal debates in the USA. During World War II economists devised the familiar Gross National Product (GNP) and its narrower domestic version, Gross Domestic Product (GDP) to measure war production. GNP/GDP and its rate of growth dominate G8 summits and became the Holy Grail of politicians worldwide. Armies of economists descended on government agencies to dispense advice on growth and how to run their affairs from education, health, welfare and pensions to trade and military policies.

Defrocking economists, as I have over the years, is getting easier. G8 leaders puzzled over conflicting advice on deflation – while many other issues – from AIDS to terrorism – are beyond the competence of economists. The economists’ tool kit promised universal applicability, with its models of rational human actors and elegant theorems based on general equilibrium of supply and demand, efficient allocation of resources – all revealed in prices. This tool kit undergirds the economic development prescriptions of the Washington Consensus.

As the world got more complex, interdependent and human activities began stressing Nature’s resources, economists kept ahead of their critics and rivals from other disciplines (political science, sociology, psychology, anthropology, ecology, thermodynamics, systems and chaos theory). Economists took theories and insights from all these rivals whom they had supplanted in public policy.

Economists’ imperialism expanded to “capture for our profession”, as a UK-based economics society put it, the issues of global warming and climate change. After the Central Bank of Sweden successfully lobbied the Alfred Nobel Prize Committee into setting up a Nobel Memorial Prize in Economics (economics is not a science) there was no stopping the ambitions of this discipline. Hyphenated societies of ecological economists, social-economists, political-economists, health-economists, labor-economists, behavioral-economists and evolutionary-economists tell this story of intellectual colonialism.

Economists trump other disciplines in academia too. Their departments and business schools receive the lion’s share of funds, research contracts, power and prestige. Economics is politics in disguise. Cost-benefit analysis or a carefully crafted economic impact statement can squelch any government reform or new social or environmental initiative. Such analyses emphasize the costs of change to existing interests, while ignoring or downplaying the current costs of the status quo on other actors, the environment or future generations. Cost-benefit analyses average out costs and benefits so as to obscure who are the winners and who the losers of a proposed policy – while confusing the general public into believing that the issue is “technical” rather than political.

Today, the chinks in economists’ armor are becoming widely evident – as has the game of preempting the work in other disciplines. Psychologists won recent Nobel Memorial Prizes in Economics for challenging simplistic economic models of human behavior. Even Harvard University may soon allow a new course in its economics department that challenges the orthodoxies still undergirding the policies of the IMF and the decisions of Wall Street and the world’s bourses.

Economists borrowing from psychologists and real world observation now admit that we humans are not always competitively maximizing our own self-interest – the standard economic view of homo economicus. Many people enjoy giving as well as receiving, care about what kind of world we are leaving our children – “irrational” behavior to an economist. No wonder economics is called “dismal.” As London-based, The Economist, points out, this re-think undermines orthodoxy in such major policy areas as free trade, taxes, school vouchers, as well as globalization and the environment.

The deepest challenges are those I outlined in The Politics of the Solar Age (1981, 1988) on economics’ inability to deal with technological change (because it views technology as given) and its ignorance of the laws of thermodynamics. In addition, today, neuroscientists are disproving the old homo economicus model by showing that human behavior tends toward trust and cooperation. This challenges game theorist, Nobelist John Nash’s famous equilibrium, which “predicts” that in economic transactions between strangers predicting each other’s responses – that the optimal level of trust is zero! Now researcher Paul Zak at Claremont University, California, has linked trust in humans to the reproduction hormone oxytocin, which induces uterine contractions, lactation and female bonding with offspring, and pro-social human behavior.

Economics was always based on patriarchal values – ignoring the work of women in child rearing, caring for the old, community volunteering as “uneconomic” in GNP. Economics did not predict the rise of socially-responsible investing (now at $2.3 trillion in the USA alone). Nor did “inflation-hawk” economists foresee the new threat of worldwide deflation. Their NAIRU (non accelerating inflation rate of unemployment) model caused central banks to disemploy millions with higher-than-necessary interest rates.

Economists are learning some humility – admitting that they have no theories on the process of economic development either. Developing country leaders can now re-invite doctors, psychologists and all the other banished specialists back into public policy. Brasil’s finance minister Palocci is an MD and Brasil will host an interdisciplinary conference (October 26) on Implementing the New Indicators of Sustainability to redefine progress and prosperity. Inter-disciplinary experts will compare all these new ways of measuring human development, well-being and quality of life. As we witness the debacles in Asia, Russia, Argentina, economist-ridden governments clearly need no longer defer to these defrocked priests.

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Hazel Henderson is author of Beyond Globalization, Building a Win-Win World and other books (see www.hazelhenderson.com) and co-developer of the Calvert-Henderson Quality of Life Indicators (updates at www.calvert-henderson.com, click on Foreword).

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