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© Hazel Henderson, February 2005
www.hazelhenderson.com
(word count 1,183)
ECONOMISTS AS ADVOCATES
by
Hazel HendersonAt last, the public debate over corporate social responsibility has been fully joined by the mainstream financial press. Let’s be grateful for this. However, to properly context this debate and counter the kind of nonsense propagated by The Economist in its Survey, “The Good Company” (Jan 22, 2005), an enduring myth must be dispelled: economics was never a science. Economics is a profession—one with rather poor quality control. Economists are advocates, not scientists. Here’s why – and how the myth of economics as a science – got started.
Since the 2004 Nobel Prize awards, there has been increasingly public brouhaha around 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 great work “An Inquiry Into the Nature and Causes of the Wealth of Nations”. Invoking the scientific knowledge of the day, Smith related his famous theory of “an invisible hand” that guided the self-interested decisions of business men (sic) to serve the public good and economic growth. Smith drew parallels ascribing this pattern of human behavior to Sir Isaac Newton’s great discovery of the physical laws of motion.
These principles of Newtonian physics can still be used to guide space craft to land on distant celestial bodies – most recently, Titan, one of Saturn’s moons.
Economists of the early industrial revolution based their theories not only on Adam Smith’s work, but also on Charles Darwin’s The Descent of Man and The Origin of Species (www.thedarwinproject.com). They seized 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:” the belief that inequities in the distribution of land, wealth and income would nevertheless trickle down to benefit the less fortunate.
Echoes of these theories are still heard today and propounded in mainstream economic textbooks as theories of “efficient markets”, rational human behavior as “competitive maximizing 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, privatization, 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 convoluted and favoring asset owners above workers’ wages (www.levy.org).
All these theories underpin today’s economic and technological globalization and the rules of the World Trade Organization, 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 privatization unleashed by Britain’s Margaret Thatcher and US President Ronald Reagan, central banks have lobbied for freedom from political control – even by democratically-elected governments. Even Britain’s labor government under Tony Blair conceded this autonomy to the Bank of England.
How was this quiet “coup” by central bankers and their advocates among the economics profession achieved? Certainly not due to their performance in achieving their targets of non-inflationary economic growth and fuller employment – given the recent history of financial crises booms, busts, bubbles, un-repayable debt and un-employment. The policy drumbeats of economists and market players supported central banks. They were buttressed by their claims that economics with its increasing use of mathematical models, had matured into a science, matching the feats of natural sciences since Newton and Darwin in discovering the laws of nature. Economists’ theories from Smith’s “invisible hand” to Vilfredo Pareto’s “optimality” were elevated from theories to the status of scientific principles.
Enter the Central Bank of Sweden. In 1969 the Bank of Sweden put up $1 million (US) to create a prize to confer scientific status and legitimacy on the academic discipline and policy advocacy of the economics profession. Thus, the Bank of Sweden named its economics prize “in memory of Alfred Nobel” and lobbied this designation onto the Nobel Prize Committee. As his descendant, Peter Nobel put it, “The Bank of Sweden, like a cuckoo, laid its egg in the nest of another very decent bird, infringing on the name and trademark of Nobel.” Since then, most of the Bank of Sweden Prizes in Economic Science has been awarded to US economists espousing the Chicago School policies of laissez faire “free markets” of its most prominent prize winner Milton Friedman (who is 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 labeled 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 (Dagens Nyheter, Stockholm, Dec. 10, 2004).
As this news spread around the world (InterPress Service, Jan 2005, LeMonde Diplomatique, Feb. 2005) 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 favorite policies as backed by some “Nobel laureate” in economics.
Yet economists need not be embarrassed by this unmasking as a profession rather than a science. Many honorable professions are content with this term: those who practice law, medicine, engineering, architecture and other such applications of knowledge. Lawyers in particular are happy to be known as advocates. Similarly, we now know, 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).
There is no quarrel with these advocates, whether lawyers, economists or lobbyists, or their roles in policy-making. All that is necessary is clarity on the part of these professionals and all advocates – so that the public is fully informed – and the issues are argued honestly. Economists can no longer falsely claim scientific status for their arguments nor confuse the public by pretending to be scientists. Why not embrace the truth and call the profession economic advocacy? After all, the “Information Age” has already morphed in the “Age of Truth.”
*****
Hazel Henderson, author of Beyond Globalization and other books, co-created the Calvert-Henderson Quality of Life Indicators, updated at www.calvert-henderson.com and is Executive Producer of the new financial TV series, “Ethical Markets,” airing on PBS stations, March 2005.