Nobel laureate Professor Joseph Stiglitz had made a rather telling comment during a seminar some years ago. Stiglitz had said that the recent world economic crisis had done to the science of economics what the collapse of the Soviet Union did to the theory of Communism. He had declared that, “We have to rewrite the textbooks”.
Some of the leading economists worldwide have expressed similar discontent, with Professor Neild of Cambridge University presenting a paper titled ‘Economics in Disgrace: The Need for a Reformation’ (Neild, 2013). This call for rethinking economics represents a turning point in the history of the subject. For almost half this century, the central proposition of the neo-classical theory that has held sway over university teaching and policymaking alike was that the free market mechanism is the most efficient framework for resource allocation, production and distribution of goods.
Market-based forecasting models in the early years of the 21st century reinforced the belief in markets and dissuaded governments from policy intervention by suggesting that the boom of the late 1990s would continue. This comforting paradigm of economics received a rude shock with the onset of the global economic crisis of 2008. Students, teachers and the public realised that neo-classical economics, the dominant orthodoxy, had been unable to both predict the crisis and figure out for how long it could last, much less produce reliable policy measures to bring it to a quick end. Fundamentally, two critical problems in the ruling paradigm became apparent following the economic crisis.
First, the idea that individual investment decisions could be based entirely on individual risk measurement was proven wrong. This is because in the contemporary world economy, many financial products such as debt bonds and risk insurance while appearing to be distinct products are actually interlinked. Hence, individual investment decisions create risk escalation at the systemic level. Since these macro risks were not taken into account (in any case they are inherently difficult to measure), a huge volume of highly insecure investments were made, making not only the global financial edifice but also the real economy fragile.
Second, as Alan Greenspan, former chairman of the Federal Reserve, admitted in a cryptic remark, that forecasting models that had predicted a continuing boom through market forces, turned out to be wrong. The question is: why? It could be argued that this was because of an essential flaw in the mainstream economics paradigm which is based on the assumption that economic forces operate like natural forces, whereby averages of the past hold onto the future. The forecasting models, therefore, are sometimes wrong in a society peopled by human beings. Thus, unexpected events exogenous to the models occur, as they did in the case of the crisis that erupted in 2008.
The flawed foundations of the mainstream economics paradigm became apparent in the public domain at a time when the world had entered a new juncture in history, marked by two new challenges. The first was the environmental crisis that threatened the life support systems of the planet, and the second was the persistent inequality which stressed out the fabric of society. Both these raised questions about social responsibility, cooperation and compassion. These imperatives for the sustenance of human society are located in a rationality unknown to neo-classical economics – the rationality of the collective rather than just the individual choice and welfare. These are issues central to the new challenges but cannot be addressed within the existing economics framework.
At a fundamental level, economics’ concept of individuality as well as rationality would have to be rethought. Contrary to the assumption of mainstream economics, the individual may not be divorced from others; in fact, one indeed knows oneself through others. Accordingly, individuality does not predate society, but was constituted through relationships in society. Similarly, rationality may not be merely the pursuit of individual material welfare without concern for others. We would have to delve into the central idea of all traditions of wisdom, that compassion for other human beings and for nature is part of what Aristotle in his Nichomachean Ethics, calls “the logic of the soul”. Caring for others may be essential for the sense of wellbeing of the individual.
Mainstream economics believed, since the Simon Kuznets’ American Economic Review paper of 1955, that while inequality increased in the initial stage of growth, market forces would in time reduce it. This view has now been overturned by evidence provided by Thomas Piketty, (Piketty, 2014). His seminal work shows that inequality of both wealth and income in the capitalist world, far from declining, increased in the long run. It is time to turn the conventional wisdom in economics on its head to help build an equitable economy. In such an economy, the creativity, innovation and productivity of all the people, rather than a few, would power economic development.
Clearly, the imperative for rethinking economics arises out of the new challenges that define the present moment in human history. The history of science shows that when an existing paradigm is unable to address new questions, the paradigm has to necessarily undergo a change, (Kuhn, 1962).
The Information Technology University, in its School of Humanities and Social Sciences, is planning to launch an undergraduate degree programme that aims to train students to participate in the great endeavour of a paradigm change in economics, currently underway at some of the leading universities of the world. The programme will provide the core of rigorous analytical tools for a critical understanding of mainstream economics. At the same time, they will be exposed to two parallel streams of ideas: a) Data Science, which involves the use of computer based ‘big data’ techniques for evidence-based policymaking; and b) crossing the boundaries of the subjects of humanities, such as philosophy, comparative literature, politics and history, so as to get a sense of what it is to be human.
It is hoped that such inter-disciplinary training will enable students to rethink economics and help build a more humane society.
The writer is dean, School of Humanities and Social Sciences at the Information Technology University Lahore.