Blog: Economics – the biggest fraud ever perpetrated on the world?

Last December, Richard Horton, Chief Editor of the Lancet,  sent out a set of ten tweets asserting that “economics may be the biggest fraud ever perpetrated on the world”. It provoked a minor storm of protest from various economists, including three respected health economists: David Parkin, John Appleby and Alan Maynard. They wrote a point-by-point rebuttal of Horton’s tweets which was published in the Lancet.[i]

Horton’s tweets were short, rhetorical and generalised criticisms of economics. Parkin, Appleby and Maynard responded with a number of technical corrections and a description of what economics is and isn’t. But in doing so, they missed an opportunity to draw out some important truths in Horton’s tweets. This blog looks at Horton’s tweets one by one and suggests alternative responses to those of Parkin, Appleby and Maynard.

RH Tweet 1: The promise economics offers is seductive: how to allocate scarce resources in society. It’s a false promise

Studying the allocation of resources across society is undoubtedly a central concern of economics. However, the actual allocation of resources is rarely driven by economists or informed by economic evaluation. It is driven by politics and shaped by the distribution of power. The gross maldistribution of resources across the world is thus less a failure of economics, than a social and political failure.

However, mainstream economics does play a role in tolerating and justifying this failure of politics. One particular problem is its overwhelming focus on ‘allocative efficiency’ (the use of available resources to produce the maximum quantity of goods and services which are in demand) which comes at the expense of the equally important issue of ‘distributional efficiency’. This is confirmed by Parkin et al who argue that “making interpersonal comparisons of utility” is impossible and therefore has a disabling effect on economists’ ability to make judgements about distributional “dilemmas”.

This fundamental flaw which privileges the efficiency of production over distributional inefficiency helps perpetuate a growing state of inequality whereby, for example, 1,426 billionaires hold $5.4 trillion of wealth in their hands while the majority of humanity subsists on an income of less than $3 per person per day. Until mainstream economics can properly integrate the self-evident fact that an extra $1 is worth vastly more to someone with an income below $3 per day than it is to a billionaire, its promise of “efficient” allocation will remain false, as Horton contends.

RH Tweet 2: Economists write as if the economy = society, and societal problems = economic problems. The conflation is false too.

Parker, Appleby and Maynard correctly note that few economists equate society with the economy. However, Horton’s tweet could be seen as an appropriate criticism of neoliberal ideology and neoclassical theories that dominate mainstream economics, and which frequently define society as a collection of atomised individuals in a market economy who make choices according to their own self-interest.

The economy is of course only a sub-component of society. But many mainstream economists would appear to be ignorant of this simple fact. While the tools of economics can bring useful insights to bear on social issues, many mainstream economists over-reach themselves in doing so. Perhaps they would do better by listening more to the expertise and theories of other disciplines.

RH Tweet 3: Once there was political economy = economics, ethics, politics. Economists have stripped morality from economics, leaving an arid science.

Horton makes an important point here. All too often, contemporary economics is presented as amoral and on a par with the physical sciences. This is expressed by Parkin et al themselves who state that “economics is no different to, say, physics, chemistry and biology”. But this is wrong. There is no economics without politics; and there is no economy that stands apart from moral discourse or social struggles. On the other hand, economists from the 18^th and 19^th centuries, including John Stuart Mill, Adam Smith and Karl Marx, had stronger and more explicit moral and political foundations.

However, while much economic science is based on the (false) premise that economies are ‘natural systems’ that operate independently of social and cultural factors; mainstream economics itself embraces a narrow, ideological view that seems to deliberately obscure the role of politics, power and vested interests. But all too often, mainstream economics has been used to serve political agendas and vested interests. For example, structural adjustment programmes implemented under the auspices of the IMF and World Bank were never socially or politically neutral – but were designed to achieve pre-determined distributional outcomes in the flow of money and resources. Similarly, the prioritisation of allocative efficiency over distributional efficiency, and the focus on economic growth rather than on poverty eradication are not socially or politically neutral.

Horton is right, in one respect, about morality having been stripped from economics. But perhaps a more insidious point is that mainstream economics pretends to have a ‘moral neutrality’ when in fact it serves particular vested interests.

RH Tweet 4: The high points of economic thinking are theories, not data. Reliable experimentally derived data are anathema for most economists.

Mainstream economics uses both theories and data. However, the problem is that it frequently dresses itself as a natural science and ignores the social and cultural dimensions of ‘economic systems’. On top of this, many of the theories of mainstream economics are based on false, dubious or untestable assumptions which are then camouflaged by statistical tests and complex mathematical formulae. In this sense Horton is right to question the scientific credibility of much mainstream economics.

While experimentally derived data may not be anathema for economists, the scope for experimentation (as the basis for constructing ‘gold standard’ evidence) is limited, especially in relation to macroeconomic policy and global economic structures. Even at the microeconomic level, the validity and generalizability of results and findings from experimental research are often limited because of the social and heterogeneous nature of communities, societies and economies.

RH Tweet 5: Economists see health as an economic good. It is an opportunity cost, with zero intrinsic value.

Parkin et al agree with Horton that most economists view health as an economic good that it is scarce relative to society’s desire for it; but they disagree with Horton’s claim that economists do not see health as having intrinsic value. However, it is unclear what Horton is getting at. He may be questioning the tendency of economists to view health instrumentally, in terms of its effects on human capital and productivity, and hence on economic output. If so, this may be a fair criticism.

Rather than conceiving of health as an economic factor; health (especially when defined as a complete state of physical and mental wellbeing) should be conceived as the ultimate purpose of economies and economics. In practice however, improved wellbeing is not the primary aim of most economic policies. Too often, economic growth – with scant attention to the distribution of that growth or its environmental consequences – is the main concern, reflecting a false assumption that aggregate income adequately reflects wellbeing. But a more coherent view would recognise that economic growth has no intrinsic value and should only be seen instrumentally.

RH Tweet 6: Rationality, for the economist, means subjecting every thought/decision to a cost-benefit analysis. A wholly narrow view of humanity.

This tweet may be an unfair criticism of economists, but it makes an important point about the simplistic assumptions about human behaviour used in mainstream economics. While Parkin et al note that some schools of economics acknowledge non-rational behaviour and that “cost-benefit decisions are applicable only to a narrow range of aspects of humanity”, they do not address the dominance of certain narrow and limited schools of thought in mainstream economics. So Horton is correct to imply that orthodox economics needs a strong infusion of theories and perspectives from other disciplines such as anthropology, sociology, psychology, philosophy and politics.

RH Tweet 7: The big idea in economics is the market. The assumption is that human beings make cost-benefit decisions based only on self-interest. No.

RH Tweet 9: Economists deny the existence of citizens. They see only consumers.

As noted by Parkin et al, Tweets 7 and 9 are unfair generalisations of economics. But again, there is an underlying truth in that mainstream economics and neoliberal ideology have privileged the market above other mechanisms for the management of society; and reduced humans to being predominantly ‘rational’ market actors driven by self-interest.

Parkin et al’s defence of economics actually reinforces this point: they argue that economists see people, not only as consumers, but also as producers and sellers, and that economic roles are a definition of citizenship. This serves only to confirm that economists treat people as economic agents defined by their engagement in economic activities (and implicitly valued by the scale of these activities), not as citizens defined by their rights (and valued equally).

It is clearly true that markets exist as physical spaces for the sale or exchange of goods and pre-date economists; but in recent decades, neoliberal economists have contributed to a major increase in their scope, seeking to create markets or quasi-markets in areas which had previously generally been seen as public services collectively provided to citizens, with or without charge, by or at the behest of the state acting on behalf of the population as a whole. In our view, this has in turn led to deterioration in the equity and efficiency of many important public services.

At the same time however, the pro-market theories of mainstream economics do not seem to have stood in the way of policies and laws (such as those related to intellectual property rights, trade, investment and tax) that have undermined markets and fair competition.

Tweet 8: The essence of economics is price. For those in health who argue for access free at point of delivery, we kill the soul of the economist.

While price may not be the essence of economics, it is the essence of monetised market economies. And when price exists as a financial barrier to health care access, the health system is shaped to reflect a monetised market economy. By contrast, the removal of price barriers at the point of access to health care shapes the health system as a social institution – one that is financed through social solidarity and constructed to provide health care on the basis of need.

But Parkin et al note that economists appreciate the features of both health and health care that limit the appropriateness and applicability of markets and consumer demand for determining how health care is produced and consumed across society. Even the World Bank has rowed back from its heavy promotion of user fees in health systems. Hopefully this did not kill any souls in Washington.

Tweet 10: Finally, it’s acceptable to worsen the lives of some provided the gains of others compensate. Economists institutionalise inequality

While many political and economic arrangements cause the ‘losses of many’ to form the ‘gains of a few’, Parkin et al argue that the discipline of economics is concerned with equity and justice. But they miss the point that our major economic institutions, including the World Bank, the IMF and our banking institutions, have not just institutionalised inequality but helped grow it; bringing us back to the central importance of ethics and politics.

Conclusion

There are many problems with mainstream economics, particularly the dominance of neoclassical economics. These include the use of false or incorrect assumptions about individual and social behaviour; invalid claims to the status of a natural science; and the dominance of a neoliberal ideology which excludes many other theories and principles that could help build a new economics that is grounded in people’s well-being and health (including that of the planet and future generations). Horton is to be applauded for questioning the credentials of mainstream economics and encouraging the wider health community to do so as well.

But Horton’s tweets need to extend beyond a critique of the discipline of economics and include a critique of the governance of our major economic institutions, the capture of economic policy by corporate and financial interests, and the wider role of neoliberal ideology.

This blog was written by David McCoy, Chair – Medact