On Economics

The President has a point

Robert Sweeney08/05/2023

President Higgins’ comments on economics made a bit of a kerfuffle. He criticised, among other things, an obsession with economic growth, the economics profession, and the discipline’s narrow focus and association with Thatcherite, free market orthodoxies. He’s not wrong.

Let me preface my comments that there is a lot of serious economics research, including work done by conventional, neoclassical economics, albeit there are places where they don’t go. Many of my comments relate to what is in the textbooks. Critiquing the economics discipline is made difficult by the fact that many points are subject to debate – economics is a social science not a physical science, where in the latter case questions are often settled by doing controlled experiments.

Where to begin? Let’s start with growth, which the president had much to say about. I don’t think it’s an exaggeration that one of the great moral issues of our time is that so much of the world’s humanity lives in poverty. If we look at how today’s rich countries became rich, industrial policies such as tariff protection were key. As documented by economic historians Paul Bairoch, Ha-Joon Chang, and others, then poor countries protected their industries from international competition to grow. Crack open a textbook on international economics, tariffs and protection are much maligned, and the historical record is either erased or fabricated. Of course, such policies don’t necessarily work, as Irish economic history aptly demonstrates.

State intervention continues to be key for technological innovation today. As documented by Marianna Mazzucato and others, public funding, including military procurement, has been central to recent technological major breakthroughs. This is clearly illustrated in her example of the iPhone and the technologies upon which it is based. For instance, the internet was developed within the US military system as a communication device for the army, whereas touchscreen technology was developed by researchers at the University of Delaware under public funding.  

What do the textbooks tell us about this? Very little. Technological change is a mysterious ‘black box’ and economics students instead learn that firm behaviour and even whole economies behave according to equations called production functions. The most commonly-used production functions were developed as much for their attractive mathematical properties than based on industrial processes, and have been discredited.

  What of inequality within countries, and in the labour market? It is sloppy to criticise conventional economics on the basis it doesn’t engage the topic. A cursory look through the journals clearly shows this not to be the case. Textbooks, though, say less and implicitly caution against redistribution with a very peculiar definition of efficiency. Within the literature, rising demand for skilled workers relative to unskilled is often implicated in the rise in income inequality. Less commonly discussed is that without state-granted/gifted monopoly protections through intellectual property rights, tech, biomed, and other workers would not rake in the handsome bounties they currently enjoy. Alternative models for funding scientific research exist.

In my view, declining power and membership of trade unions and other labour market reforms are more persuasive explanations for the rise in income inequality. To be fair, this point is often raised by the profession. However, I’m only exaggerating slightly that textbook economics says ‘unions are bad’. By raising wages for members above what would prevail if left to market forces, unions generate unemployment.

Is this story true? Certainly, it can be, but reality is more nuanced. Countries where collective bargaining is strongest often have strong labour market performance, and union presence can encourage firms to invest in cost-reducing productivity improvements. It would certainly be nice if textbooks acknowledged that the labour movement has been instrumental in many of the basic rights and civilised privileges we enjoy, such as half-decent working conditions and a five-day working week. Economists may claim that normative judgements about the effects of poor working conditions are not their tack. But conventional economics hardly shies away from highlighting the ravages of unemployment.

As to the issue of climate. I don’t believe there is a necessary trade-off between growth and ecological sustainability. Similarly, it would again be sloppy to say that the profession does not point out issues of market failure – the classic case being a factory polluting a river. But I don’t think it goes far enough. Perhaps a value judgement on my part, but the fact that the survival of the human species is under threat from climate change, and that that threat stems from unchecked market forces warrants a much stronger critique.

There is much good work done on climate by economists, including in Ireland. The leading economics journals, however, have been embarrassingly reticent in engaging the topic. Surely, reluctance to discuss what is probably the most important issue facing humanity is itself a value judgement? 

Most people who study economics either in secondary school or in third level do not end up being economists, or engaging the research. Rather, what they get is in the textbooks, which includes free trade necessarily good, unions bad, and half-truths about the state. The research picture is more nuanced, but hardly exemplary. It’s not that economics is unusual among the social sciences in having ideological commitments, commitments that can do much harm. That, I believe, is what the president was getting at.

Posted in: Economics

Tagged with: economics

Robert Sweeney     @sweeneyr82

Sweeney, Robert

Robert Sweeney is a policy analyst at TASC and focuses on issues surrounding Irish political economy and distribution. He has a PhD in economics from University of Leeds, which concentrated on financial markets and investors, banking, international macroeconomics, and housing. He is also interested in debates on alternative schools and methodology in economics, and ownership.



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