The Bankruptcy of Classical Economics
by Walter Haines

Is the accumulation of physical wealth the most important pursuit of humanity? An economist looks at his profession and finds it wanting.

Economists today tend to believe that their subject is the most rigorous of the social sciences. After much time and study they have developed complex equations, which they can manipulate extensively in modern computers, turning out solutions to complicated questions in precise detail. Why then are their predictions so frequently wrong? Why is it possible to say, not wholly with tongue in cheek, that we probably wouldn't be any worse off if we let economists predict the weather and meteorologists predict the economy? The answer, in one sentence is that their theoretical models don't have much to do with reality. Let's look at just one very important example:

In health care today, fundamental principles of the marketplace do not apply.

Prices are not determined by supply and demand or by competition among producers. Comparison shopping is impossible. Greater productivity does not lower costs.

Sometimes, in fact, the system works exactly opposite to the way of the normal marketplace. For example, the providers of the service, doctors and hospitals, determine how much of their service their customers will buy. Their customers, the patients, can rarely evaluate the quality of the service they are receiving.

This is one reason medical costs are rising out of control.

    New York Times, 26 October 1993

This is not an inconsequential example since 14 percent of gross domestic
product (GDP) was spent on health care last year, and the amount is rising rapidly.

At the same time government purchases of goods and services (which do not include government transfer payments such as social security and medicare represented) 11 percent of GDP. No economist of any stripe has ever claimed that economic theory can explain the expenditures of governments.

In non-governmental areas we assume that it is Adam Smith's invisible hand of competition that drives the market. But nowhere do we find Smith's concept of competition working in the United States today. Nor do monopoly theory, oligopoly theory, and a dozen other specialised market theories help
much.

In another direction, if the invisible hand, or even the visible hand or government, is supposed to keep business honest, why do we hear almost every day of another instance of fraud, price gouging, and illegal collusion not only by the small fry, but by our largest and presumably most respectable corporations.

Why, in the richest country in the world, are consumers so disaffected, so unsatisfied, so restless? Why cannot we find pure air, pure water, clean soil, or relief from the omnipresent oppression of nuclear wastes? Why do we not have even a suitable place to dispose of all the household wastes that our affluent civilization produces? What has happened to the market that is supposed to take care of these economic details?

What about macroeconomics? As the United States struggles to recover from a recession that "officially" hit bottom in March 1991, some economists are worrying about a strong recovery breeding inflation; yet the percentage of the working-age population employed is actually lower now than it has been since 1987. It is conceivable that the government has interfered with recovery by allowing the "wrong" policies, but economics has not helped, if only because economists are not agreed on what the "right" policies might be. The bottom line here is that there is no generally accepted economic theory that is capable of solving our practical problems.

On the world-wide level what does economics tell us about global warming, the ozone level, vanishing species, destruction of natural resources, the disappearing fish catch, bio-diversity? Cost/benefit should say something about such issues. We arc working feverishly on these problems, but the figures that are churned out by various researchers vary from one to another by orders of magnitude, at least partly because we cannot agree on how to measure benefits often not even costs. Where are the answers?

As economics has struggled mightily to become more scientific, it has become even more useless. Every time 1 have occasion to tell a layman that I am an economist, I feel that I must immediately apologize, for every educated citizen is aware of our failure to come to grips with the real issues.

Why this parlous state of affairs? Surely it is not that economists are stupid. Nor untrained. Nor perverse. Nor corrupt. Most of them are seriously trying to probe the depths of the intricate web that is our industrial society. Why have they failed? Let's look at a few of the underlying difficulties.

Specialists Wear Blinders

For several centuries at least the amount of knowledge that the human race possesses has increased by leaps and bounds, and scholars have tried to adjust to this explosion by limiting their individual concentration to smaller and smaller pieces of the whole in the process known as reductionism. But the ultimate result is the reductio ad absurdum. As one wag has put it: A jack of all trades is a person who learns less and less about more and more until finally he knows nothing about everything, while a specialist is a person who learns more and more about less and less until finally he know everything about nothing. Our specialization has given us lots of pieces but no overall pattern into which to fit the pieces together.

What is the economic view of the world and its peoples.? human beings are selfish and aggressive. Nature is pure mechanism and has no function except to be exploited. Material progress is all that matters. Quantity of things is more important than quality of life. Efficiency is the prime virtue. Atomistic individuals are the base of civilization, and social community is an aberration. All persons are rational, and rationality is defined in terms of single-minded pursuit of wealth. Anything that can't be quantified is irrelevant.

Economists are, of course, human beings, and no human being thinking as an individual, could possibly believe all these things. The catalogue of economists who in their saner moments, have written about the idiocy of one or more of these untenable tenets of economics is long and wide But when they retreat into their "scientific" persona, the old pattern is repeated and strengthened .

John Maynard Keynes, in one celebrated but isolated article, condemned the current orientation of economics in strong language indeed in his prediction of a future golden age:

"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the highest virtues ... love of money as a possession will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease."

Value judgments are not facts

That quotation brings me to the most important and damaging point of all. which is that among the most basic premises of economics are a fair number of value judgments that economists present as if they were facts. We economists present ourselves as unbiased. We are pure scientists completely shorn of prejudgments, ruled only by reality, not opinion. Yet we assume that highest goals of human existence are fundamentally economic, that GDP is the most significant measure of human progress and human happiness. Is that a fact? Or is it merely a fancy? How has it been proven?

To the best of my knowledge no economist has attempted to prove it. It is part of the folklore of the human race, and like much folklore it is not devoid of original significance. When human beings were on the teetering edge of death from starvation, it could be readily seen that food was one of the driving forces of existence. The economic activities associated with farming (or hunting and gathering) were paramount in the life of the community. But even at that level the life of the community included a great amount of non-economic activity: the togetherness of the family, the rituals and festivities, the social order. Never was food the sole driving force. And as those most primal physical needs for food, clothing, and shelter were met, the "higher needs", to use Maslow's phrase, became more prominent: health, education, and security; friendship, affection and belonging; esteem and self-respect; self-actualization (see Haines, 1982; Maslow, 1970).

The sad actuality is that, without proof or even examination, economists have hammered at their primal myth so long and so effectively that almost everyone accepts it as Gospel Truth. We have all been brainwashed, and our behavior has been subverted into chasing false gods. Even economists are tricked by their own propaganda. Wealth equals happiness; we must get more of it.

What do people want?

How economists have succeeded in perpetrating this fraud on the world's people is hard to understand. It is particularly strange because it is such nonsense. The function of economists, we say, is to satisfy people's wants. That seems legitimate. What is it then that people want? Is it important to you that your country have a higher GDP per capita than Japan?

 Economists say that wants are "given", and then go on to assume that those wants are predominantly for economic goods. Psychologists, who are supposed to be the specialists in understanding wants, say no such thing. One would hardly expect that Freud would be concerned with economics; he certainly wasn't. Henry Murray, an expert whose inventory of human wants turns up in many psychology text books lists 20 different categories of wants from achievement to understanding, not one of which is economic. Achievement sounds as if it might be economic, but Murray illustrates it by such activities as climbing mountains and the will to power.

 One might also think that if one wanted to discover what people want one could ask them. Interestingly enough, economists who mention this possibility usually dismiss it as unscientific. People don't know what they want; only economists do. But when individuals are asked, they agree with the psychologists (or vice versa).

 Public opinion polls again and again put non-economic desires at the top of  people's list of desires. One startling Harris Poll taken in 1978 found that 76 percent of the respondents preferred "learning to get our pleasures out of nonmaterial experience" compared with 17 percent who voted for "satisfying our needs for more goods and service." (Current Opinion, 1978)

Similar results have been found by poll-takers over the decades. The statement, "Americans would be better off if they lived more simply" elicited agreement from a surprising 83 percent of those queried in an ABC News-Harris Survey (1980). A 1987 poll asked, "what does the term rich life remind you of?" The highest answers were: health, 30%; happy family life, 20%; spiritual contentment, 19%; financial wealth, 9%. Examples can be extended ad nauseam. There are many things that people desire more than wealth.

Who is right: the economists or the people? It should be said in partial defence of economists that in spite of the fact that poll respondents voice their strong support of non-economic goals, the actions of those same people often belie their words. Yet this fact may itself be evidence of the effectiveness of the economists in urging people to act in a materialistic way whether they want to or not. The self-seeking that Adam Smith attributes to individuals may well become a self-fulfilling prophesy. The individual feels that "this is the way l am supposed to act in order not to be a misfit". What actions show may therefore be conformity rather than inner desire.

It is not the purpose of this paper to outline the various solutions to present problems. Many have been suggested by others over the years, indeed over the centuries. I am interested only in pointing out that one significant approach to a solution, one that has not been often discussed is a change in the way we think. Specifically, it behooves us economists to abandon the fiction that we are wholly unbiased scientists looking to the truth, to recognize that we are probably more responsible than most people for perpetrating the nonsense that lies at the root of our folly, and to stop preaching the fervent gospel of economic growth as the ultimate salvation of our bodies if not our souls.

Adam Smith was a great thinker. He had a significant message for his own day. But that day is two hundred years out of date. Much as we owe to the master, we must recognize that his gospel is deadly poison for our own time. We must acknowledge that we have sold ourselves a bill of goods in emphasizing the importance of economics, asserting its purely scientific basis, and touting its medicine as a cure for our ills. We need to recognize that happiness is more satisfying than pleasure, relationships are more important than goods, the environment takes precedence over gadgets, nature is our precious habitat, holism is the science of the future, altruism can be more gratifying than plunder, cooperation brings more rewards than competition and peace (both inner and outer) is a state devoutly to be wished.

Walter Haines is Emeritus Professor of Economies at New York University. This is an excerpt of a paper presented before the Society for Human Economy, at Drew University. The complete version of the paper appeared in Human Economy (The Human Economy Center, P.O. Box 28, West Swanzey, New Hampshire, USA, E-mail: humanecon@igc.apc.org)

This article was published in New Renaissance magazine Vol.5, No.3

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