By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil
Recently I stumbled upon what appeared to be an interesting book entitled “Economics as Religion: From Samuelson to Chicago and Beyond” by Robert Nelson, an economics professor at the University of Maryland. This is a vital and interesting topic.
I asked a few heterodox economists if they had heard of it. To my disappointment one of them told me that, while the author obviously had a point, he was part of a school called the “New Institutionalists.” They are wedded to many of the neoclassical ideas which are in turn quasi-religious (witness, for instance, Bill Black’s coinage, “theoclassical”). Unfortunately, my friend proved right. While the book is interesting and contains many valuable observations, it is nevertheless orthodox in its thinking. The author, while firmly aware of many similarities between economics and religion makes two enormous mistakes both of which are tied up with one another.
First of all, the author does not properly deal with the true kernel of what makes neoclassical economic discourse similar to that of religion. In this regard he merely scratches the surface. He picks out many similarities between the two discourses and does provide a good case that economics has become a modern religious system, but he never identifies the aspects of neoclassical theory that lead to this.
Secondly, and tied to this, he ends up in many ways glorifying the religious aspects of economics. As Deirdre McCloskey writes in a blurb on the back of the book:
Nelson does not regard ‘theology’ as a cuss word, and so his detailed study of the theology underlying Samuelsonian and Chicagoan economics is not a putdown.
The reason that the author appears to uphold this view is that he seems to believe that economics could not be much else other than a theology. He seems to think that the nature of economic thought is to provide a set of moral guidelines that economists can preach. This seems odious. While I can fully appreciate that people do need moral truths with which to live their lives, I do not think it is the place of the economist to provide these.
In what follows I hope to show the key feature which makes neoclassical economics a theological rather than a rational doctrine – the key feature being the neoclassical concept of market equilibrium. In doing so I shall also lay out a different concept of equilibrium which, if properly applied, would ensure that economists could cease thinking in theological terms altogether. That this will take the form of a dialogue with Nelson’s book is because, while I firmly disagree with his methods and find his conclusions slightly regressive and even primitive, all in all he has written a very relevant and valuable book that I would encourage others to read.
Market Equilibrium: The Great Chain of Being Versus Intelligent Design
Let us first then examine two very different concepts of equilibrium. One of these is the one favoured by neoclassical economists and will hereafter be referred to as “market equilibrium”. The other is the one favoured by Post-Keynesian economists and will hereafter be referred to as “stock-flow equilibrium”. Let us turn to market equilibrium first.
The reader will probably be quite familiar with this notion of equilibrium as we are bombarded with it every day. Indeed, in a very real way it structures our morality and our thinking about the world around us. It is represented in this familiar form of the supply and demand diagram:
The idea is that equilibrium is determined by the interaction of supply and demand. The view implicit in the diagram is that we are in a marketplace of haggling buyers and sellers where the buyers make bids on goods while the sellers adjust their prices. Eventually when the whole process is finished the market falls into equilibrium which determines that price of the goods and the amount sold.
The economist Paul Samuelson, who will be discussed in detail later on, summed this up quite nicely in his introductory textbook “Economics” as follows:
Supply and demand interact to produce an equilibrium price and quantity, or market equilibrium. The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell. The reason that we call this equilibrium is that, when supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.
There are many problems with this simple picture. The diagram, for example, assumes that if prices rise less of the good will be demanded. As we have discussed, not the case in many markets,. Think, for example, of the housing market prior to the financial crisis. In that market as price climbed ever higher these price rises themselves generated more demand for houses due to people trying to speculate on rising home values. The same phenomenon takes place across financial and asset markets and in many ways appears fundamental to the structure of markets.
What we are here interested in are only the metaphysical properties of this setup, not so much its inherent truth-value. We are interested in these because neoclassical economics when boiled right down is basically just a big pile of supply and demand graphs thrown one on top of the other. The economy is, in many ways, seen as being a giant supply and demand diagram – a giant marketplace tending toward or even already in market equilibrium.
The clue to the metaphysical properties of this setup is contained in the key concepts that an economy is either “tending toward” or “already in” equilibrium. The neoclassical market equilibrium analysis conceives of the economy in one of these two ways.
The strong or “general” equilibrium assumption is that economies are always already in equilibrium. Supplies and demands of and for everything, from labour to cat food, are always in balance and when a shock causes changes the economy adjusts pretty much instantaneously. The metaphysical kernel in this idea is almost too obvious to point out. The economy, indeed the world around us, is here portrayed as a perfectly harmonious utopia and we are implicitly warned not to mess with the Holy processes of supply and demand lest we fall into sin. Much like the old metaphysical Great Chain of Being the portrayal here is of a static world in which everything is in its right place and we are warned in a strictly moral tone not to question or mess with this structure.
The weaker or “partial” equilibrium assumption is that although the economy is thought to be out of equilibrium as it moves through time it is nevertheless always tending toward equilibrium. Whereas the strong or general equilibrium assumption presents a picture of perfect harmony, the weaker or partial equilibrium assumption presents a picture of a tendency toward perfect harmony. This idea of equilibrium is a teleological rather than a static concept, but the religious overtones are the same (one might compare it to intelligent design).
While the strong assumption of general equilibrium contains the basic message “you live on God’s (the Market’s) earth and it is already perfect therefore you should not step out of line with His rules”, the weaker assumption contains the message “you live on God’s (the Market’s) earth and, although it is not yet perfect, it is always moving toward perfection according to His rules and you should not break these”. It is basically a fight between the medieval Neo-Platonist theologians who posited a Great Chain of Being and the modern day Creationists who attribute teleological direction to the process of development.
Stock-Flow Equilibrium: A Practical Engineering Metaphor
There is, however, another concept of equilibrium that although the reader might not recognise it in its economic guise it may well remind them of other sciences, such as engineering. This concept of equilibrium, a stock-flow concept, is illustrated in the two following graphs (click to enlarge).
The perceptive reader will notice that these two graphs, unlike the neoclassical equilibrium approach, refer to specific variables rather than just supply and demand in the abstract. The graph on the left refers to disposable income and consumption, while the graph on the right refers to two different forms of investment. The reason that these graphs refer to real variables is because they are not really concerned with metaphysical abstractions that are then applied to data after the fact, as is the case with the neoclassical approach. Instead, as in engineering and other sciences, they are concerned with how a change in one real variable affects another variable.
In the graph on the left we see that an increase in disposable income leads to an increase in consumption. This is simple enough but we should note that it also contains a concept of equilibrium. Take a look at the bottom left of the graph where the line begins (the “Y-intercept”, for mathsy types). The X axis – that is, the bottom axis – depicts different time periods in years. From 1955 to 1959 the levels of disposable income and consumption remain the same. This is referred to as a stock-flow equilibrium point. Next, a shock occurs – maybe an increase in government spending – and disposable income starts to rise after 1959 and drags consumption up with it. However, once this new flow of income stops increasing around 1975 the graph moves once more toward a slightly unstable equilibrium. This is even clearer in the graph on the right-hand side where by around 1985 the two variables have reached a new perfectly stable equilibrium after a shock of new investment in 1960.
These ideas can be better explained through the bathtub analogy that the economist Wynne Godley used to use; Godley being the man who fully formalised this approach to economics in his seminal work, co-authored by Marc Lavoie “Monetary Economics”. Godley asks us to think of economic variables as one would a bathtub. We fill up the bathtub to a certain level – call this level X. If we pull the plug the level of water starts to fall from point X. However, if we turn on the tap and ensure that the rate at which the water is flowing into the tub is the exact same as the amount of water flowing out, the water-level will remain at X. The bathtub can then be said to be in stock-flow equilibrium.
This conception of equilibrium is in no way metaphysical. It implicitly contains a vision of the economy as a collection of interacting stocks and flows. Our job as economists then is not to meditate on the harmony of supply and demand but instead to study how these variables are interacting and advise macroeconomic policy based on this. This is certainly not the economist-as-priest that Nelson, stuck in the neoclassical paradigm, assumes is inevitable in his book.
Today many neoclassical economists insist that their market equilibrium models are indeed stock-flow consistent. This is never the case and simply shows how, stuck as they are in their metaphysical stories about market equilibrium and rational agents, they completely muck up their analysis of the economy and cannot even get things straight in their own minds. There is an interesting history as to why the economics profession side-lined the stock-flow equilibrium approach in favour of the backward market equilibrium approach and we recap it below.
John Maynard Keynes: Aspiring Dentist
Nelson’s section on Keynes and the Keynesians is not only rather unfair but it also completely ignores Keynes’ own students who had very similar ideas to those above about how the economy operated and were just as hostile toward economic theorising characterised by assumptions that the economy is a giant market perpetually moving toward or already in market equilibrium. Nelson instead focuses on some of Keynes’ throwaway essays that he wrote for a popular audience and holds these up as proof of Keynes as religious seer rather than the rationalist of the General Theory.
Why he does this we can only guess. But it appears that he found it hard to detect theological elements in the General Theory and so in order to hold his contention that economics is in essence a religion together he had to focus on the popular essays instead. Keynes himself was acutely aware that economics was an odd profession and he explicitly made it his task to bring it back down to earth. In the very essay that Nelson focuses most on, that is “The Economic Possibilities for Our Grandchildren” Keynes famously writes:
If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!
Certainly this is not something that a person trying to maintain for his profession the status of a priesthood would write. Keynes’ own students were largely in agreement. Joan Robinson, for example, while studying under Keynes wrote an essay entitled “An Economist’s Sermon: Economics is the Dope of the Religious People”. Again, hardly the words of a person who wishes to see the economic theology remain intact or someone who is working within a group that does not recognise the theological underpinnings of the orthodox school.
Nelson ignores the British Keynesians and those that followed in their tracks and instead looks to the American neoclassical-Keynesian school – the “bastard Keynesians” as Robinson called them – as the inheritors of the tradition. Here it is not hard to detect elements of the old-time religion and Nelson focuses specifically on Paul Samuelson’s introductory text “Economics” as the Bible of American Keynesianism. In this regard he is certainly correct as this type of economics is replete with supply and demand graphs and other metaphysical notions. But Nelson does not seem to appreciate why this religion was held intact by Samuelson and his allies against the new stock-flow approach that would have rationalised the discipline had it gained dominance.
In order to understand this we must discuss a now rather obscure Canadian economist who studied under Keynes called Lorie Tarshis. Tarshis was trained in the Keynesian tradition of Keynes himself and his students; the tradition that emphasised the economy, not as a giant market, but as a system of stocks and flows ever-expanding and contracting. Tarshis took it upon himself to bring this new economics to America, but unfortunately the whole enterprise turned ugly very quickly.
Tarshis published an excellent Keynesian textbook entitled “The Elements of Economics” in 1947, well before Samuelson’s “Bible” was released. At first the orders came pouring in from universities across the US and it looked like the new economics was set to come to America. But then, alas, the red-baiting started. Right-wing thinkers began to ferociously attack the book as a work of Communist propaganda in reviews and articles. William F. Buckley Jnr, the notorious right-wing propagandist, wrote a long attack on Tarshis which amounted to being a complete and utter stitch up. Colander and Landreth in their paper “Political Influence on the Keynesian Textbook Revolution: God, Man and Lorie Tarshis at Yale” relate that Tarshis wrote:
That bastard Buckley – I get so angry when I think of him, because, you know, he’s still parading his objectivity and concern for “moral values”, and so on. The amount of distortion is enormous. He would pick a phrase and tack it onto a phrase two pages later, another page later, another page four pages earlier, and make a sentence that I couldn’t recognize as anything I’d written –I was only able to see it when I had my book in front of me, and I could see where they came from – and make it seem as though I was no supporter of market capitalism, which I felt I always was.
Yes, there were those who did not want the new economics to gain any traction at all because they fully realised how it would completely overturn their old time religion. Buckley, while not a terribly intelligent man, knew instinctively that market equilibrium, the Great Chain of Supply and Demand, was a good conservative doctrine that held everything in its right place and ensured that no uncomfortable questions were asked about the structure and setup of society. The Austrian economist Friedrich von Hayek, to take another example of the response to the new economics which concerned itself with the consequences of the overturning of the old market equilibrium ideas, summarised nicely what the old priests thought of the new ideas:
Some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.
What Hayek really meant, of course, was that they had ceased completely to do the type of economics that he and his caste preached. Paul Samuelson, on the other hand, took a few of the Keynesian ideas in vulgarised form and stuck them onto the neoclassical market equilibrium edifice, thus insulating the old religion from rational criticism by integrating to some extent the new ideas. He did this partially because he liked basking in the mystique of religion, but also partially because he was scared that the McCarthyites would go after him should he commit the same heresy as Tarshis had. Collander and Landreth document Samuelson’s response to the attack on Tarshis:
Samuelson, in answer to the question “What kind of attacks did your book get and how did you deal with it?” responded that “For some reason that I have no understanding of, the virulence of the attack on Tarshis was of a higher order of magnitude than on my book, but there were plenty of attacks on my book, and there was a lot of work done by people. Also I wrote carefully and lawyer-like so that there were a lot of complaints that Samuelson was playing peek-a-boo with the Commies. The whole thing was a sad scene that did not reflect well on conservative business pressuring of colleges.”
Samuelson claims not to know why his book did not come under the same sustained assault as Tarshis’ but in light of the above discussion it should be obvious: Samuelson kept the Great Chain of Being intact. Samuelson was, at heart, a priest and the right-wing propagandists did not feel threatened by him.
Nelson is perfectly correct in that neoclassical economics is closer to religion than to science and he has done the world a service by publishing his book. However, tied as he is to the Samuelson neoclassical school he has concluded that this is not a particularly bad thing. He is, in a sense, perfectly comfortable with his status as priest because he simply ignores the alternative.
It is, of course, up to the reader what they think economics should be. Should it be a collection of fairy tales about harmony and market equilibrium or should it be the serious study of stocks and flows at a macroeconomic level? The reader can decide that for themselves. Being what I consider a child of Enlightenment I believe that religion has no place in economics but, just as some people prefer Intelligent Design to evolution, others are perfectly free to disagree. What they must understand however is that, first of all, what they are engaging in is theology – the Intelligent Design crowd are content in admitting that and the market equilibrium theorists should be too. Secondly, they must understand that there is an alternative ready and waiting should they ever decide to emerge from the Dark Ages. Then at least we are in a position to have an honest debate: what should economics be, religion or science?