Pearls and Irritations

It is a rare event when scientists directly challenge the theory, political power and cultural embeddedness of conventional economics. And yet such a challenge is needed because neoclassical economics theory and neoliberal economics practice together form one of the principal driving forces of environmental destruction and social injustice.

They do this by treating our life support system, the environment, as an add-on to the economic system, assuming it’s just an infinite source of raw materials and an infinite waste dump. They reinforce the capitalist commitment to endless growth on a finite planet that’s destroying the environment. They spread the notion that wealth trickles down from the rich to the poor, despite empirical research that refutes this.

Our paper, just published in an international, peer-reviewed journal, offers a comprehensive critique of NCE. But first, this article examines NCE and neoliberalism more closely.

Pseudo-science

The proponents of NCE call their discipline a science. But its details are shrouded from the view of non-initiates by advanced mathematical models with little relevance to the real world. It uses terminology from physics — forces, equilibrium and efficiency — but without the scientific content of physics. Its priests, certified by degrees in economics, disseminate its ideology among politicians, the public service, and the mass media. It has even created its own “Nobel Prize”, actually the Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel.

NCE props up neoliberalism

NCE is believed incorrectly, by many people, to provide the theoretical basis for neoliberal government policies. This is based on the notions that government, its expenditures (apart from defence) and taxes should be small, and that major environmental, social and economic decisions should be left to the market – in other words, to the 1% or 0.1% who control the market.

Thus neoliberalism gives support to politically powerful vested interests that lobby governments to remove environmental constraints on the fossil fuel, mining, forestry, large-scale agriculture, aluminium and other industries. Furthermore, it supports the false notion that subsidies to the rich benefit the poor.

From time to time, heterodox economists, and even occasionally NCE researchers, show that the underlying hypotheses of NCE theory, that are supposed to justify neoliberalism, are contradicted by observation; that NCE is inconsistent with Earth system science; and that it has internal contradictions. They point out that NCE failed to predict the Global Financial Crisis (although a heterodox economist, Steve Keen, did) and misuses Gross Domestic Product by treating it as an indicator of national wellbeing.

Yet, despite all its failures, NCE continues to dominate government decision-making in Australia and many other countries.

Alternatives to NCE

Dissatisfaction with NCE has stimulated the creation of new approaches to economics, for example, behavioural economics, which is more psychology than economics, and political economics, which underwent a long struggle for survival at Sydney University, eventually being finding a place in the Faculty of Arts.

Even stronger dissatisfaction led to the creation in the 1980s of the transdisciplinary field of ecological economics and its journal of the same name. Unlike NCE, ecological economics treats the economy as a subsystem of society, which is in turn a subsystem of the natural environment. Its researchers include enlightened economists, natural scientists, engineers, sociologists and lawyers. It is very different from environmental economics, a branch of NCE, that considers that environmental protection can simply be achieved by pricing in markets.

Despite its attempts to become “respectable” in the eyes of NCE, ecological economics is taught as a whole subject in very few universities around the world. Australia has one, at Torrens University. The grip of NCE is still very strong.

Although ecological economics has grown substantially over several decades, this has been achieved partly by allowing neoclassical economists to dominate the editorial board and content of the journal Ecological Economics. Concern about a possible takeover of ecological economics by NCE has led to a proposal for a new transdisciplinary field with a stronger emphasis on environmental protection and social justice: social ecological economics.

A new critique of NCE

Our team of four sustainability scientists and an ecological economist have just published a paper entitled “Sustainability Scientists’ Critique of Neoclassical Economics”. Since NCE claims to be a science and uses the language of physical science, it is appropriate that NCE be critiqued by scientists.

Because there are many definitions of NCE, the authors focused on one that’s common to almost all versions, based on a paper co-authored by economist and former Minister of Finance for Greece, Yanis Varoufakis. The latter paper argues that three unproven assumptions define all variants of NCE: methodological individualism, methodological equilibration and methodological instrumentalism. Let’s unpack these formidable-sounding terms.

Methodological individualism 

This assumption asserts that socioeconomic phenomena can be described in terms of subjective personal motivations by individual actors not influenced by other actors or society. But, in the real world, individual decisions are influenced by advertising, fashion, friends and relatives, laws and other institutions.

Furthermore, methodological individualism cannot credibly explain major global problems such as climate change, war, limited global resources, poverty and pandemics. These involve complex socioeconomic and political systems in which the whole is greater than the sum of its parts – in other words, they have emergent properties.

Methodological equilibration

This assumption asserts that economic systems are generally in or near a state of “general equilibrium”, where supply and demand are balanced in all markets. In the real world, boom and bust cycles and other financial crises demonstrate that economic systems are often far from equilibrium.

Methodological equilibration depends on the notion the humans behave like Homo economicus, that is, they are entirely self-interested, consistently “rational” in the sense of economics, can access and process all available information on prices etc., and can optimise their decisions. However, economist Joseph Stiglitz, applied mathematician John Blatt, and others have shown theoretically that there is no assurance of equilibrium or optimality or stability in economic systems.

The notion of Homo economicus has also been refuted by findings in anthropology and sociology that cooperation exists together with competition in all societies known to humankind. The field of behavioural economics was developed because of the failure of the Homo economicus model.

Methodological instrumentalism

This assumption asserts that NCE’s economic theories do not have to explain the real economic system or predict future trends, provided they are not contradicted by observation. NCE’s hypotheses and claims are refuted by observation of real socio-economies, by elementary logic and by lack of internal consistency.

Concluding remarks

Our paper also refutes seven additional hypotheses and four claims made by some neoclassical economists. It argues inter alia that the natural environment cannot be separated from the economic system; that NCE’s concept of a Pareto efficient economy, used by neoliberals to argue against government intervention in the market, does not exist in the real world; that tax deductions for high-income-earners do not generally benefit the poor; and that government budget deficits are not generally inflationary.

Our critical examination of the unproven hypotheses underlying NCE shows that NCE fails to describe the behaviour of the real economies of industrial society. Each hypothesis fails to satisfy one or more of the basic requirements of scientific practice. NCE is fundamentally flawed, bad science, irrational in the common meaning of the word, and biased towards the rich and powerful. It damages democracy by giving support to state capture by vested interests. Therefore, it should not be used as a guide for government policies.

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