Mainstream Economics and Political Economy

So I, being a smart and thoroughly non-masochistic person, decided to read a reddit thread about mainstream economics and its relationship with Marx. It and the linked previous “good discussion” threads can be summarised as “political economy is dead, economics is a hard science, all hail mathematics,” interspersed with grossly misinformed understandings of even the most basic Marxist takes.

This is… shit. There was one reasonable take in there, which is nice I guess. The problem here is that “political economy is dead, economics is a hard science, all hail mathematics” is highly flawed in each of its pronouncements. I should also note for posterity and honesty that I’m not a Marxist myself (or at least I don’t identify as one, I haven’t read that much, and for entirely separate reasons I disagree with quite a lot of Marx’s takes).

I will skip over the “hard science” thing because it barely deserves a mention. I think that the “all hail mathematics” section is also reasonably obvious, with a mathematical model being only as good as it is empirically accurate, conceptually sound and normatively valuable and acceptable.

This segues us nicely to a discussion of political economy and its value. Briefly, a huge problem with neoclassical economics is its neglect of the political-economic ramifications of certain economic policies, and its inability to recognise the primal fact of economic power conferring, well, power. Power over society, power over discourse and power over the economic institutions themselves.

Markets (and all social and economic forms more broadly) do not exist in a vacuum, they are supported, created even, by the institutions (formal, informal, discursive, social) that surround them. These institutions both constrain and enable behaviour and strategies of individuals and groups.

For example, the economic institutions that influence modes of exchange and production on the more radical side and things like interest rates, banking regulation, union power and so on on the less radical side, are created and maintained by political actors, political institutions and social actors.

If the political system collectively changes the economic institutions, the details of exchange, production and accumulation change too. If you want a gorgeous and succinct summary of how ignoring this can go wrong, the end of page 181-183 in this paper by Acemoglu and Robinson, is god-tier, and discusses the issue through the example of inequality and bank deregulation over the past 30 years in America.

In short though, power is power- neoclassical economics which is attempting to correct a market failure or other distortion (for good or bad reasons), may deal significant harm to the economic system in the long term by not engaging in the ramifications of these decisions. To take the example of the paper cited above, when deregulation of the banks happened, there was a huge burst of economic growth. This was because the banking regulation was legitimately a distortion, in the abstract sort of sense that neoclassical economics approaches these problems from.

And removing these barriers to economic success did indeed deliver that success. What they did not anticipate (or claim to have not anticipated, depending on your position) is that by deconstructing regulation designed specifically to check the power of banks (for example, through the prohibition of the merging of interstate banks, the hard limits put in place between commercial and investment banking and so on), the banks and bankers suddenly had a huge amount more power over the political institutions governing the economic ones.

The authors note that where in 1990 the financial sector donated $61 million to political causes, by 2006 it donated $260 million, making it by a mile the largest-donating sector in American politics (Acemoglu and Robinson 2013: 183). And so, institutions and laws got changed in an increasing snowball of power and deregulation that went far beyond the scope of the initial policies.

Remember though that those initial policies did indeed correct market failures, they just introduced far, far bigger problems into the political and economic systems of America, that eventually plunged tens of millions into poverty and paved the way for the fascist bullshit that’s happening now.

Power is power, and that’s the most important lost insight from political economy. Marx talked about it, Ricardo talked about it, and, despite what the free-marketeers would have you believe, Adam Smith was all about such discussions.

Any school of economics which discounts society, views economic policy as politics-free, and thinks that (relatively) simple, linear mathematical models built upon rational-choice axioms will be a good guide for policy is fundamentally flawed. It is noted by economic historians that neoclassical economics is anti-history. It doesn’t, in large part, respect, understand or even engage with it. And it frequently suggests empirically toxic policy that is thoroughly obviously toxic to anyone with the slightest experience in history, public policy, behavioural science etc.

This is a little polemical, and neoclassical economics does have its value, but my god should it not be all that is taught.

In summary, make economics a pillow again uwu

References:

Acemoglu, Daron and James A. Robinson 2013 ‘Economics versus Politics: Pitfalls of Policy Advice’, Journal of Economic Perspectives 27(2): 173-192.

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