Friday, August 25, 2006

R.I.P. Neoclassical Economics

In the July/August issue of Adbusters, Paul Ormerod interviews a number of economists outside of the neoclassical school.

One of those Ormerod interviews is Joshua Farley, a prominent ecological economist working in the department of Community Development and Applied Economics at the University of Vermont.

Here’s a little of what Farley has to say:

At my university, there are students who are engaged enough to say “wait a minute, this doesn’t make sense.” They often organize dialogues or debates between ecological and neoclassical economists. They’ve done ones on fair trade and globalization and a comparison of the overall disciplines. Through these debates I think both sides get to air their views and students get to hear both sides together. Of course, it’s fairly clear to me what side generally makes the better case. And I think the students feel that way too. We simply have a much better argument then the neoclassical economists.

The World Bank and International Monetary Fund are so bought into the neoclassical model, they can’t imagine anything else. We call it the Washington Consensus because it has the full weight of Washington behind it. Developing countries are told, “If you’re having an economic slow down, you should increase taxes, slash government expenditure, and raise interest rates.” Whereas when we have a slow down here in the United States we do precisely the opposite. We force other countries to do the exact opposite of what we do and demand insane requirements such as privatizing water supplies; which essentially means creating private monopolies . . .

The World Bank has tried to address poverty by introducing fees for public school and basic healthcare, which proves that economists don’t even understand their own discipline that well. If you introduce fees for public healthcare and people can’t afford basic prevention from contagious diseases, you increase the reservoir of contagious diseases in your society, and that actually increases expenditures on the part of the government. Same with the privatization of water. If you privatize water and people can’t afford to buy it, they drink cholera-laden river water and you create an epidemic that takes more resources to deal with.

Economists have such a narrow vision and they’ve bought into this faith-based assumption that markets are always best. So it’s not a science anymore, it’s a theology.

Right now, our society's major goal is to increase consumption. But there’s very little evidence that increasing consumption does anything to make us better off anymore. In the US, every generation consumes twice as much as the generation before. So, if our GDP fell by fifty percent that would put us back to the 1970s standard of living. Big deal! People were not living in misery then. I would argue that in spite of all our economic growth, the poverty rate has not fallen, so it has done nothing to make us better off.

Consumption cannot remain the core of our economic measures. We need something more like what Bhutan is doing. Try to measure the things that make people happy. There are fundamental human needs that are consistent across cultures. Things like affection, creativity, protection/security, independence, etc. Trying to measure these things would be a little sloppy, but it’s something we should at least be thinking about and pursuing.

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