Pseudoeconomics Catalyzes Catastrophe

Friedrich A. Von Hayek in his Economics Nobel acceptance lecture 1974 had warned, “To act on the belief that we possess the knowledge and the power which enable us to shape the process of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm”. Almost four decades later, Ricardo J.Caballero, an economist with Massachusetts Institute of Technology, observed in his October 2010 paper “Macroeconomics After the Crisis: Time to Deal with the Pretense of Knowledge Syndrome”: “The root cause of the poor state of affairs in the field of macroeconomics lies in a fundamental tension in academic macroeconomics between the enormous complexity of it’s subject and the micro-theory-like precision to which we aspire… The old institutional school concluded that the task was impossible and hence not worth formalizing in mathematical terms… The modern core of macroeconomics swung the pendulum to the other extreme, and has specialized in quantitative mathematical formalizations of a precise but largely irrelevant world.”

There would be no economy without a constant inflow of natural resources like the sun and the atmosphere, the soil, the seas, fossil fuels, minerals, etc throughput in the system. Most classical economists had their vision of a “stationary state” — the ontological destination of economic growth and development constrained by the planet’s population exploration vis-à-vis finiteness of arable land and the exhaustibility of non-renewable resources. Humanity does not produce these “fictitious commodities” but exploits them, as observed by Karl Polanyi in his pathbreaking treatise The Great Transformation (1944). Simply by holding title to a portfolio of real property, without any effort to increase their value, one could quickly turn a profit from social investments, as revealed in classical prudence. Karl Marx’s entire critique of political economy is based on the contradictions between use value and exchange value. Marx established that the soil had no “indestructible powers,” as it could be degraded leading to ecological destruction.

Marxism was never a major force in United States. The primary challenge to the classical tradition came from what has since come to be known as neo-classical economics. The classical tradition of economic thought was ably synthesized and represented by one dominant figure of the age in America: Henry George. His 1879 book, Progress and Poverty sold more copies throughout the world than any book till that time except the Bible. George propagated that conflating land into capital allowed land rent to be concealed and diluted and the undeserving windfalls accrued to “leisure class” speculators and led to depression of labour wages at the margin. Following the classical tradition, George recognized that there is no justification for the titleholders to reap the return of what society has invested. George advocated for a progressive tax because land was mostly concentrated among the wealthy. Mason Gaffney in his 1994 book The Corruption of Economics has described how most influential oligarchy in late nineteenth century America, the railroad barons exerted their manipulative power to preempt the possibility of any rent extracted from land use. Leading Economics scholars engaged in establishing the American Economic Association (AEA) were induced to change definitions and to initiate two-factor (capital and labour) neoclassical economics denying land and natural resources’ contribution in production process. To oppose and alienate George from the domain of economics had been the preoccupation to the founding members of the AEA that fetched a grand success.

Frederick Soddy, recipient of Chemistry Nobel Prize in 1921, considered economics a pseudoscience requiring a paradigm shift and offered an alternative perspective on economics, rooted in the laws of thermodynamics. Contrary to mainstream belief, economy used to draw energy from outside itself and thus incapable of generating infinite wealth. Sody’s critique has been furthered by Nicholas Georgescu-Roegen in his magnum opus The Entropy Law and the Economic Process (1971). Georgescu-Roegen considered the economy as a living system that used to draw from its environment valuable or low entropy matter and energy adjusted by equal quantity of polluting high entropy matter-energy back to the environment.

Classical economics was concerned about scarcity of savings as well as dangers of overconsumption. Thomas Malthus was a remarkable exception within the classical tradition who promoted the idea that underconsumption causes recession. Based on Malthusian conviction, J.M. Keynes came forward to reverse under-consumption and oversaving during the Great Depression of the 1930s in his The General Theory of Employment, Interest, and Money. (1936) that government spending and subsidized consumer spending can compensate for “demand deficiencies”. Keynesian revolution aimed at long-term growth of national income through consumption, investment, incremental capital/output ratio without considering physical and energetic realities. An American economist Murray Rothband observed that Keynes “possessed the tactical wit to dress up ancient statist and inflationist fallacies with modern, pseudoscientific jargon, making them appear to be the latest findings of economic science.” Keynes’ misrepresented Say’s Law as “supply creates its own demand” as if it were a quotation from J.B. Say. Paul Samuelson’s Foundations of Economic Analysis (1947) had initiated the mathematization of economics in a grand scale that provided the power to confuse the outsiders along with the economists incapable to cope with “competitive inflation of rigour”. The novelty of Milton Friedman’s essay, “The Methodology of Positive Economics” (1953), was in innovating the immateriality of background assumptions. According to another main proponent of neoclassical school of economics Robert Solow, technology has been the determinant factor of economic growth. Subsequent research has observed that Solow has failed to assess the energy processes of consumption, transformation, and depletion, though these factors are inseparable from the growth of industrial production.

Thus the treadmill of production, founded on the eternal law of capitalist circulation: supply creates its own demand, drives the expansion of production and consumption synergistically. The zero-sum game has its obvious tolls on wretched teeming millions mostly of the “other” world. Andre Gunder Frank elaborated his earlier “Development of Underdevelopment” thesis in a 2001 paper based on multilateralism and entropy on how the structure, process and transformation of the world-system generate the new wealth and poverty of nations. Entropy is dispersed from the more “ordered” regions and sectors of the global world economy to other less “ordered” regions that are obliged to absorb the entropy dissipated in their direction by the more “ordered” one. Global biophysical transformation engenders localized stresses in the forms of coastal erosion, ice melt, and infertile land and deteriorating water sources. Thus fast liquefying of Arctic cryosphere, causes matching rise in sea-beds that will result in submerging of several small-island states in Pacific and Indian Ocean by the end of twenty-first century. The catastrophic ecological crises manifested by growing human strive for higher per-capita consumption, the only indicator of economic growth, by deploying ruthlessly limited resources stored in a finite and fragile planet. Thus the project to divert Economics from the road to flourish as a disciplined study of humans’ economic activities in the broader socio-ecological context to a mere vocational training equipped with quantitative tools had been completed. A “boutique” or more aptly, a “comprador” economics had elevated to full-swing marginalising political and methodological plurality. Margaret Thatcher’s famous assertion that ‘there is no alternative’(TINA) and Francis Fukuyama’s equally famous verdict of ‘End of History…’ trumpet the advent of a particular political and economic system as the final destination of humanity’s socio-cultural evolution.

The global financial crisis surfaced in 2000s, apparently as a consequence of sub-prime housing mortgage practices in USA, has its root in growing disjuncture between the real economy of production and the paper economy of finance. As early as in 1920s, Soddy argued that the financial system could increase the public and private debts and mix-up this expansion of credit with the creation of real wealth. But growth of production and growth of consumption imply growth in the extraction and final destruction of fossil fuels. The obligation to pay debts at compound interest could be fulfilled either by inflation or economic growth. But economic growth is fallaciously measured because it is based on undervalued exhaustible resources and unvalued pollution. The myth of unlimited economic growth has all along been justified with unrealistic assumptions and “evergreen” predictions. Vested interests from late nineteenth century American railroad oligarchy to vanguards of Washington consensus have promoted the pseudoeconomics quixotically empowered to dominate academics and policy. Foucauldian knowledge-power discourse reminds us that if the values and political implications underlying the “growth business-as-usual” do not ensure how to protect the society, we can refuse to accept their imperatives and develop alternative epistemology.

Arun G. Mukhopadhyay is formerly of Indian Institute of Management Calcutta. His current research interests are in Ecosocialist Worldview, Political Economy of India, etc. Apart from numerous publications in journals, etc., many of his papers have been accepted by international conferences held in Europe, North America, and Asia. He can be reached at: Read other articles by Arun.