Conventional economic theory seriously misleads and distorts thinking. This is mainly because it is only about one form of economic system among many possibilities, that is, a basically capitalist economy. It legitimises that economic system, it portrays the system as normal, natural and inevitable. No other way is seen as realistic. It is not a theory about economics-in-general and it cannot tell us much about the way other economies work. It therefore hinders thinking about what might be the best kind of economy. It proceeds as if there is and can only be one kind of economy, and then focuses on how it works and how to make it work. This is not to say that its theoreticians deliberately intend to deceive us. It’s just that they take this perspective for granted, having been thoroughly schooled to do so. If they thought in any other way, no firm or government would employ them.
Following are some of the theory’s core elements, and how they misconstrue things, warp the mind and lead to undesirable policies and practices.
Conventional economists proceed as if their economic theory describes the way things happen in that large realm of the natural universe that involves production, distribution, exchange and development. We are therefore led to believe that conventional economics has discovered certain natural laws about the economic realm, such as when supply decreases price increases. But this is not true. Conventional economists only deal with one basic kind of economy, that is, the one that has been adopted in our society, and the “laws” they proclaim only describe what happens within it. For example, it is not a law of nature that if demand increases price increases. Sometimes in some economies and in some situations this is indeed what happens, but it is not a general law describing what happens in economies. It never happens in a good household economy or tribe or commune. If you find that there is not enough porridge in your house for all to have their normal breakfast it is not the case that the price you all have to pay for breakfast increases. What happens is something that conventional economists cannot explain; i.e., you share the porridge without any change in its price, and without any thought about its price.
The household economy runs according to totally different rules compared with those the conventional economist assumes. Its rules include considerations of morality, justice, mutual benefit, needs, and environmental effects. However, the calculations conventional economists make and their laws make no reference to any of these factors. They are framed in terms of only one factor, which is dollar exchange value. The internal operations of household economies almost completely ignore this in making production and distribution decisions. Nor can use of the conventional economist’s units and laws tell us anything about production, distribution, etc. in the economies of Aboriginal societies.
So the theory is basically only about what happens when economic transactions are geared to the maximising of monetary gains in a competitive market situation. This obviously completely ignores many important economic phenomena. For instance, possibly one-third of all the work and production that takes place in Australia is not performed for money…because it is housework. People make breakfast and sweep up without payment in money. They give rather than sell many things to each other freely, including advice, company, emotional support, help and entertainment. There is also a big voluntary sector of the wider economy, including many people who work in charities and aged care. There are things people could but would not sell, because that would be considered to be immoral, such as tabooed food items, children, or toys with sentimental value. What economic principles govern these realms? Sometimes considerations of fairness or justice or need or sentimental value settle what is to be produced or who is to receive it. Conventional economic theory totally ignores these many phenomena and cannot give an account of the principles governing decisions and transactions within them, because what is produced is not sold.
Malinowski says, the work of the Trobriand islander is “prompted by motives of a highly complex, social and traditional nature, and towards aims that are certainly not directed towards the satisfaction of present wants, or to the direct achievement of utilitarian purpose … All, or almost all of the fruits of his work, and certainly any surplus which he can achieve by extra effort, goes not to the man himself, but to his relatives in law.”
“There will be heaps of yams in front of huts. These are obligatory gifts from kin and clients possibly. The size of the heap indicates status. People work hard for months, just to give away their produce. Production and exchanges of yams is determined by kin obligations, quest for status, and reinforcement of social bonds. Magic can be used to make the yams grow. There are many rules applying to production and exchange of food; it is not determined by profit. The yams are not merely commodities to be exchanged for money.”
— Eriksen, 2010
This fault means that many important costs and benefits of economic actions are not taken into account at all, especially costs such as the boredom of unemployment or the loss of a view or the damage to social cohesion or to ecosystems. The theory is almost useless in calculating the real cost/benefit situation involved in whether or not to move a factory to China.
Similarly, some of the most important benefits of productive activity or investment decisions are ignored, i.e., the feelings of satisfaction people get from the object they made or how smoothly their workplace runs, or the peace of mind that comes with a secure job, or the solidarity reinforced when a community working-bee does something for the town.
The theory therefore operates with a seriously impoverished, insufficient vocabulary, or set of concepts, for dealing with the full range of economic phenomena. There is so much you cannot even begin to discuss, let alone represent satisfactorily, if you confine yourself to only talking about the monetary value of things. It is as if we were trying to discuss art but the only terms we could use referred to the thickness of paint. That would allow us to develop sophisticated, precise and verifiable mathematical equations and theories based on accurate empirical measurements but we could not even begin to discuss anything that matters about art.
Even more important than the narrowness is the way the set of concepts and terms conventional economic theory uses distorts our thinking about, and understanding of, production, distribution, exchange and development. Firstly, because only terms to do with money value are used we are led to believe that the only things that matter in economics are monetary costs and benefits, and that all the other factors noted above are not important or not relevant. This is what conventional theorists think because they have the hide to call these many important things “externalities”.
The theory therefore leads us to think that things like producing to share, or to help others, or to meet social obligations, or not producing something in order to protect the environment, are not part of economics. They imply that these are not economic phenomena at all, or are only parts of primitive economics but not “proper” economics. In tribal societies people don’t produce food to make money; they do it primarily to satisfy social responsibilities, such as having to give the first yams of the season to your uncle. Food gets distributed and eaten but that is not the main goal. Similarly, a tribal person will tell you that he will not buy that item of food even if it is very cheap, indeed he will not eat it under any circumstances because it is his totem and eating it is taboo. In many eco-villages there are elaborate food production, distribution and investment activities involving no monetary considerations. These are situations in which rules governing the food economy have nothing to do with money, individual gain, competition, market forces, the finance industry, etc., and they involve processes which conventional economic theory cannot deal with.
Similarly offensive is the way conventional economics treats everything as a commodity for sale. Yet many things should not be treated like that, such as children, the decisions of judges, wives, friendship, parole from prison, and especially labour, land and money. Whether people get jobs should not depend on whether someone can make a profit buying their labour, as if it were bricks or fish. In the era of globalisation and Neoliberal triumph more and more things are being made into a commodity to buy or sell, including public assets, personality, loyalty, identity, personal data, tradition, culture, and things people ought to have a right to regardless of monetary cost such as water, employment and health care.
The ex-head of the World Bank, Lawrence Summers, said it would be more efficient to locate toxic industries in the Third World, because the cost of a death there is lower than in the rich world. (Pearce, 1992.) That’s how conventional economics gets people to think. (Following widespread criticism Summers claimed he was only joking.)
Another serious mistake is evident in the way conventional economists regard income from financialisation. Rent and interest going to investors and owners of rented properties is added to income from activities like producing potatoes to make up the GDP, which economists claim is a measure of national wealth. But much financial income produces nothing and actually reduces the national wealth. Consider again selling the beaches to private firms and allowing them to charge a rent when people want to go for a swim. That would add a lot of income to the GDP but would obviously reduce national welfare. Instead of boosting the economy privatisation often enables the siphoning off of rent and interest which reduces disposable income and therefore capacity to spend.
Possibly the greatest damage done by conventional economic theory and economists is due to their failure to accept and implement Modern Monetary Theory. They maintain the system whereby money has to be borrowed by governments from those who have a lot of it and repaid with billions of dollars in interest when in fact they do not need to do this because they can create as much money as they wish. (For the detail see Chapter 3.) Even worse, this mistake leads governments to say they can’t afford to spend more on welfare and to impose “austerity” policies on their people. As a result billions of people suffer immense misery that could be avoided.
Consider the definitions of “living standards”, “productive”, and “efficient”. When conventional economists talk about the most “productive” and “efficient” investments all they are referring to are those that will maximise the monetary return on money invested. As a result conventional economists will say it can be a much more productive and efficient use of capital to build one luxury mansion than fifty humble cottages for poor people, or to use Third World land to grow luxury crops for export than food for hungry people there. But in fact the market is the most appallingly inefficient way of determining food production and distribution; it never prioritises allocating enough food or housing or clean water to those who need them most.
Similarly, we are all in favour of improving “living standards”, but all the conventional economist means by this term is increasing the GDP or sales or consumption per capita, again a definition which is delightful for those with capital to invest. If on the other hand you defined “living standards” in terms of quality of life then productive capacity would flow into very different projects (and the GDP would shrink as capacity was withdrawn from useless or destructive but profitable projects.)
As noted above, a major fault regarding GDP accounting is due to the inclusion of interest and rent as additions to the GDP and therefore to national wealth, when in fact as Hudson points out rentier income reduces national wealth and shrinks the economy, because it represents the flow of wealth that has already been produced to the rentiers.
Another example of a deceptive definition is that of unemployment. They count you as employed even if you have worked only one hour in the week! This makes the economy appear to be working much more satisfactorily than it is. The real unemployment figure is more like twice the official one.
“… consider the 10,000-mile cod. Scottish fishermen catch cod in the North Atlantic. Now, the fish could be consumed fresh in Scotland, but no… First, the poor piscine provisions are deep-frozen into codsicles, which are then shipped to China, thawed, filleted, packaged, re-frozen, and shipped back to Scotland for eventual consumption.” Efficient?
— Merritt and Edwards, 2009
A rarely considered category of “externalities” includes the overlooked non-monetary processes and costs on the “input” side without which factories and offices cannot function. For instance, Ecofeminists point to all the work and skill that goes into preparing workers to cope with the factory, the “housework”, child production and care, the maintenance of healthy community relations. One could add the education, roads and public health systems that must be provided if firms are to function. Above all there is the R&D carried out in public universities and often given to corporations.
Chapter 7 discussed one of the worst examples of deceptive definition, the way economists conceive “Development”. It is basically equated to growth of GDP, or at least it is assumed that growth will enable the emergence of all other desirable things such as better nutrition and reduced infant mortality. Therefore, the overriding goal is to crank up the dollar value of business turnover, production for sale, investment and especially export production. As noted above, this is exactly how local elites, foreign corporations and banks want development to be conceived, because it means it is important to put resources, capital and effort into enabling lots of lucrative investment opportunities for them. But obviously development should be defined in terms of developing what is most urgently needed to improve the living conditions of the people, and in general this would mean preventing most conventional development and enabling people to put the available resources into directly providing for themselves the things they need. The overwhelming majority of development experts, literature and even NGO effort takes for granted the conventional view, illustrating the warped thinking that condemns billions to avoidable deprivation and poverty.
Perhaps the most damaging invalid idea taken for granted for hundreds of years is to do with the monetary system. To repeat, this is the assumption that governments must borrow money (from people who have a lot of it.) The fact that this is not true was discussed in Chapter 4. Modern Monetary Theory explains how governments can create money out of nothing, that is literally print it, to put unused labour and resources to work. So why has everyone taken it for granted that governments must borrow, cannot afford to spend on necessary projects, have to inflict crushing austerity on their people, and pay lots of your tax in interest to lenders? All this despite the fact that from time to time they actually do create vast quantities of interest-free money, as in Quantitative Easing?
Because all this is studiously ignored it maintains the myth that governments cannot afford to raise pensions or improve welfare, and that because the debt is already so high they have to implement “austerity” measures. That means cut spending on services and welfare. It also enables governments to say they do not have the money to fund better roads, so we need to get private corporations to build them, on favourable terms that disadvantage the public.
It is hugely in the interests of the rich and the banks who lend their wealth out that critical attention is not drawn to any of this deceptive ideological baggage.
Economists have a choice here. Either they can:
define economics as only involving dollar costs and benefits, in which case they will be able to construct neat and precise equations, but their discourse will be largely irrelevant and grossly misleading, or they can
accept that economics is about what happens in production, distribution, exchange and development, and that many factors other than monetary values have to be taken into account to understand what happens and to discuss what ought to happen. They would have to accept therefore that economics is a very messy and imprecise realm, overlapping with politics, sociology, ecology and ethics.
The supremely important measure of economic progress is taken to be the Gross Domestic Product, i.e., the value of all the production or consumption taking place. The first problem here is that the GDP is not a measure of wealth or welfare. It only adds together all the spending that is taking place. Some of this represents benefits but some of it represents costs and therefore reductions in welfare. For instance, if we have a social system that generates road accident costs of several billion dollars per year, then obviously the amount we have to spend on this problem represents the reduction that accidents make in our welfare. Yet economists add all such expenditures to the GDP and pretend that the total represents the level of our income, wealth and welfare. Because GDP per capita is taken to be a measure of “living standards”, people think it is important to constantly increase GDP, and therefore support increase in business turnover.
The GDP is not an indicator of anything that matters much. Whether the amount of production increases or decreases is not important; what matters are things like whether welfare or happiness or the quality of life increases, or unemployment and poverty decrease. In fact, the most important factors for any sensible accounting for long term economic viability and capacity to produce are psychological and ecological. In Bhutan the supreme criterion is the Gross National Happiness. Why don’t we just measure what matters and forget about the GDP? The answer of course is mainly because the owners of capital want us to accept as our top priority increasing the volume of buying and selling that is going on all the time.
Another major fault in the GDP is that it only measures throughput, that is spending and income, and therefore it gives no indication of stocks of wealth or changes in these. The GDP of a country which makes a lot of money in one year selling off its forests might give the impression that it has become richer, but if we were to take into account the loss of this stock of timber and ecological wealth we might find that despite the cash income it has become much poorer.
Little more needs to be said here about the absurdity of holding the growth of GDP as a goal, let alone the supremely important goal. Conventional economic theory does not give any attention to the possibility or merits of the steady-state economy we must have in a sustainable society. It can tell us nothing about the way to run such an economy, the problems that will arise, or the kinds of institutions we will need.
As has been discussed above, no aspect of conventional economic theory has more disastrous consequences than the assumptions that economics is about what happens in markets and that the best way to conduct economic affairs is via markets. The market is taken to be the most efficient way to allocate resources and incomes, to decide what is produced and who gets it, and to determine what is developed. But it has been explained that the market is only efficient at maximising monetary returns to investors, purchasers and sellers and it is appallingly inefficient at meeting needs, ensuring justice, maintaining social cohesion, caring for the environment or producing appropriate development. More importantly, there are many other ways to organise an economy than in terms of market relations, but this gets no attention from conventional economic theorists.
The market mechanism does some things well and might have an important place in the transition to a satisfactory society, but market forces are responsible for most of the misery and environmental damage in this world. They inevitably generate inequality and deprivation, although they also generate wealth for some. To argue for freedom for market forces is to argue for freedom for the rich and their corporations to do and take whatever they like. We cannot have a satisfactory society without far more social control and regulation than we have now (not necessarily by the state; see Chapter 10), and therefore without greatly reducing the scope for market forces.
Chapter 4 referred to the way the theory assumes that humans are naturally self-interested competitors seeking to maximise gain, and to how misleading this is. But humans have strong dispositions to be cooperative, to share and be altruistic and to help each other. (Kropotkin 1902, Bregman 2020.) Once more we see emphasis on a view about the nature of things which reinforces the tendency to accept as natural the competitive economy which works mostly in the interests of the rich.
To summarise, conventional economic theory is basically only about an economy in which things are produced to sell at a profit, only monetary costs and benefits are taken into account, outcomes are mostly determined by market forces and competition, and some people have capital and they are allowed to decide what to produce in terms of what will most enrich themselves. Many economies do not have these characteristics. It is, in other words, only a theory about capitalist economics, not economics in general.
Consequently, thousands of students studying economics think they are learning about what happens in the economic realm of human behaviour and experience, but in fact they are only learning about what happens in one type of economy, and they are also learning that no other kind of economic system exists or is worth thinking about or is even conceivable. What they are learning is the view of economics that it suits the owners of capital to have us accept.
Conventional economic theory must therefore be seen as an ideology. It provides an account of a realm which puts things the way a particular group want you to see them because that will lead you to accept and endorse ideas and practices which are in their interests and not yours. In Foucault’s terms it is a “discourse”, a frame or vocabulary or set of definitions for discussing the field which mislead us to accept interpretations that suit particular interest groups and disadvantage others.
This is not to say that it is all a deliberate conspiracy. Often the dominant or taken-for-granted ways of thinking in a society fairly automatically come to be those that it suits the dominant class to have everyone believe. Those in power tend to talk and theorise only in the ways they see things and want others to see them, so it is not surprising that all people come to accept these ways of thinking without question. As Marx put it, the ruling ideas in a society tend to be those of the ruling class. Usually even the ruling class sincerely believes the dominant ideology. There was a time when kings as well as serfs believed kings have a divine right to rule. In our society people are exposed to nothing but Neoliberal rhetoric so it is not surprising that they come to see that representation of the economic world as normal and the only way things could be.
Claims embodied in an ideology might all be true, while reinforcing a challengeable overall view of the field. For instance, one might point out that humans have always done a lot of competing, dominating, struggling for wealth, and killing and it is difficult to curb these tendencies. That would be to give an impression which additional information could modify or contradict. Ideologies typically select and omit in order to reinforce a particular perspective.
Conventional economists proceed as if the “hidden hand of the market” determines what happens, or ought to be left to do so, and the rewards and inequalities that result reflect contributions to produced value. They proceed as if power is irrelevant and plays no role in economics. But in fact economic phenomena are heavily influenced by the power of players, especially the big and ruthless ones, to get decisions, access, benefits, etc. through their capacity to influence the political process. This means that the correct title for the field is “Political Economy”.
There are tribes in which the priests or the elders or the men have more privileges and authority enabling them to have the best parts of the animal to be eaten. Consider the extremely high fees lawyers and specialist doctors can charge because such groups have the power to set their fees as high as they like. The fees are not set by competition in a market. Pensioners, the disabled and poorly educated people have negligible power to influence what happens in our economy. In our society the rules of the economic system give far more power to those with capital. Many of the biggest and most juicy economic prizes are monopolies given to one corporation by government, for instance in telecommunications, mining, toll roads, gambling, and media fields. The licence to begin a new mine is allocated by government to a single corporation, so there is scope for all sorts of non-market forces to be brought to bear to affect the decision, such as campaign contributions and threats to withdraw investment.
It is not possible to analyse what happens in an economy satisfactorily without considering these power phenomena. They involve much more than getting favourable policy decisions out of governments because power is also exercised to set the rules of the game. The most important rules have been those the Neoliberals have pushed through in recent decades to get rid of impediments to investment. You will not understand what’s going on in an economy if you attend only to market phenomena.
All this is a serious indictment of the economics profession, especially the academics who theorise and teach. How can it be that theories and practices that are often so patently unsatisfactory, indefensible, misleading, unjust and socially damaging and that have had such catastrophic consequences on the lives of billions of people on the planet, have gone so unchallenged? There is relatively little fundamentally critical discussion of the nature of the “discipline”. This is quite a disturbing and puzzling phenomenon and it has depressing implications for the capacity of the human race to recognise, confront and deal with its mistakes.
Most economists have a vital interest in working within conventional theory and not questioning it, because most of them work for corporations, banks or governments whose interests are well served by the conventional way of thinking about economics. But why do the academics teach this deeply flawed doctrine, without even telling their students that it is so problematic? Universities have to attract students in order to pay their way, so schools of economics are going to teach the things that corporations and governments want students to learn, and students are going to want to learn only those ideas and techniques that will get them a good job in a corporation. The result is that large numbers graduate from economics courses without ever having been introduced to the kinds of criticisms dealt with in this book.
We should be extremely angry about conventional economic theory and those who practise and teach it. They produce and legitimise many arrangements, policies and actions that are dreadfully bad. They share responsibility for most of the chaos, deprivation, poverty, illness, waste, misery and environmental damage in the world, especially for the gross injustice generating the poverty experienced by billions of people in the Third World. The theory is also largely responsible for much of the armed conflict in the world. It legitimises the ceaseless quest for resource-intensive lifestyles and systems which generates vicious inequality and deprivation, and armed struggle for resources and markets.
Especially important is the fact that the limits to growth analysis of our global situation shows that this economic system has put all countries on a path that is grossly ecologically unsustainable. Rich-world rates of resource consumption are far higher than all could ever rise to, yet the supreme goal in conventional economics is to increase “living standards” and the GDP all the time.
Recently this kind of criticism of economics, economies and economists has increased, but the conventional juggernaut and its well-paid promoters plod on.