Why and how economics must change: IMF blog by Jayati Ghosh

Economics requires increased humility, a deeper appreciation of historical context, and greater diversity.

According to an IMF blog, the need for drastic change in the economics discipline has never been so urgent. 

Humanity is confronting existential crises, as planetary health and environmental challenges loom large. 

A professor of economics at the University of Massachusetts Amherst Jayati Ghosh says in her blog the global economy was already in a fragile state prior to the pandemic, and the subsequent recovery has laid bare deepening inequalities, not only in terms of incomes and assets but also in access to fundamental human necessities.

Humanity faces existential crises, with planetary health and environmental challenges becoming major concerns. The global economy was already limping and fragile before the pandemic; the subsequent recovery has exposed deep and worsening inequalities not just in incomes and assets but in access to basic human needs. 

The resulting sociopolitical tensions and geopolitical conflicts are creating societies that may soon be dysfunctional to the point of being unlivable. All this requires transformative economic strategies. 

Yet the discipline's mainstream persists in doing business as usual, as if tinkering at the margins with minor changes could have any meaningful impact.

There is a long-standing problem. Much of what is presented as received economic wisdom about how economies work and the implications of policies is at best misleading and at worst simply wrong. 

For decades now, a significant and powerful lobby within the discipline has peddled half-truths and even falsehoods on many critical issues—for example, how financial markets work and whether they can be "efficient" without regulation; the macroeconomic and distributive implications of fiscal policies; the impact of the labor market and wage deregulation on employment and unemployment; how patterns of international trade and investment affect livelihoods and the possibility of economic diversification; how private investment responds to policy incentives such as tax breaks and subsidies and to fiscal deficits; how multinational investment and global value chains affect producers and consumers; the ecological damage wrought by patterns of production and consumption; whether tighter intellectual property rights are really necessary to promote invention and innovation; and so on.

Why does this happen? The original sin could be the exclusion of the concept of power from the discourse, which effectively reinforces existing power structures and imbalances. Underlying conditions are swept aside or covered up, such as the greater power of capital compared with workers; unsustainable exploitation of nature; differential treatment of workers through social labor market segmentation; the private abuse of market power and rent-seeking behavior; the use of political power to push private economic interests within and between nations; and the distributive impacts of fiscal and monetary policies. 

The deep and continuing concerns with GDP as a measure of progress are ignored; despite its many conceptual and methodological flaws, it remains the basic indicator, just because it's there.

Inconvenient truths

There is a related tendency to downplay the crucial significance of assumptions in deriving analytical results and in presenting those results in policy discussions. 

Most mainstream theoretical economists will argue that they have moved far away from early neoclassical assumptions such as perfect competition, constant returns to scale, and full employment, which bear no relation to actual economic functioning anywhere. 

But these assumptions still persist in the models that explicitly or implicitly undergird many policy prescriptions (including on trade and industrial policies or "poverty reduction" strategies), particularly for the developing world.

The power structures within the profession reinforce the mainstream in different ways, including through the tyranny of so-called top journals and academic and professional employment. 

Such pressures and incentives divert many of the brightest minds from a genuine study of the economy (to try to understand its workings and the implications for people) to what can only be called "trivial pursuits." Too many top academic journals publish esoteric contributions that add value only by relaxing one small assumption in a model or using a slightly different econometric test. Elements that are harder to model or generate inconvenient truths are simply excluded, even if they would contribute to a better understanding of economic reality. 

Fundamental constraints or outcomes are presented as "externalities" rather than as conditions to be addressed. Economists who talk mainly to each other, then simply proselytize their findings to policymakers, are rarely forced to question this approach.

As a result, economic forces that are necessarily complex—muddied with the impact of many different variables—and reflect the effects of history, society, and politics are not studied in light of this complexity. Instead, they are squeezed into mathematically tractable models, even if this removes any resemblance to economic reality. To be fair, some very successful mainstream economists have railed against this tendency—but with little effect thus far on the gatekeepers of the profession.

Hierarchy and discrimination

The enforcement of strict power hierarchies within the discipline has suppressed the emergence and spread of alternative theories, explanations, and analysis. These combine with the other forms of discrimination (by gender, race/ethnicity, location) to exclude or marginalize alternative perspectives. The impact of location is huge: the mainstream discipline is completely dominated by the North Atlantic—specifically the US and Europe— in terms of prestige, influence, and the ability to determine the content and direction of the discipline. The enormous knowledge, insights, and contributions to economic analysis that are made by economists located in global majority countries are largely ignored, because of the implicit assumption that "real" knowledge originates in the North and is disseminated outward.

The enforcement of strict power hierarchies within the discipline has suppressed the emergence and spread of alternative theories, explanations, and analysis.  

Arrogance toward other disciplines is a major drawback, expressed for example by the lack of a strong sense of history, which should permeate all current social and economic analysis. Recently it has become fashionable for economists to dabble in psychology, with the rise of behavioral economics and "nudges" to induce certain behavior. 

But this too is often presented ahistorically, without recognizing varying social and political contexts. For example, the worm's eye randomized tests that have become so popular in development economics are associated with a shift away from studying evolutionary processes and macroeconomic tendencies, to focus on microeconomic proclivities that effectively erase the background and context that shape economic behavior and responses. 

The underlying and deeply problematic underpinning of methodological individualism persists, largely because few contemporary economists attempt a philosophical assessment of their own approach and work.

These flaws have greatly impoverished economics and unsurprisingly reduced its credibility and legitimacy among the wider public. The mainstream discipline is sorely in need of greater humility, a better sense of history and recognition of unequal power, and active encouragement of diversity. Clearly, much has to change if economics is really to become relevant and useful enough to confront the major challenges of our times.