The Australia Institute ran a training day on economics for conservationists at the 60L building last week. I popped my head in afterwards because I was working just upstairs at the Australian Conservation Foundation. As Richard Denniss and I were explaining the fallacies and simplicity of many principles still taught in economics, a lady asked us if these concepts (at the time we were talking specifically about ceteris paribus) were still taught. As any undergraduate would know, they most definitely are.

Several books look at this including Zombie Economics, Debunking Economics, The New Paradigm in Macroeconomics, Meme Wars and more. Similarly, lots of think tanks are focused on an alternative economic narrative such as the New Economics Foundation and The Institute for New Economic Thinking.

So then why do so called neo-classical ideas persevere and why do schools of thought such as the famous “Chicago school” come to dominate political and public opinions of the profession?

According to Kalle Lasn, author of Meme Wars: The Creative Destruction of Neoclassical Economics, “old paradigms”:

cannot be replaced by evidence, facts, or “the truth”… it will not be thrown out because its forecasts are wrong, its policies no longer work, or its theories are proved unscientific. An old paradigm will only be replaced by a new one when a group of maverick scientists orchestrate a coup and throw the old-school practitioners out of power.

Strongly worded stuff but that is from the founder of Adbusters Magazine after all.

Where do I stand on all this? Although I think Lasn is onto something, i don’t think it’s necessarily the ideas that need changing in economics, but rather the use of the right idea to solve a particular problem.  In-fact, I think the whole debate about the failure of economics that seems to be popular in public opinion lately is falling into this trap itself.

Solving a problem begins with defining the problem and then asking the right questions to understand the causes of the problem. So just what is the problem that people calling for a paradigm shift are incensed about?

• Rising inequality? Welfare economics and a variety of indicators (e.g gini) and measures of progress can identify these problems.
• Poverty? Plenty of great work in the area of developmental economics and by economists such as Jeffrey Sachs.
• Financial crises? Plenty of economists have called out bad policies that lead to bubbles of a scale that were potentially avoidable.
• Environmental degradation? Ecological and environmental economics have plenty of tools to analyse and potentially rectify this.
• The financial sector? The economics of monopolies or oligopolies predict much of the rent seeking we observe. And individual incentives explain much of the individual behaviour of staff within these companies.

With the right economic tools at our disposal to answer many of the questions some parts of society are incensed about, why do we still see poor economic outcomes? I believe that at least one reason why we see poor economic outcomes is because most practicing economists are not actually acting in the interests of economy as a whole but rather a particular economic agent (i.e. an interest group).

In theory, the public interest is the domain of public policy and economists in various Government departments. In practice, project assessments are typically performed by the economic agent that stands to benefit from the project with oversight and input from somebody truly concerned with maximising welfare (consumer and producer surplus). As a result we most commonly see a zero sum game played whereby one sides gain’s are offset by another’s losses. The ultimate outcome is a death by a thousand cuts for the environment and society.

The real problem with economics lies in the area of politics and incentives, not in economic theory itself. More anger has to be directed to bad policy that doesn’t make economic sense (e.g. the drug war). In other words, don’t blame the toolbox, blame the people misusing and abusing the tools.

Note on the term ‘zombie’ as applied to economics:

As far as I’m aware, Paul Krugman was the first person to refer to the term ‘zombie ideas’ in relation to economic policy. Here are some links to articles he’s written on the theme for anybody who is interested in some further reading. Interestingly, in his 2010 article. Krugman doesn’t blame economics itself (why would he?) but promoters of ‘zombie ideas’.

• All the President’s zombies (August, 2009)
• When zombies win (December, 2010)
• The Ultimate Zombie Idea (November, 2012)

 On the ease of selling simplicity:

In order to keep my blog above clean, I have left out something that I think plays a critical role in the perseverance of zombie economics. Simplicity. Simple is always easier to sell than complex. And most zombie economic ideas tend to oversimplify the world they seek to explain or the solution to a problem. Complex issues require complex solutions, and selling complex solutions in an era of short attention spans (and perhaps more importantly, political cycles) is difficult.