Chapter 8. The Critique of Neoclassical Economics and its Influence on Policy Decisions

Table of Contents

Where Are We Going?
Mainstream Economics
The Long-Running Critique of Neoclassical Economics and its Limited Relevance to Policy
The Mainstream Reaction to this Torrent of Criticism
Economic Policy and Epistēmē
Idealisation in Neoclassical Economics
The Normative Use of Neoclassical Economic Idealisations
Market failure
The Flawed Assumptions of Neoclassical Economic Idealisation
Individual preferences again
Rational choices and optimisation
Pareto-optimality and welfare
General equilibrium
The general theory of the second-best
Information economics
The separation of efficiency from distribution
Game theory
The Formal Ontological Critique of Neoclassical Economics
The Appreciative Justification for Competitive Markets and its Association with Lockean Political Theorising
Economics and Economic Growth
New and Revived Schools of Economics
The Reform of Economic Teaching

Adam’s Smith’s invisible hand may be invisible because, like the Emperor’s new clothes, it simply isn’t there; or if it is there, it is too palsied to be relied upon…But let us be quite clear about the epistemological basis of the neoclassical proposition: It is not a deductive proposition…The neoclassical synthesis was put forward as dogma, an article of faith.

— Joseph Stiglitz[1]

Hitherto men have constantly made up for themselves a false conception about themselves, about what they are and what they ought to be. They have arranged their relationships according to their ideas of God or normal man, etc. The phantoms of their brains have gained the mastery over them. They, the creators, have bowed down before their creatures. Let us liberate them from the chimeras, the ideas, dogmas, imaginary beings under the yoke of which they are pining away.

— Karl Marx[2]

Where Are We Going?

Until now, I have confined my account to a critique of the historical, philosophical and scientific foundations of economic fundamentalism, pointing to general concerns about the practical value of economic theorising and the tradition of political and moral theorising of which it forms part. It is now time to turn more directly to the content of that theorising and its impact on economic policy. In this chapter, I propose firstly to make some further preliminary remarks about the influence of mainstream economics on economic policy settings. I then propose to draw attention to the long-running critique of neoclassical economics and the tendency of economists to run up the shutters in defence of their ‘normal science’. The account will then turn to the nature of the knowledge that is involved in public policy making and the stubborn search for epistēmē rather than for practical wisdom among policy advisers. The account will then move to a description of the consequences of that search for epistēmē in the form of the idealisations and unrealistic assumptions of neoclassical economics. These are falsely supposed to result in an analytical situation analogous to the experimental situations of the natural sciences.

We will then take a brief diversion into the normative consequences of that idealisation—the fact that the idealisations assumed have become normative ideals. We will then return to a more detailed description of those flawed assumptions and their implications for faith in unregulated markets. From there, we will move to the formal ontological critique of neoclassical economics, which brings together the above ideas. In the absence of a secure theoretical foundation for economic policy making and the irrelevance of recent dabbling in game theory, I will describe briefly the appreciative justification for competitive markets that the above theoretical story is supposed to underpin. We will then move to the absence of a convincing growth theory in neoclassical economics and then to a brief description of alternative approaches to economic analysis. The chapter ends by drawing attention to proposals for the reform of economic teaching.