Limiting your options to the established school of thought is a false economy. Ha Joon Chang explains how more is more when it comes to shaping economic policy.
Thanks in large part to student campaigns following the 2008 global financial crisis, economic pluralism has been placed firmly on the political agenda in universities across the world. I say political agenda, rather than academic agenda, because many academic economists are still in denial and insist that marginal tinkering to the dominant Neoclassical framework will be sufficient to address whatever is supposed to be the problem with economics. Some of them don’t even seem to be sure what the problem is.
Even though few schools of economics other than the Neoclassical one get a mention – not to speak of being properly taught – in today’s university economics curriculum, there are several others.
In my 2014 book, Economics: The User’s Guide, I discuss nine schools of economics: the Classical, the Keynesian, the Marxist, the Neoclassical, the Austrian, the Developmentalist, the Schumpeterian, the Institutionalist and the Behaviouralist schools. However, there are several less prominent (although not necessarily less important) schools of economics, such as the Latin American Structuralist, the Evolutionary, the Neo-Ricardian, the Feminist, and the Ecological schools. If we also split some schools into sub-schools, the number of schools of economics could easily reach a dozen and a half – for example, the Institutionalist school can be split into the Old Institutionalist school (of Veblen, Commons, and Mitchell) and the New Institutionalist school (of Coase, North and Williamson).
These different schools have different strengths and weaknesses. This is because, first of all, they are interested in different things. For example, some schools, including the Classical, Marxist, or Developmentalist ones, are more interested in production, while others such as the Neoclassical or Austrian economists are more interested in exchange. Second, different schools conceptualise the economy differently. For example, some – such as the Classical, Marxist, and Keynesian schools – see the economy as being made up of classes, while others, typically the Neoclassical and Austrian schools, see them as collection of individuals. However, the Austrians, unlike the Neoclassicals, see the individuals as products of society as do the Behaviouralists and the Institutionalists. Third, different schools make different assumptions about technologies, human motivations, and institutions and therefore have different theories of how the economy works.
Economists belonging to the dominant Neoclassical school treat other schools of economics as, at best, historical relics that are not relevant anymore and, at worst, as the economics equivalent of pre-religious superstitions. They argue that the Neoclassical school is dominant because it offers the best theories.
However, this view assumes that it is possible to settle debates between different theories in economics in the same way in which we can in subjects like mathematics, physics, and chemistry. However, debates in economics cannot be settled like the ones in natural sciences.
First of all, unlike sub-atomic particles or chemical compounds, human beings have free will, ethical values, and even imagination, which makes it impossible to understand and predict their behaviours in the exact way in which you can with particles and chemical substances.
Second, we cannot conduct experiments in economics in the way we can in physics or chemistry. The human costs and the ethical problems involved in large-scale economic experiments are unacceptably high – recall the enormous human costs of many economic policy experiments, ranging from the Soviet central planning, the IMF-World Bank Structural Adjustment Programme in the 1980s and the 1990s, and financial deregulation and trickle-down economic policies since the 1980s. There are smaller-scale experiments that have lower such costs, like the running of “games” in “laboratory conditions” or randomised controlled trials, but they cannot be generalised in the way experiments in natural sciences can be.
Third, the practice of economics is intricately linked with money and power, so a particular economic theory, or even a whole school, can become dominant for reasons other than its intellectual merits. A theory that favours the powerful and the moneyed may establish dominance due to greater political support and research funding, even if it is weaker than other theories at least in some respects. The best examples are the economic policies based on trickle-down economics, especially tax cuts for the rich and deregulation of business, which have been pursued in the US and many other wealthy countries in the last few decades. Contrary to the theoretical prediction, these policies have failed to increase investments as a share of GDP and growth rates. Despite that failure, they are still pushed by various governments as routes to prosperity. In other words, an economic school’s dominance does not necessarily imply that its theory is intellectually superior.
Now, some may say that, while learning different schools of economics may be fine for academic economists, it is a luxury for policy economists, who need to take quick and decisive actions. However, the study of diverse schools of economics is actually very important for policy-makers.
By studying different schools of economics, policy-makers get to see the economy differently.
For example, when you study Keynesian economics, you get to take the role of finance in macroeconomics seriously. If you also add Behaviouralist theories to your theoretical arsenal and further refine your understanding of the financial sector, you will see macroeconomics very differently from what is portrayed by the Neoclassical perspective.
For another example, the Schumpeterian, the Marxist, and the Austrian schools see competition as a process, rather than as a state, as the Neoclassical school does. Marxists and Schumpeterians especially emphasise the productivity-enhancing power of oligopolistic competition through technological innovation. So, if you were informed by these views on competition, you would see the limitations of the Neoclassical theory of competition in designing anti-trust policies.
For yet another example, the Behaviouralist school and the Old Institutionalist school (but not the New institutionalist school) emphasise how institutions are not just constraints on human behaviour but also shape human motivations. This suggests that institutional reforms, which then change people’s motivations, may be far more effective than fiddling with incentives under given institutions in changing economic agents’ behaviour – at least in the long run. If you learn Marxism, which emphasises how institutions are shaped by material conditions, you can see that sometimes the most effective way of changing people’s behaviour is to change their material conditions through economic growth and redistribution, rather than psychological manipulation or even institutional reform.
For a final example, in looking at economic development, the Developmentalist and the Schumpeterian schools emphasise the importance of changing productive capabilities, many of which are developed at the level of productive enterprises. So, if you knew these schools, you will design your national development policy or, if you are a donor country, your foreign aid programme in such a way that gives priority to the development of productive enterprises over investments in ‘human capital’ at the individual level.
Knowing different schools of economics not only makes you see the economy differently but also makes you see different things about the economy.
For example, unlike other schools including the Neoclassicals, the Marxist school has emphasised the oppressive nature of work under capitalism and the importance of work in self-realisation of individuals. Neoclassicals would have it that just wages and working hours matter greatest. But Marxism highlights how the nature of work – how interesting it is, how oppressive the monitoring is and the control the workers have over their work processes – matters in improving human welfare.
There are other examples. Once you learn the Classical, the Marxist, the Developmentalist, and the Schumpeterian schools, you begin to realise the critical role of production in economic life, and not just consumption and exchange, as emphasised by the Neoclassical school.
And when you learn the Behaviouralist school, you realise the limitations of the Neoclassical view that increasing transparency is a solution to problems in all sorts of areas – ranging from financial regulation to the imposition of ethical standards for consumption goods. However, the Behaviouralist school’s concept of “bounded rationality” makes you realise that very often the problem is not the lack of information but the limited human capabilities to process information. The solution, then, should be sought in simplifying the system, by restricting or even banning certain activities such as the creation of overly complicated financial products or the use of unethical practices in production, rather than increasing transparency.
So there is a plurality of legitimate approach to understanding economic problems. And learning all the different schools of economics would be highly useful not just for academic economists but also for economists working in the policy-making world.
Given that different schools of economics focus on different things, with different views on how the economy works, learning different schools of economics can not only help policy-makers understand the economy differently but it can also help policy economists see and analyse more problems than a single school – such as the currently dominant Neoclassical school – can teach them.
Pluralism in economics is not a luxury that only academics with the time available can afford. It is a necessity, if we are to enable people and policymakers to make the world a better place with the help of, among other things, well-designed interventions.