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Philosophy For Our Times
Why the neoclassical philosophy of economics is fundamentally flawed | Abby Innes
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- [00:01]
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- [00:58]
Abi Innes
N. An early name, a kind of early label for neoclassical economics. Mathematical economics was social physics, because the idea was that this is effectively what they do. They effectively cut and paste Newtonian mechanics and exchange the idea of energy in Newtonian mechanics and swap it out for utility in order to have this sort of scientific mathematical approach. And the aspiration is a really human one. I think the aspiration is to say, look, there's all this, you know, conflict and poverty and endless metaphysical horror, if you like. Imagine if we had a science that could solve it.
- [01:49]
E.B.
Hello, and welcome to Philosophy for Our Times, bringing you the world's leading thinkers on today's biggest ideas. My name is E.B.
- [01:56]
Daniel
and I'm Daniel. Today's episode is a conversation with Abi Innes, Associate professor of Political Economy in the European Institute at the London School of Economics. Much has been said about the current state of Britain and its economy, but Abby comes at it from an incredibly unique angle, arguing that the country's current economic issues mirror those of the Soviet Union as it transitioned into neoliberalism. In exploring this, she'll look at how a Kantian philosophy of science can help to explain why the neoclassical approach to economics is fundamentally flawed, why depoliticizing economics is an impossible ideal, and how pluralism may be the answer to our country's economic woes.
- [02:36]
E.B.
With all that said, let's hand over to Harry Carlisle as he interviews Abby Innes.
- [02:49]
Harry Carlisle
Hello, Abby. Welcome to how the Light Gets In.
- [02:51]
Abi Innes
Thank you very much. I'm very happy to be here.
- [02:53]
Harry Carlisle
So your work covers this curious connection between the Soviet Union and the modern British government, which is quite counterintuitive.
- [03:01]
Daniel
So could you Give a little brief
- [03:02]
Harry Carlisle
summary of how you've come to this conclusion.
- [03:05]
Abi Innes
I can. So the title Late Soviet Britain is very bizarre. And it's not what I thought I was going to be arguing when I started the book. So when I started the book after Brexit, I thought I was going to be writing about state failure, because the intuition I had was that Brexit was the wrong diagnosis of a real crisis, and the real crisis was a crisis of the British state. So when I first started working on it, I was looking at failures in things like public sector outsourcing, quasi markets, in the welfare state and at the new public management. And the thing that became really strange was that the more I looked at it, the more I thought these failures are really familiar. And they were familiar to me as someone with a background in the old Soviet system and in the post Soviet transition to neoliberalism. And so my next thought was, well, that's insane, they can't be the same. Neoliberalism is the opposite to the Soviet system. How on earth can I be seeing these pathologies that seem so familiar? And then I realized that the book was going to be much longer than I thought, than I was expecting when I started it, because I realized that to make sense of that, I was going to have to drill all the way down into the metaphysics behind Soviet and neoliberal economics. And the more I did that, the more I understood that they were effectively mirror images that Stalinist economics specifically, and the mathematical formal neoclassical economics which is the basis of neoliberal policies since 1979, they're effectively both machine models of the economy. They both operate with sort of closed system reasoning about the possibility of a completely efficient system, whether that's a completely efficient social plan or a completely efficient market. And then the dark historical joke is that they necessarily converge on the same statecraft. Because if you believe you live in a computable world, then the methodology of organizing the state is a methodology of quantification and output planning and forecasting, and the assumption that if you design regulations in the appropriate way, enterprises will only ever work in a way that is socially productive. And so this took me down a philosophy of science route, eventually backwards induction that I needed to use to explain why closed system deterministic machine models of the economy can't work in a human society. That is an open ended system that cannot escape the uncertainty that we live with because the world is always becoming something else. So there's a philosophy of science argument at the beginning of the book which is pointing out that you would need godlike omniscience to be able to solve the riddle of history and say we have a governing science that is good for all times and places, that can govern an economy in a fully efficient way. And what the Kantian tradition in the philosophy of science would say is, you can't do that. You can't escape the history of your own curiosity. Every theory we have is built on the back of the theories that came before. You can't suddenly transcend that. So there's some kind of Archimedean point where you can read the world clearly. And even if by some miracle you could bump into a perfect explanation of how we got here, the human social world is always becoming something else because we're imaginative and you get emerging novelty and complex systems. We have technological changes, so the future is always going to be different from the past anyway. And actually our freedoms live in that openness. So we should be very wary of embracing an economic science that says we have the correct science now, you can all conform to it. And that's what the book is about, is that we, not only do we fail to conform to it, it would be impossible that we could conform to it.
- [07:25]
Harry Carlisle
So this notion of philosophy, of science being so important here, it makes me wonder, why do you think the field of economics has been led so astray in the wake of the Soviet Union? It feels diametrically opposed. And yet why is there such this appeal to utopianism that can motivate economics, that has led to the same pitfalls that we have all live in today?
- [07:46]
Abi Innes
And they are diametrically opposed. I mean, in the sense that it would be outrageous on the political level to compare the kind of totalitarian, politically violent system of the Soviet Union with the free and fair elections and the liberal democracy of the British system. And the irony there is that we've nevertheless been using what is effectively a totalizing economic science. And we've done it to ourselves. We've done it without physical coercion, we've done it without revolution. It's not that there's been no political violence. Anyone who remembers the miners strike or the poll tax riots will say, well, the state has been willing to repress in particular those riots or those political demonstrations that have been very economic, but still, in regime terms, they really couldn't be further apart. What they hold in common is that they're both misadventures in high modernism. So they're both coming out at the end of the 19th century and the beginning of the 20th century and looking for Methodologies that will effectively allow us to transcend the vicissitudes and uncertainties of the social world. And it's part of the scientific revolutions in a way to say, well, the idea that there could be an absolute science, that we could have mastery over nature, that we could find the correct answer, so that we go away from the haphazard, endlessly sort of controversial political philosophy and emerging political science and ethical debates that we've had from, you know, the dawn of civilization to today, and we'll just have the answers. And an early name, a kind of early label for neoclassical economics, mathematical economics, was social physics, because the idea was that this is effectively what they do. They effectively cut and paste Newtonian mechanics and exchange the idea of energy in Newtonian mechanics and swap it out for utility in order to have this sort of scientific mathematical approach. And the aspiration is a really human one. I think the aspiration is to say, look, there's all this conflict and poverty and endless metaphysical horror. If you like, imagine if we had a science that could solve it. And actually a lot of the early neoclassicists were socialists, which is something that gets lost actually in a lot of left wing critiques of neoclassical economics slightly caricatures the fact the idea that it's all right wings, it's better understood as a methodology. And the most optimistic dogmatic users of that methodology say no, no, no, perfectly competitive markets are possible, free market's possible, people are rational, they're fully informed. But what became adopted as the Blairite tradition, actually the kind of mainstream economic tradition is more critical and says no, that's utopian, but it's a scientific heuristic which will allow us to talk about how markets fail. So then we'll have this whole methodology that allow to solve the riddle of history. We can mend market failures, we can sort out monopoly asymmetric contracting, we can solve the climate crisis by pricing nature. We can do all these progressive things by using the methodology given to us by formal neoclassical economics. My argument is that's not nearly as metaphysically neutral or as apolitical or as politically expansive as that implies. Because the idea that you can mend market failures is a fallacy. It's assuming that by mending the broken connections in a system, you're getting closer to the horizon where everything is complete and competitive, perfectly competitive markets.
- [11:43]
Harry Carlisle
A market failure implies it can be fixed exactly.
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Abi Innes
And that is a category error. It's a confusion of something that is logically valid with something that you can reproduce in the social world. And we've spent the last 45 years trying the first, best version, finding that none of it works in the terms by which it was justified. Privatization, deregulation, all of these things had effects, but they weren't the effects we were told they were going to be. And then the next generation, as it were, Cameron's generation, the Blairite generation, the New Democrats in the U.S. the European Commission, I mean, you know, pick your institution, pick your party, has basically spent the last sort of 25 years trying to mend the market failures and being increasingly baffled that all those institutions continue to evolve with dynamics and pathologies that neoclassical economics can't even describe, let alone solve. And what they're ignoring is the fact that the later decades of the Soviet Union were spent with talented, brilliant economists, Russian economists and Polish economists and Hungarian economists, trying to figure out how to mend the broken connections in a planning system that you could never make complete. So the later generations of neoclassical economists, like their cousins in the Soviet bloc, spend their lives trying to solve information failures on the misunderstanding that this is something that you can do in a world that is evolving and always becoming something else.
- [13:25]
Harry Carlisle
So I thought something interesting that happened today on one of the panels was Will Hutton, the former editor, observer, labor grandee, so to speak, criticized you for straw, Manning.
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Abi Innes
Yes.
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Harry Carlisle
The old position on the fishermeager hypothesis, that it doesn't apply to reality. Why do you think the left has this blind spot for the methodological problem when they. Because they must, well, believe that they are doing something distinctly different to the libertarian right.
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Abi Innes
Yeah, and they are.
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Harry Carlisle
But there is this underlying methodology and utopian ideals that still encaptures the way they think.
- [14:00]
Abi Innes
So I think there are several aspects of that, and I think almost the most damaging aspect of these kind of high modernist philosophies, but neoclassical neoliberal economics is it has got us entirely used to the idea that there are technical solutions for social problems. So the idea that you can depoliticize economics, it's such a lovely idea. I mean, it's back to the origins of neoclassical economics. Imagine if we could have a methodology that would take us to a world of perpetual peace, or that would, in the Blairite terms, the third way terms, get the best of markets and states. Right? Where you could use the state to regulate markets so effectively and efficiently that the state would only have the function of making a presumptively mendable system mended and efficient and effective. I mean, it's a great dream, but it's a utopian dream. But it is so ingrained. I Mean if you're an economics graduate, this is what you learn in your economics degree. The Treasury Green book that defines the decision making processes across all government departments is a neoclassical second best world green book, that is that methodology. International financial institutions use neoclassical reasoning. Central banks use dynamic stochastic general equilibrium models that are effectively general equilibrium models that use the idea of the representative agent. You have rational expectations models that are also used by central banks. The irony being that rational expectations model started life as a technical idea that everyone in the model shares the same knowledge about the system as the modeler and it allows the modeler to come up with kind of probabilistic arguments out of this model. They often use an idealized social planner as the model and the originators. People like Thomas Sargent in Rational Expectations Models talks about the communism of models, literally because they are the idea that everyone in the system understands the system and it's a perfect system of coordination, no information gets lost. So these models, these way of reasoning way through things, these way of building forecasts, integrated assessment models for climate change also have these methodologies. It's a very windy answer to your question, which is basically why do social democratic parties cling onto this methodology? Because without it we'd be starting again. I mean we would really be stripping out the governing science that we have institutionalized in almost every single economic agent in the country, whether that's government or banks or financial entities or credit rating agencies or corporations or consultancies. And I don't want to argue that neoclassical economics is useless. It's around asymmetries in contracting. It can be very insightful. If you're looking at simple markets where you can reasonably coherently say that there are repeated phenomena, that you can isolate the generative mechanisms in that story, then neoclassical reasoning can be very insightful after the fact. It can let you rationalize what may have happened or what may happen repeatedly in certain circumstances in a way that is, is insightful. But the idea that it is a sufficient governing science is unsustainable in the philosophy of science. And if you look at the state of Britain today, I think it's also unsustainable socially and politically. I think it is taking us very deep down a rabbit hole that we should escape.
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Harry Carlisle
Do you see this ending in a Soviet Union esque tear down this wall situation? Or is this, is there a way we can navigate past it? Because of course we've been teaching reams of economists for years and years and years and this theoretical approach, and it's in every government, every institution as you say, and it makes government easier. Like if you have that model, you just plug in the figures and you plug in your problem and it comes out with a little solution. And the solution may be wrong. Yes, but it's a handy little way of doing it.
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Abi Innes
Yes.
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Harry Carlisle
So what is the alternative and how can we change it without tearing down this wall?
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Abi Innes
Yeah, it's a great question. I mean, because neoclassical arguments are arguments from assumption. They're axiomatic deductive arguments. They're arguments from logic. They can't be wrong in the sense that they're as impossible to refute as they are to implement because they are forms of logical reasoning from assumption rather than what we think of as the scientific method, which is theorization from observation and continuous review. Right. We live in a system where without being too facetious, you could think of Thatcherism as like Leninism. Right. It's the point of revolutionary idealism. And then it didn't work the way it was supposed to. And so there were attempts to be more socially inclusive and to have. So we get into the mending market failures idea. So sort of Blairism puts us into a world of sort of Krustovite. They're the Krustovites in this system, but as in the Soviet system, because that too doesn't work the way it's supposed to. Blair and to a lesser extent Gordon Brown. But the Blairite government spent a decade mending market failures only to find that by continuing to decant authority and revenues into the private sector and the financial sector, that then proceeded to not behave in the virtuous ways that we would have assumed. Although certain things did improve. I mean, sure, start things like that that are outside of that paradigm were brilliant and genuinely improved things. And mending market failures was better than not mending market failures. But we still got into deeper and deeper structural problems. What the conservative governments of the last 14 years have been like is neoliberalism, the Brezhnev years, right? Where you basically give up the attempt at really reforming it and you end up with a kind of neo traditionalist attempt to just sing the old songs and hope they're going to work. I have a deep hope that labor sooner rather than later will recognize that they are pulling levers and mending market failures and getting none of the responses that they think are going to happen. So my fear is that at the beginning Labour might have, because I think it still is in this technocratic mindset. My fear is a kind of good chaps version of government that says, but we understand the market failures. And so we're going to apply that methodology and then things will improve. But like the late Soviet system, British capitalism at this point bears absolutely no resemblance to any of the promises that were made for it by the Thatcher revolution. And between excessive financial extraction out of the economy and the excessive power of the financial industry, which by the way, closed system reasoning can't even integrate into most of the models. The models we use to calculate tax breaks under Osborne are exchange models, actually originating with a Soviet economist called Vasily Leontief. But those were the computational gentle equilibrium models that the treasury used. Anyway, you can't even bring the financial markets into those models because it's just too complicated. So they're not even in the picture. So we're in a world where the cost of living crisis, the fact that we have 4 million children in abject poverty, the fact that we have financialization, the fact that we have corporate state capture, none of these things you can diagnose with neoclassical economics, but they are what is driving both poverty and alienation from democracy. They are what is encouraging the rise of anti system parties. So it's an extraordinary situation because all this has happened in an open society with open debate. And I think we don't understand the extent to which we are operating in an analytical monoculture in economic terms. And there's a lot of brilliant experimentation and very different ways of doing things happening really is a coping mechanism in a lot of cities and communities which don't follow any of this rubric and they are discovering, rediscovering a way of doing economics which is much more empiricist, it's much more about social purpose, it's much more inventive. It understands that the economy is much more like an ecosystem than a watch. And so the question for me then becomes, how do you mainstream those attitudes and encourage those with authority to say, oh, we can't make the machine work the way theory is telling it's going to work and that it will look outward and it will look for those new ideas, because at the moment it does that, it will find that the country, and this would be true in Europe, it would be true in the us, it would find that those ideas are there, It's a matter of bringing them into the conversation. And I think those people are there. In the Labour government, I would put Ed Miliband in that category in terms of being more kind of analytically open minded. But the risk is that there is this available toolkit and it is very seductive because it tells you that there are answers to questions that are really complex. So the very worst thing we could do would be to say, the old science is dead, long live the new science. Because what the philosophy of science would tell you is there ain't no such thing for the social world. So what you need is to go, which is actually a relatively easy thing to do. You need to embrace analytical pluralism. You need different perspectives in the room. And I think as soon as you started to make policy on the basis of a bigger plurality of perspectives, ideas, solutions, things would start to improve pretty much instantly. Because I think we've scraped the barrel to the miserable stones underneath of this paradigm. And if we shift away from it in incremental, experimental, creative ways, everything will improve. And I. I say that because it's hard to imagine how they would get worse. And the way they would get worse is if people decided that what doesn't work is not the economy, it's democracy. So the real risk is that we give up on democracy before we give up on a paradigm that was misconceived from the beginning.
- [24:57]
Harry Carlisle
Keir Starmer, is he a Brezhnev or a Khrushchev?
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Abi Innes
He's not an economist.
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Harry Carlisle
Rachel Reeves, then.
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Abi Innes
And what worries me is that it's going to take some courage at the top to admit that we are at the end of a particular road in terms of the way we think about the economy. And Rachel Reeves, who is a profoundly smart woman, was brought up through the bank of England, and the bank of England is an essentially neoclassical economic institution. And so it would take. And I think she's more than capable of it. But the question is, at what point will she say, my training and the treasury in front of me and all the advice I'm getting from the mainstream economists that I'm using is not fit for purpose. And that's a political decision.
- [25:42]
Harry Carlisle
Well, let's hope she's a Gorbachev instead.
- [25:45]
Abi Innes
The trouble is, look what happened to Gorbachev. Right, of course.
- [25:48]
Harry Carlisle
Well, thank you, Abby, and thank you for coming to how the Light Gets In.
- [25:51]
Abi Innes
You're welcome. Thank you. That was fun.
- [25:58]
E.B.
Thank you for listening to philosophy for our Times. What do you think? Do we mistakenly treat economics as an exact science? Do you agree that attempting to depoliticize economics is futile or even harmful? What do you think, Daniel?
- [26:11]
Daniel
What particularly stood out to me was Ennis idea that we're misdiagnosing the economic issues which our country is facing with so much time spent pointing fingers at different groups rather than exploring how the very logic behind our economic system may be the root cause.
- [26:26]
E.B.
If anyone listening has any thoughts they'd like to share on this episode's issues, we'd love to hear it. You can either get in touch via the email in our show notes or by leaving a comment on whatever platform you're using to listen to this.
- [26:38]
Daniel
And I promise we do read them well.
- [26:40]
E.B.
Keep them coming and like and subscribe for more episodes like this. Or head over to our website IAI TV for thousands more brilliant debates, talks and interviews from the world's leading thinkers.
- [26:53]
Daniel
Bye Bye
- [26:57]
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