The Need to Move Away from ‘Economic Empiricism’

Yesterday, speaking in front of the Treasury Committee, the leading figures of the Bank of England (BoE) sat and faced many questions. Whilst there were many issues discussed, particularly with regards to the Bank’s navigation of economic waters since the referendum decision to leave the E.U., it is a comment by Monetary Policy Committee member Gertjan Vlieghe that serves as the central issue for this post. Speaking rather candidly about the strengths and weaknesses of the Bank, he alluded to a much wider issue, which has ramifications for all of society; when discussing the ability to foresee economic disasters, Vlieghe said ‘we are probably not going to forecast the next financial crisis, or forecast the next recession. Our models are just not that good’. The results of the Committee’s hearings relay similar messages, like that delivered by Andy Haldane, the BoE’s Chief Economist, who stated that ‘we know that people find risk hard to understand; I find risk hard to understand’ – which is an incredible admission by one of the foremost economists in the country. But, this post will shy away from attacking economists, for the moment at least, and turn the focus towards the political elite. What we will see is that the political elite serve to function for the public via the economy (and consequently via economic thought), which may be termed as ‘economic empiricism’, as we shall see shortly.

Andy Haldane has been on somewhat of a campaign to speak as candidly as possible about the state of the economic profession. In January of this year he stated that not being able to foresee economic catastrophes like the Financial Crisis fundamentally affects the trust afforded to the profession, and that the economic models adopted failed to account for ‘irrational behaviour’ in the modern economy (which is demonstrable of the constraints of the discipline, although these constraints are rarely taken into account). This is undoubtedly true, but there is merit in attempting to ‘flip’ our focus, all the while remaining highly critical of the economic profession for its part in inflating and then rarely warning about the explosion – something which is beginning to define the modern era. For example, in the Committee hearings Jacob Rees-Mogg MP suggested that the bank should be more careful with its predictions, and that they should not present them as a ‘holy writ’ – this is true that the BoE has a certain responsibility and should take great care in administering information, but a critical question is this: ‘why should we accept, point blank, what the BoE say?’ In reality, we do not accept what they say irrefutably because, as the public are the ones who actually live within society, we assimilate information based upon a number of factors which are personal to us. The Government, however, do not do this to anywhere near the same degree; their reliance upon economics, as a discipline, to inform many areas of life which have no direct link to economics in reality, is almost absolute. This phenomenon has been referred to as ‘Economic Empiricism’ and has been debated for a long time, but essentially refers to the economic analyses of seemingly non-economic parts of life, with the approach having an almost devouring nature to it.

An analysis that may even get close to assessing the vast literature on this topic is far beyond the scope of this post, but an interesting piece by Professor Ben Fine makes note of the almost ‘colonial’ nature of economic empiricism, implying that it has long since had the capacity to colonise other social sciences. Continuing, Fine describes how there is an almost paradoxical element to the understanding because the nature of the economic discipline, traditionally, it to rely heavily upon its ‘sacrosanct’ methods without the necessary reflection and development, which is paradoxical because as the effect of this empiricism grows, i.e. the range of opportunities and the development of society accelerates as a result of its adoption, its potential for developing a well-rounded and considered approach fundamentally decreases. This fundamentally-encroaching development of what Fine labels as a focus on ‘utility maximisation’, above all else, has been described, and in the case of Nobel prize-winner Gary Becker accepted, as being akin to ‘Economic Imperialism’, as it continues to envelop the study of key elements of society like education, crime, and the core of society, the family as a unit. As this analysis cannot do justice to the study of this phenomenon, it will steer clear at this juncture, but in positioning this understanding it will be important to demonstrate the real-world demonstration of this.

In an earlier post in Financial Regulation Matters, we saw how newly-elected President Donald Trump is filling his cabinet with the elite members of the financial industry, which demonstrates the infiltration at the top levels of government by economically-trained individuals who are tasked with governing multiple elements of society. In the U.K., the Governmental Cabinet is littered with those who have studied Economics (in one form or another) including, but not restricted to: Jeremy Hunt; Liz Truss; Philip Hammond; Amber Rudd; Justine Greening; Greg Clarke; Sajid Javid; and Priti Patel. These cabinet members are in charge of areas like Health, Justice, and International Development, but it is clear to see that there is a theme running through their ideological development.

So, whilst the infiltration of economic thought is pervasive in the most influential governments, the question needs to be asked of what effect this is having. The earlier admissions by Vlieghe should demonstrate for us that economic thought is far from infallible, and in fact can be quite destructive if left unchecked – we already saw in a previous post that the effect upon society of this destructive element is now tangible, with an unforgivable spike in mortality being directly linked to the austerity measures put in place to protect against the impact of this inward-looking thought process. The purpose of this post is not to lambaste Economists, because to do so would be to miss the point entirely. Economic thought helps to expand society and deliver opportunities and a quality of life which has never been seen before in human history, but relying on that thought-process whilst simultaneously reducing the role of other disciplines is a certain way to invoke societal disasters. What is required is simple in theory, but would take a momentous change in consciousness – what is required is the increase in influence of other socially-concerned disciplines like sociology, law, politics, criminology, geography, and many more. This would increase the consideration afforded to policies that go on to effect society in every manner possible, but the crux of the matter is this – such consideration does not generate money, it generates well-being, and in this era that equation simply does not make sense to those that can initiate such change. Western society, at least, is responding to being attacked by finance by electing those who value economic thought above all else, which is an approach that is highly unlikely to bring about the security many claim they want.