The Death of the Dismal Science (1999)

From the December 1999 issue of the Socialist Standard

  An understanding of how the capitalist economy works should be essential for anyone claiming to have any influence over it, whether they be politicians or financiers. Why then is the “dismal science” of economics apparently on its deathbed—and deservedly so?

Standard economics textbooks used in schools and universities today should, in theory, encapsulate something which is of importance. They should be representative of the sum total of accumulated knowledge developed in modern times about how the market economy operates, the fruits of millions of hours of labour-time put in by a variety of economists who have observed, measured, and theorised about a system which now dominates the entire planet. This is a system—capitalism—which they almost invariably believe to be both necessary and irreplaceable.

But economists have not just taught schoolchildren and undergraduates all they understand about the workings of the market. They have provided the stimulus—and intellectual justification—for countless schemes adopted by capitalism’s political representatives for the betterment of their system. And in no period of human history have economists been more in demand, or risen to more prominence, than in the century just passing.

The twentieth century has seen the “science” of economics reach its influential zenith. As the capitalist economy has grown more complex and the role of governments within it more necessary, so have politics and economics become ever more entwined. No government is ever likely to be elected to office in the modern capitalist world without having what is considered to be a credible economic policy.

Yet here lies the paradox. Virtually all the governments in the world today claim to want to solve major social and economic problems, like poverty for instance. Most of them claim to have a coherent set of policies aimed at doing precisely this. But more people in the world live in poverty today (on whatever definition) than at any other time in human history. This seems especially strange given that total world output has, according to many of the economists, increased more than tenfold this century.

Few features of the market economy today cause greater stress and strain than unemployment. Indeed, economists have spent more time analysing this particular phenomenon than perhaps any other. Yet even in the European Union, the advanced heartland of the global capitalist system where economic analysis should be at its most developed and refined, ten per cent of the workforce is currently unemployed.

It goes without saying that the movements and machinations of the international financial system should be meat-and-drink to those armed with decades of accumulated knowledge about monetary movements, bond markets and stock markets. Yet why is it that the vast majority of these economists have systematically failed to anticipate every single crash and every single recession, ever?

Pseudo-science

As the twentieth century has worn on, so economics has moved from being the observation of verifiable phenomena and argumentation developed from this into being an entire pseudo-science which today finds expression in the construction of increasingly elaborate economic models, a practice otherwise known as “econometrics”. Econometrics must rank as the most dismal failure of the dismal science so far. Responsible for laughably inaccurate Treasury forecasts and much else, econometrics is now openly derided by many economists themselves who have now realised that what socialists were telling them at the beginning of the century was true all along: capitalism is an anarchic and uncontrollable system which has an unnerving habit of making fools out of those who seek to plan or guide its development. Paul Ormerod was one of those honest enough to recognise this in his book The Death of Economics, where he wrote that today “economic forecasts are the subject of open derision. Throughout the Western world their accuracy is appalling”.

There can be little doubt that dismal science has been a dismal failure and it is now being edged out of universities and colleges in favour of the more amorphous “business studies” where, presumably, it is hoped its inadequacies will be less apparent. In one sense, this could be construed as being an unfortunate situation for the ruling class in society. For despite its manifold failings, conventional economics had the advantage of being an effective ideological weapon for the capitalists. Economics grew up with capitalism and is essentially an intellectual defence for the capitalist system, justifying the existence of private property and essentially concerning itself with capitalism’s surface appearances, like markets, consumers and rewards to the “factors of production”.

At its very core—indeed in its first principle—conventional economics is anti-socialist. It justifies both its own existence and capitalism’s on the basis that resources in society will always be scarce. Not only this, it postulates that wants are somehow limitless too, ensuring an irreversible tendency for demand in society to exceed supply without the guiding hand of the price mechanism to ensure some sort of equilibrium. In taking this position, economics reveals itself to be the ideological discipline it really is, distorting any meaningful definition of the word “scarce” (which, like dictionary definitions, would stress its relative nature, that is, resources in relation to needs) in favour of abstract absolute concepts like scarcity existing at any point when resources aren’t infinite. It is from this entirely bogus philosophical construction that economics deduces that abundance is impossible, and that so, therefore, is socialism.

Unfortunately for socialists, the effective demise of modern economics does not necessarily mean that every single one of its false assumptions has been scuppered for ever. The view that scarcity is an absolute concept which makes the existence of a system like capitalism inevitable for the purpose of allocating scarce resources among competing uses, still lingers on. As the twentieth century closes one of the many challenges for socialists is to be able to show how a society of real abundance is now possible, and in so doing demonstrate the practicality of socialist production.

Despite economics’s paper-thin defence of private property society, it has in most other respects now become almost entirely useless, even for the ruling class. It was not always so, of course. As capitalism has never been short of economic problems its economists have long been around with their advice on how to deal with them: unemployment, crises and slumps, balance of payments problems, budgetary difficulties, income inequality, monopolisation, distorted markets, and all the social (and political) problems consequent on them.

But as the problems of capitalism have proved to be so remarkably intractable, so economics has seen its practitioners splinter into opposing camps offering conflicting analysis and advice. Even if the fundamental propositions of mainstream economics have been the same over time, the precise theories advanced by economists at any given point have sometimes varied markedly from those considered so useful in other periods. Indeed, it is because conventional economic theories have proved to have been such failures that they have been picked up and then dropped to be replaced by something else with such monotonous regularity.

What seems unique about the end of the twentieth century is that the economists do not appear to have any new theories left, just—at best—remixes of old ones. In the century now passing, protectionism, free trade, land taxes, social credit, currency inflation, currency deflation, rearmament, Keynesianism, the “welfare state”, nationalisation, indicative planning, privatisation and monetarism have all at some point been advocated by large numbers of economists as the solution to the economic problems of the time. For the last fifteen years—since the failure of monetarism—the cupboard has been bare. The present Chancellor, Gordon Brown, made his name talking about neo-classical non-endogenous growth theory, which sounds more like an affliction than a body of thought, but even that was at root more ancient than any of the theories named in the economic progeny listed above.

Alternative strategy

Given the disarray of our opponents, do socialists have any right to be smug? Of course not. While capitalism’s economists have been impotent and clueless, socialists have been an isolated minority commanding relatively little public attention or support. We have not been able to alter the course of the twentieth century in the way that we had wished and that is our greatest failure. But what we have been able to do is present to the working class a coherent alternative to the present system which has stood the test of time far better than all the theories and prognostications of the economists which have been dreamt up and then re-hashed a thousand times over. In addition, we have been able to provide a comprehensive critique of existing capitalist society, and explanations of its shortcomings, in a way few others have been able to. We have done this on the basis that it is only when workers understand the real nature of the inadequacies of capitalism that they will seriously countenance an alternative.

It was socialists who argued from the outset that poverty is endemic to capitalism as it is based on the exploitation of the poor by the rich and the maintenance of what is now an entirely artificial scarcity of resources in relation to demand. It was socialists too who claimed—in distinction to the bleatings of the economists and politicians—that unemployment is a constant feature of the market system, because:

  “As wages, the price of labour power, are regulated by the relation of supply and demand, a surplus of labour power (the unemployed) is necessary to prevent wages swallowing up all profit. Therefore the unemployed army is a vital necessity to capitalist production, and there can be no solution under Capitalism” (Socialist Standard, December 1908).

How many other comments from the pages of this journal and from a myriad of socialist writers have confounded the predictions of capitalism’s finest defenders? On everything from the periodicity of economic crises, to the crumbling welfare state, through to the unchecked excess currency issue which has been the greatest cause of the massive rise in prices since the Second World War, socialists demonstrated that the wishful thinking of reformers and tinkerers was no substitute for socialist understanding.

Even when the anarchy of the capitalist economy has rendered socialist analysis tentative in some fields, we have, of course, had an in-built advantage over capitalism’s economists. This has been our use of the body of economic theory built up by Karl Marx and other key figures in the working class movement, especially Marx’s labour theory of value and its related economic concepts. Marxian economics delves beneath the surface appearance of things in the market, to reveal the underlying “laws of motion” of the system which the conventional economists deny exist. In practical terms this Marxian approach, applied in the developed capitalist conditions of the twentieth century, led the Socialist Party to predict the failure of every Labour government from MacDonald to Blair, to outline the shortcomings of nationalisation and planning in the capitalist economy, and to debunk Keynesian economics after the war when it was considered almost heretical to do so. It was actually John Maynard Keynes, the most influential economist of the century, who claimed that Marx’s approach was “obsolete”. But what has really stood the test of time better—an approach which anticipated the failures of all the economic theories designed to patch up the evils of capitalism, or the theories themselves which failed to do just that?

As one millennium closes and another begins the chatter of the economists who have understood little and achieved even less gets more frantic; now they try to rationalise after the event phenomena they neither anticipated nor were able to prevent. Watch them squirm in the broadsheets and the supplements as the millennium draws closer. Socialists, while humble in the knowledge that we have work to do if the revolution we desire is to come to fruition, will be happy to let our record speak for itself.

Dave Perrin