A customer walks into a costume shop in Nassau County of Long Island, New York, May 27. Long Island’s start of the first phase of reopening leaves New York City the only region remaining under the “PAUSE” order in New York State. Photo: Wang Ying/XINHUA

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Events in the decade since the 2008 financial crisis, such as the persistence of slow growth, the failure of conventional monetary and fiscal policies to revive economies, and the rising number of global trade disputes, have all given rise to a widespread skepticism about economics.

According to Sanjay G. Reddy, an associate professor of economics at the New School for Social Research in the US, economics underwent a phase of mathematization in the mid-twentieth century, which was driven by the idea of its becoming more scientific. During that period mathematical economic theory gained great prestige. Empirical statistical methods in economics using econometrics also underwent great development. However, over time skepticism arose about whether either economic theory or econometrics could deliver definitive results. The possibility for deriving reliable results from economic studies was questioned as a result of the possibility of arriving at diverse conclusions about important economic questions depending on the models and data employed.

In the last twenty years, as a result, there has been a shift, which has involved on the one hand a de-prioritization of theory and on the other hand the “identification revolution” (a focus on making valid causal inferences in empirical research) and the empirical turn in economics more generally, Reddy said. But more recently, there are some signs of the big questions coming back in, especially as a result of the return to political economy and institutional analysis.
 

The theory of rational expectations in the 1970s as well as monetarism and Neo-Keynesianism which were mainstream in the 1980s largely laid the foundations for modern economic doctrines, and economics since then has evolved to focus on building mathematical models, said Yan Liang, a professor of economics at Willamette University.
 

The 2008 financial crisis, however, prompted some economists to reflect on the limits of mainstream economics, Liang said. For instance, the financial instability hypothesis developed by American economist Hyman P. Minsky received some attention. Nevertheless, the 2008 crash did not completely weaken the status of mainstream economics.

There are many different strands of criticism of mainstream economics, Reddy noted. Alternatively-minded economists have often criticized what they view as the idealized character of economic models, for instance their emphasis on maximizing consumers and firms, equilibrium as an explanatory concept, and the use of various simplifying assumptions.
 

Many alternative strands of economics have focused on weakening these idealizations or building alternate foundations for models altogether, for instance through introducing the role of institutions, political economy, social norms and culture, models with heterogeneous agents pursuing but not necessarily optimizing strategies, disequilibrium processes, and so forth. “These efforts are based on the conviction that economics needs a fuller range of theoretical concepts and empirical tools to make sense of reality,” Reddy said.
 

Criticisms from within the discipline are not strong and mainstream economics is deeply ingrained, said Liang. While the 2008 financial crisis has driven some economists to question the market efficiency theory, the dominance of mainstream economics is not shaken. American economist Paul Krugman and several other scholars have questioned the policy insights offered by mainstream economics, but they still embrace its basic theories.

Criticisms from outside the discipline focus on why mainstream economics was not able to forecast or prevent the 2008 crash, Liang continued. In other words, why did the theories of market efficiency and rational expectations believed by mainstream economists fail to explain real-world economic issues? This is indeed a question that economists should think seriously about. Mainstream economists stand for less government intervention in the economy due to their belief in market efficiency. However, while market development has been significant, economic growth has been constantly interrupted by crises resulting from insufficient demand or financial instability, and economic inequality is getting increasingly worse.

 

The current outbreak of COVID-19 has exposed the hollowing out of the real economy, the tremendous debt burden of businesses and the weakness of social security in the United States, Liang noted. The slump during and following the pandemic is likely to fuel debates among economists about economic theories and policy approaches.

Unlike most natural sciences, what economists say can affect real-world economic activities, said Kaushik Basu, a professor of economics at Cornell University and former chief economist of the World Bank. People often complain that no economist has been able to predict stock market crashes or exchange-rate fluctuations. But if such an economist exists and he or she predicts a stock market to crash next month, the crash will happen immediately, because people will sell their stocks right away. This way, the very reason for the crash may be that the economist predicted it.

All science, including economics, is based on assumptions which are sometimes so deeply ingrained that their problems are neglected, Basu said. For instance, Adam Smith’s metaphor of an “invisible hand,” one of the central tenets of mainstream economics in the Western world, has been taken out of context, contorted and used as the cornerstone of free-market orthodoxy over the past two centuries.
 

“This misrepresentation has hampered our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be,” Basu warned.

Reddy noted that the neoliberal policy orthodoxies are being questioned today but we still do not have a new economics that is fully adequate to understand economies differently and to examine the various policy options that are present. There is a vital need for more interchange between disciplines as well as between subfields of one discipline, going beyond what is sometimes called “economic imperialism” or the application of economics to other disciplines’ domains.

Liang agreed that interdisciplinary research is essential and effective. “Economics rarely learns from other social and natural sciences, except for mathematics. But many disciplines, such as psychology, sociology, history and biology can be a beneficial source of inspiration for economics.”

 

edited by JIANG HONG