Is neoliberal economics a science?

or what...?

I recently overheard a colleague arguing that economics is a science. This got me wondering.

First, let’s be clear about what we are discussing. There are many potential variations on the theme of ‘economics’ but my colleague was referring to mainstream market or neoliberal economics, the form of economics let loose about a half century ago and which dominates the world economy today.

Neo-liberal economics views the economy as the set of reciprocal exchange relationships between private businesses (firms) and households, governed by the so-called law of supply and demand. In neo-liberal economies, capital – the means of production – is privately owned. Private businesses create products; households – consumers – pay businesses for those products. Households are free to purchase whatever goods and services they want from the options on offer in the marketplace. When households demand more of something, market prices tend to rise which induces firms to supply more of that something. When demand falls, then… (well, you get the picture).

Motivated by profit, businesses respond to market trends and compete for market share. This theoretically drives efficiency and innovation, keeping prices down and creativity – new products – up. Profitable businesses pay higher wages, salaries and dividends to households which the latter again spend on goods and services, keeping the now-expanded cycle going. Note that governments have a minimal role, basically ensuring contracts that are honoured – businesses see government intervention in the market (regulation) as inherently inefficient.

It is important to understand that economics is concerned with the allocation and distribution of scarce excludable goods only. These are valued goods and services for which a money price can be assigned – i.e., for which markets can be established – and which are therefore available only to those with money to spend (others are ‘excluded’). Economics is not interested in so-called public goods, including abundant resources to which anyone has access and for which use by one person doesn’t prevent use by another (non-excludable and nonrival goods). Note that, in neoliberal economies, markets effectively become the arbiters of social value; if a thing has no money price (no market), people tend to assume it has no real value.[1]

So much for economics; what about ‘science’?

Science acquires knowledge about the biophysical world through experimentation, other forms of systematic observation (data collection), and reasoned analysis. Ideally, the scientific process involves forming testable hypotheses, making predictions based on the hypotheses and conducting experiments (or undertaking statistical analyses of observational data) to test the validity of the hypotheses. Note that the proper domain of science is that which is measurable in time and space. In short, science springs from verifiable evidence from empirical observation of reality, not from faith, belief or wishful thinking. If something cannot be observed and measured, it is not subject to scientific analysis.

So, is neoliberal economics a science? To get at this question, we have to go back to its epistemological or foundational roots of neoliberal theory.

Modern techno-industrial (MTI) culture springs from the quasi-religious assumption of human exceptionalism (sometimes exemptionalism). This is the obviously unscientific, socially-constructed notion that humans are unlike other species, that we are not part of nature and not subject to biophysical laws.

Neo-liberal economics actually builds on this arguably weird perspective – which would seem to disqualify it from scientific standing from the outset. Starting with 'the circular flow of exchange value' between firms and households described above, neoliberal theory considers the economy to be separate from, and independent of, 'the environment'. (Note that the latter is not mentioned in our textbook description.) True, the environment does serve as temporary source of resources and receptacle for wastes, but its main role is as a convenient substrate and backdrop for human affairs. Economists, eco-modernists and other optimists consider human ingenuity to be the 'greatest resource'. Technology, stimulated by market scarcity and rising prices, is deemed capable of developing substitutes for any good or service provided by nature. And of course, with more and more humans, ingenuity is virtually unlimited.

Note that once one buys into the assumptions that the human economy and nature are separate systems, that ingenuity is the greatest resource and that ingenuity is unlimited, it is a short mental leap to our dominant cultural beliefs in perpetual economic growth propelled by technological innovation and that everyone – untold billions – can be rich. From here the mission becomes one of maximizing global production/consumption – and profit – by maximizing economic and techno-efficiency. From this perspective, the only thing market economics tells us about the natural world is that the natural world has no inherent value.

There are many other problems with neoliberal thinking. A major flaw is that economists generally don't test hypotheses or perform experiments. As an honest economist colleague once explained:

Real scientists develop falsifiable hypotheses and run experiments to test those hypotheses. If feedback from those experiments suggests that the hypothesis is incorrect, then the scientist accepts this judgement from the real world and revises his/her hypothesis. By contrast, economists generally create simplistic models of how they think the economy should behave and then expect the real world to conform to their models.

Ironically, led by economists, the world community has actually been engaged in one massive decades-long economic experiment – trying to force society and the biophysical world to conform to simplistic growth-demanding market models on a finite planet. This is obviously a failed experiment as shown by copious negative feedback – global heating, ocean acidification, plunging biodiversity, tropical deforestation, soil/land degradation, falling mammalian sperm counts, pollution of everything, and myriad other inconvenient ‘externalities’. Turns out that the economy, far from spinning off in splendid isolation is actually a fully-contained, dependent, growing subsystem of the non-growing ecosphere (aka ‘the environment’) – which it is effectively parasitizing and depleting. Externalities – meaning outside the market – is a distancing fudge word used to describe real costs that are not included in consumer prices. Indeed, they can’t be since the affected values are not even recognized by markets. Since such costs are not reflected in consumer prices, virtually everything we purchase is underpriced and thus over-consumed.

To bad for the ‘external’ world. This one-off real-world experiment in continuous growth shows the human enterprise to be in potentially catastrophic ecological and demographic overshoot. There are too many people consuming and polluting too much. And, of course, we still also have egregious inequality, a yet-widening income gap, and persistent poverty. It seems our prevailing economic paradigm is no better at representing social concerns than it is ecological values.

Biologists, physicists and other ‘hard’ scientists accept this measurable real-world feedback and urge the global community to reject the 'exceptionalist' and 'infinite growth' hypotheses as well as the notion that free market prices can be an adequate determinant of meaningful value. Revise your economic models!

Mainstream economists – and the world community – respond by doubling down on their disastrous creation. They argue that we need more growth to provide the wealth necessary to fix 'the environment' and eliminate poverty. They are also vocal pro-natalists, bemoaning falling birthrates/populations as leading to economic disaster. Some even argue we need more growth and wealth so humanity can eventually abandon what is becoming the shell of a shriveled planet.

So, what do you think – is growthist economics a science or does it play out more as wonky religion?

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[1] Oscar Wilde once quipped that a cynic was someone who knows the price of everything and the value of nothing.