Economics: Death of a failed science

There has been much discussion in the UK in recent days over the surprising rise in retail sales and fall in unemployment even though GDP figures indicate a ‘double dip’ recession. Some useful insights emerged in a London School of Economics blog, but this only skirts around the issue.

It is more likely that the decades-old yardstick, Gross Domestic Product, with its national focus and mechanistic terms of reference, is unsuited to a globalised world, including internet-based trading. It is dangerously flawed as an indicator of ‘growth’ as it does not take into account deficits and borrowing. Its use as the misleading indicator of ‘growth’ or ‘recession’ acts as a spur to politicians seeking debt-fuelled credit booms. Pressure is now building for governments to repeat their mistakes of a decade ago.

In New Normal, Radical Shift we argue that the profession of economics has failed, and that its assumption of the economy consisting of money, with people supposedly behaving like commodities, is a fundamental conceptual error.

Take the Wikipedia, textbook economics entry on the labour market and its impact on inequality. For ease of reference, we have altered the layout of the section in order to place each sentence on a separate, numbered line. It asserts:

1. Wages work in the same way as prices for any other good.
2. Thus, wages can be considered as a function of market price of skill.
3. And therefore, inequality is driven by this price.
4. Under the law of supply and demand, the price of skill is determined by a race between the demand for the skilled worker and the supply of the skilled worker.

Under the new normal perspective, there are certain problems with these assertions, which are:

1. No, they don’t.
2. No, they are not.
3. No, it is not as simple as that: a major determinant of reduced inequality is the calibre of organizational management and its ability to develop skills, teamwork and successful enterprises based on cooperation.
4. This may be approximately true over short time periods in some contexts, but is seriously inadequate as it assumes that aggregate skill levels remain constant over time, and that the capability of all workers with an identified skill is the same.

Old normal economics has failed. It is not suited for the new normal world. Labour is not a commodity. The labour market does not follow laws. GDP does not measure growth. The economy does not consist of money.

Summary of New Normal alternative is here.