Tuesday, June 19, 2012

Reinert's Critique on Modern Economics

Standard textbook economics is created as an abstraction from an economic scenario in the same way that the game of chess is created as an abstraction of a war scenario. But just as the war in Iraq is not solved by referring to the rules of chess, the problems of world poverty are not solved by referring to an economic theory that does not contain key variables from factual knowledge. 
-- "How Rich Countries Got Rich" by Erik S. Reinert p. 34

The way economics was formalized following the Second World War further strengthened the weak points of Adam Smith's theory. While economists in the inter-war period switched between open-minded common sense and self-referential models, economics became ever more introverted. Not being able to formalize Sombart's main driving forces of capitalism - not being able to reduce them to numbers and symbols with the toolbox - they were simply left out. This is another example of economics proceeding along the path of least mathematical resistance and away from relevance. [...] The ones suffering from the regime of simplistic models were the poor and the weak.
The economists gradually lost their earlier ability to move between theoretical models and the real world and correct the models when they obviously went against ordinary common sense. Faraway countries and races who had no political power were the victims of this development; in countries like the USA politicians saw to it that the theory was not used if it went against the interests of their own country. Pragmatism ruled at home, and high theory ruled abroad.
Combined with a general lack of knowledge of history, this led to what Thorstein Veblen had diagnosed as contamination of the instincts: an irrelevant education leads to an inability to communicate with what practical people see as 'common sense'. Astonishingly enough, a committee from the American Economic Association in 1991 pointed out the problem of universities producing 'well-educated idiot' economists: 'graduate programmes (in economics) may be turning out a generation of too many idiots savants, skilled in technique but innocent in real economic issues': graduate students could not 'figure out why barbers' wages have risen over time', but they could easily 'solve a two-sector general equilibrium model with disembodied technical progress in one sector'.
-- "How Rich Countries Got Rich" by Erik S. Reinert p. 122 - 123
The risk with globalization is that the value chains of production are broken up in such a way that the rich countries take all the high-skill jobs, while [lower-skill] activities are farmed out to poor countries. Poor countries tend to specialize in the economic activities which rich countries can no longer mechanize or innovate further, and are then typically criticized for not innovating enough.
The price of the monopoly power of an extremely abstract economic theory is in reality carried by the poor.
-- "How Rich Countries Got Rich" by Erik S. Reinert p. 39



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