How Power Shapes Economics

A Plain Language Explanation

I received a note from a non-economist who asked me what the last LL was all about. So, I have decided to rewrite it in plain language, so that non economists can better understand what I was getting at. Think of what follows as a translation (or code switch) aimed at making things plain.

The Big Picture

Economics isn't just about markets and money - it's also about power and who gets to decide what "counts" as proper economic thinking. This plays out in several important ways, affecting both how we study economics and how we make economic decisions.

The Problem with Mainstream Economics

Mainstream economics has become dominated by a specific type of economic model (called DSGE). These models have become the only acceptable way to do economics in mainstream circles. Economists who don't use these models often find their ideas ignored or dismissed from serious consideration. This behaviour is rather like having a powerful ring that can make other viewpoints disappear. What's particularly peculiar is that these models haven't earned their position through better explanations of the economy - they're simply backed by powerful institutions.

A Different Approach

There's another way of studying economics called "institutional economics" that offers three significant advantages. Firstly, it's more flexible and can examine economic problems from numerous angles. Secondly, it openly questions how power works in both the economy and in economic thinking. Thirdly, it accepts that there might be multiple ways to understand economic truth, rather than insisting on one "correct" way.

Real World Impact

The significance of these different approaches becomes clear when we look at real events. When the 2008 financial crisis occurred, mainstream economics proved unable to explain or predict it. Yet, because of its established power in universities and policy circles, it maintained its dominance. This influence extends to which solutions to economic problems are considered "realistic" and which are dismissed as impractical.

The Warning

Even alternative approaches to economics must exercise caution. When they attempt to create their own "grand theory of everything," they risk becoming precisely what they aimed to replace - too rigid and controlling in their approach to understanding the economy.

Let me expand on this important warning about alternative economic theories.

Consider it like this: When economists become frustrated with mainstream economics, they often try to create their own complete alternative system. This is understandable - they want to offer a better way of explaining how economies work. However, this creates an interesting paradox.

These alternative economists might start by saying "The mainstream approach is too rigid - it tries to explain everything through one lens." But then they sometimes fall into the same trap by trying to build their own all-encompassing theory that explains everything. It's rather like someone criticising a monopoly only to try to create their own monopoly.

Here's a concrete example: Some economists who reject mainstream theories might create a new framework that explains everything through the lens of, say, power relationships or class struggle. While these factors are certainly important, making them the only lens through which we view all economic activity can be just as limiting as the mainstream models they're trying to replace.

The irony is that in trying to break free from one restrictive framework, they end up creating another one. It's similar to what happened in George Orwell's "Animal Farm" - the revolutionaries eventually became just like the farmers they overthrew.

A more constructive approach would be to:

1. Recognise that different economic situations might need different analytical tools

2. Remain open to insights from various theoretical perspectives

3. Acknowledge that some economic phenomena might require multiple explanations working together

The key is to resist the temptation to create a new "one size fits all" theory, even when critiquing the mainstream's "one size fits all" approach. Good economic thinking should be more like a well-equipped toolbox than a single, magical tool that claims to do everything.

The Key Lesson

The most effective approach to economics embraces several crucial principles. It should be capable of examining problems from multiple perspectives, whilst questioning how power operates throughout the system. It needs to maintain humility about what it can and cannot explain. Perhaps most importantly, it should avoid trying to become the "one theory to rule them all."

Why This Is Important

Economics isn't just an academic pursuit - it fundamentally shapes how our society operates. Think of economists as influential storytellers who help determine which policies are seen as "sensible" and which are dismissed as "unrealistic" or "impractical". Their influence extends far beyond university lecture halls.

Consider these key areas where economic thinking directly impacts our daily lives:

Government Policy

When governments make decisions about interest rates, taxation, public spending, or welfare programmes, they rely heavily on economic advice. If that advice comes from a narrow theoretical framework, it can exclude potentially valuable solutions. For instance, during the 2008 financial crisis, many helpful policy responses were initially dismissed because they didn't fit the dominant economic model's view of how markets should work.

Business Decisions

Major corporations and financial institutions employ economists and use their theories to make decisions that affect millions of people - from setting wages to choosing where to invest. The theoretical framework these economists use influences whether they consider factors like environmental impact or community wellbeing alongside profit.

Public Debate

Economic ideas shape what ordinary people think is possible. When economists consistently argue that certain approaches are "unrealistic" or "inefficient" - whether about addressing climate change, reducing inequality, or providing public services - these views often become accepted as common sense, even when they're based on quite narrow theoretical assumptions.

Media Coverage

Journalists often rely on economists to explain complex issues to the public. If they're only hearing from economists who share the same theoretical framework, the public debate becomes unnecessarily limited. It's like having a conversation about health but only allowing one school of medical thought to participate.

Education and Training

Universities training future business leaders, civil servants, and politicians typically teach economics from particular theoretical perspectives. This shapes how the next generation of decision-makers thinks about what's possible and desirable in economic policy.

This is why having multiple approaches to economics matters so much. When a single framework becomes too dominant - whether it's the current mainstream approach or an alternative one - it can:

1. Limit our collective imagination about what's possible

2. Exclude valuable solutions to social problems

3. Make certain policy choices seem "natural" or "inevitable" when they're actually just one option among many

4. Reduce our ability to respond to new challenges like climate change or technological disruption

Using our earlier metaphor, it's like having a society where all our problems must be solved using the same tool, even when different tools might work better. This becomes particularly dangerous during times of crisis or rapid change, when we most need fresh thinking and diverse approaches.

Consider the current challenges we face - climate change, inequality, technological disruption. These are complex problems that likely require multiple perspectives and approaches. If economists become too wedded to any single theoretical framework - whether mainstream or alternative - we risk missing crucial solutions simply because they don't fit our preferred way of thinking.

The goal isn't to reject any particular economic approach entirely, but rather to maintain intellectual humility and flexibility. We need economists who can draw on multiple perspectives and adapt their thinking to the specific challenges at hand, rather than trying to force every problem to fit their preferred theory.

This is why the warning about alternative approaches becoming too rigid is so important. In trying to replace one inflexible system, we must be careful not to create another one. What society needs is economic thinking that's adaptable, inclusive of different perspectives, and humble about its own limitations.