To What Extent Is Economics an Ideology and to What Extent Is It a Useful Theory?

By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory. The views expressed in this interview are not those of his employer

Ever since the Enlightenment many societies have moved away from justifying their existence and formulating their aims through recourse to religious language. Gone are the days of the ‘Great Chain of Being’ which justified the natural and social orders all the way from the plants and trees through the commoners, via the nobility and the King all the way up to God the creator. What replaced these ideologies were ideas about ‘Progress’ – how the good society was attained through Progress and what such Progress would look like. Progress, it was said, was to be grounded in the scientific method; what had worked so well to uncover natural processes could also be applied to engineer society.

It was in the 19th century, however, when the ideologies of Progress really began to blossom and flower. One was economics, of which we will have more to say about below. Another was phrenology. Phrenology was a science that claimed that a person’s character – including his capacities and his dispositions – were contained within his skull and could be determined by studying his skull carefully. Today few take this seriously – although many still recognise that phrenology was an early progenitor to so-called ‘neuroscience’. But throughout the 19thcentury these ideas were enormously popular – one popular English work sold more than 300,000 copies!

What made phrenology so popular was what also made economics so popular at the time: it gave a rationale for a society based on Progress and also provided a blueprint for how this could be achieved. The phrenological doctrine, being so vague in its pronouncements, was highly malleable and could be used to justify whatever those in power needed justifying. So, for example, in 19th century England phrenology was used to justify laissez faire economic policies by emphasising unequal natural capacities amongst the population while in early 20thcentury Belgian Rwanda it was used to justify the supposed superiority of the Tutsis over the Hutus.

In my book The Reformation in Economics I take the position that modern economics is more similar to phrenology than it is to, say, physics. This is not at all surprising as it grew up in the same era and out of remarkably similar ideas. But what is surprising is that this is not widely noticed today. What is most tragic, however, is that there is much in economics that can and should be salvaged. While these positive aspects of economics probably do not deserve the title of ‘science’ they at least provide us with a rational toolkit that can be used to improve political and economic governance in our societies.

The Ideology at the Heart of Modern Economics

The curious thing about modern economics is its almost complete insularity. Its proponents appear to have very little notion of how it applies to the real world. This is not the case in normal sciences. Take physics, for example. It is extremely clear how, say, the inverse squares law applies to experienced reality. In the case of gravitation, for example, the inverse squares law makes experimentally testable predictions about the force exerted by, say, the gravitational pull between the sun and the earth.

Modern economics – by which I mean neoclassical or marginalist economics which relies on the notion of utility-maximisation as its central pillar – completely lacks this capacity to map itself onto the real world. As philosophers of science like Hans Albert have pointed out, the theory of utility-maximisation rules out such mapping a priori, thus rendering the theory completely untestable. Since the theory is untestable it cannot be falsified and this allows economists to simply assume that it is true.

Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Such books read in an almost identical way to the fashionable books of 19th century phrenology. The economists address everything from parenting to crime to the Ku Klux Klan by filtering it through the non-experimental theory of utility-maximisation – a theory that has not and cannot be verified and so the author and reader alike take it entirely on trust.

Such systems of ideas are ideological to the core. They are cooked up independently of the evidence and are then imposed upon the material of experienced reality. We are encouraged to ‘read’ the world through the interpretive lens of economics – and when we ask for evidence that this lens uncovers factually accurate information we are confounded with circular arguments from the economists.

Large-scale public policy is also filtered through this lens. This is done by constraining the study of macroeconomics – that is, GDP growth, unemployment, inflation and so on – by tying it to the theories of utility-maximisation. All macroeconomics today must be ‘microfounded’. This means that it must have microeconomic – read: ‘utility-maximising’ – foundations. In reality, as I show in the book, these foundations are anything by ‘micro’. Rather, what is done is that the entire economy is seen to be dominated by a single uber-utility-maximiser and all the conclusions flow from there.

This may seem like odd stuff but it is built into the theory as a sort of foundational delusion. The arbitrary, non-empirical theory of utility-maximisation assumes primacy to all considerations of actual statistical facts, intuitions about human motivations and even basic assumptions about what should constitute a properly moral view of man. What we end up with is not just a crushing, anti-inquiry ideology but also a lumbering failure of a system of ideas that has no hope in extracting relevant information about the real world.

What Is To Be Done?

Is economics then to be thought of as a failure? Must we scrap economics and try to find other ways to describe and address our economic and political problems? In this regard, my book claims to lay out a new path – albeit one that has been intuitively followed by some economists, most notably those in the heterodox camp. This new path is based on two key interrelated premises.

The first is that we have little insight into what actually motivates human beings. For this reason theories that rest on assumptions about human motivation – like utility-maximisation – must be thrown out and the study of the economy must be undertaken by examining large economic aggregates. In short, micro must be tossed off the throne and the crown must be handed to macro. The second premise is that we must not be overly concerned with highly precise ‘models’ of the economy. Instead we must take what I have come to call a ‘schematic’ approach. A schematic approach involves building tools that can be integrated into how we understand the world around us without assuming that these tools provide us with an exact description of this world. This schematic toolkit – which I begin to lay out in the later chapters of the book – can then be used to approach the study of actual economies.

These may seem like rather simple rules. But when applied to economic theory they generate rather radical results. At the same time they greatly constrain the amount of wisdom that we can assume economists to have; given these premises no book like Freakonomics should ever be taken seriously and should probably even be written in the first place. In that sense, they may appear to militate against Enlightenment optimism. This may well be so, but I would argue that they are arrived at through rational Enlightenment-style inquiry and so should be taken seriously even by proponents of Enlightenment Progress. After all, phrenology eventually fell in the face of rationalistic criticism.

In the book some of the issues around uncertainty and free will are also explored. Implicit in some of the book’s central criticisms is that societies are not to be understood in a deterministic manner. Unlike billiard balls, social forces are not subject to deterministic laws. In one sense this is unfortunate as it means that our understandings of social and economic processes must always be of a contingent and not-too-precise nature. But on the other hand it is optimistic in the sense that it attributes an agency to human beings to create the world around them that mainstream marginalist economics stripped away by imposing the limited utility-maximiser framework on everyone from Mother Theresa to Hitler.

This also creates an opening for a proper discussion of ethics and morality. Although this is not dealt with directly in the book – it would surely require another ten volumes – the framework does reopen awkward questions surrounding morality and ethics. Some self-professed social scientists, nervous that these questions have been passed to us from the world religions, would prefer to do away with any moral and ethical questions. But this was always a fantasy – even the most hardened anti-ethicist, unless they are serving life for serial-killing, has a system by which they determine right from wrong.

All that I have said here is rather abstract. But a good portion of the book is not and I do not want to give that impression. It contains chapters that deal with inflation, profits, income distribution, income determination, financial markets, interest rates, investment and employment. It is not simply a book of methodology but rather one that tries to also provide the basic building blocks of a theory that can be applied to understand really-existing economies. In this sense, I hope that it is again more optimistic than many mainstream economics books that leave the reader without any capacity to apply the supposed ideas that they have absorbed by reading them beyond mere chest-puffing at dinner parties and moral condemnations of the social safety net.



About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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18 Responses to To What Extent Is Economics an Ideology and to What Extent Is It a Useful Theory?

  1. Sounds good, but you left out the most important part. The problem with Enlightenment thinking is that it came before Darwin. I hope the book realizes that physics is not the only science.

  2. There is a very interesting work in critic of political economic realized by Henry Charles Carey. I think that he has the merit of expose very confusing and pernicious ideas of David Ricardo. The error of Ricardo are of several classes, but the same grave is his presentation of capitalism as a slavish system. This is connected with the Ricardo value definition. He excludes worker wage from commodity value.
    Additionally, this is assumed by Karl Marx as base of his economy an politic.

  3. skippy says:

    I think abstract methodology is important in the wider purview of this topic e.g. how are we to format our minds as individual and greater society as a whole….

  4. Daniel J Antinora says:

    Hey! Bought the book. Read it. Liked it a lot.

    I think Debunking Economics, Debt (by Graeber), and your book are an ideal introduction to economics (I suppose they should be coupled to Mankiw’s intro text).

    Question: Is Warren Mosler right about the big points he makes? (Are you familiar?)

    Feel free to answer privately by email if you feel like endorsing him might make you seem crankish.

    Thanks for the work you do and for the encouragement to study the subject that it provides me.

    • Hey,

      Thanks for buying the book. I don’t think that an association with Mosler implies crankishness. After all, I co-wrote a paper on tax bonds with him a few years back and I’m pretty sure I referenced him in the money chapter.

      As far as the monetary plumbing and fiscal expenditure goes I think that Warren is entirely correct. Where I differ from him is his saying that imports are unambiguously a net benefit — although his ideas are by no means crazy. I also don’t like the way he frames the natural rate of interest as I find it a bit misleading. But apart from that I think he’s basically correct.

      • Daniel Antinora says:

        Thanks! You’re my sanity check. I wanted to make sure I wasn’t going crazy nodding my head in agreement. It felt sorta “esoteric” or Gnostic and that raises alarm bells for me.

        I didn’t realize you had written a paper with me.

        Maybe you could give us a post about why you think framing the interest rate issue that way is misleading in the future?

      • Daniel Antinora says:

        A paper with *him*

      • Yeah, there’s a cult-like quality to MMT which they’d do best moving away from. They’re mostly correct though.

        Here’s my paper with Warren:

        I don’t post on here anymore. But the MMT guys — apart from Randy — don’t seem to understand what the natural rate of interest is. It is a theoretical equilibrium concept that is central to marginalist macroeconomic theory and has been for nearly 100 years. They don’t tend to criticise it directly but rather engage in vague rhetorical appropriation of the term. I think that’s very unproductive.

        I wrote a critical paper on the theory here if you’re interested:

  5. Harman Kirk says:

    Just got the book last week, it’s pretty good so far.

    On another note, are you familiar with the work of the marginalized Harvard professor Stephen A, Marglin?
    His book that critique economics “The Dismal Science: How Thinking Like an Economist Undermines Community” should be read along Steve Keen’s book and your own book. You can get a copy here:

    There’s also his beautiful paper (What Do Bosses Do?: The Origins and Functions of Hierarchy in Capitalist Production):

    I know you’re fan of Graeber’s Debt (although you don’t share his anarchist politics), what do you do think of this academic paper of his:

    • Thanks for the interest. Yes, I’ve always found Marglin’s work interesting. His wage-led/profit-led framing is very helpful, I think.

      I like Graeber’s work but I’ve never appreciated the “specter of materialism” that underlies some of it. All of that “materialist determinants of x, y, z” always struck me as ideological shoehorning of the same kind that I critique utility theory for in the book.

      • Harman Kirk says:

        I doubt that Graeber is guilty of any crude “materialism”, his “anthropological theory of value” uses a lot of “critical realist” stuff (he wrote the Guardian obituary of Roy Bhaskar, so I assume that he’s pretty close to that tradition).
        I think he addresses some of that in this interview:

        The most interesting thing is his concept “human economies”, which is quite different from Keith Hart’s, who btw wrote one the best reviews of Debt I’ve read:

        The thing I think that you guys economists is that economic activity is not just “market” activity, and a big sectors of our “economy” are neither capitalistic, non-state and non-“market” based.

        This other guy also discuss this stuff from a more simple starting point: Free gifts and positional gifts, Beyond exchangism, Dave Elder-Vass,:

        On another note what do you make of the “Capital as power” people (Jonathan Nitzan and Shimshon Bichler)?

        Here’s a summary:

        They also put their book for free online:

        Click to access 20090522_nb_casp_full_indexed.pdf

      • Oh, I don’t think that it’s crude materialism. I’m friends with David and we have talked about this pretty extensively. I think that he and a lot of other people interested in Bhaskar’s work are trying to salvage something of the Marxian materialist philosophy.

        Personally, I think this runs against the spirit of Bhaskar’s work. His early work was effectively Kantian and his later work was fairly extreme speculative idealism. I think many people – David included – want to salvage a kernel of the Marxian vision of “society as interacting material/economic/power relationships” while jettisoning problematic concepts such as the labour theory of value.

        Anyway, long story short I pretty strongly disagree with most of this stuff and think it’s basically flawed at a very basic level. But I do appreciate Graeber’s work a great deal and have always tried to promote it where possible.

      • Harman Kirk says:

        As an alternative to the Marxian theory of value (although I’m not sure that what you say applies to Diane Elson’s “Value Theory of Labour”, George Henderson or Moishe Postone’s work), what do you think the theory of value presented by pragmatist Hans Joas in some his books like “The Genesis of Values” and “The Creativity of Action”?

        Also, I would really like to get your view on this paper on gift economies in contemporary society by Dave Elder-vass:

        He also has a book on that, though it restricts itself to the digital economy:

        Also I just read this review on the Institute for New Economic Thinking website that might pique you interest:

      • I think “value theories” are a fairly silly Enlightenment concept that have totally failed conceptually and politically. Prior to the Enlightenment “value” was the realm of moral philosophy – where it belonged. “Values” were handed down either by religions or by philosophic cults (the Stoics, the Epicureans etc). Often these handed-down values were then used to structure society morally and even economically – think of the doctrine of the “just price”, the ban on usury etc.

        Enlightenment thinkers hated moral philosophy because it always appealed to some sub-rational basis or dogma – a religious text, a doctrine etc. They tried to formulate their own moral theories that were built on rational principles but they largely failed. Then the “value theorists” came along to fill this void. Again, they aimed at some perfectly rational theory of value. But there is no such thing. All moral systems are ultimately founded on dogma. And so, so too did the value theories. Utility theory was founded on the dogma of “free choice” etc. Marxist value theory and its offshoots was founded on the dogma of exploitation etc. And so on. There is no real way to choose which of these conflicting theories of value is any better than another. So people will tilt toward the theories that justify best their general view of the world – which appears to me almost entirely coloured by psychological temperament.

        Regarding gift economies, I’m sure that you can understand many transactions in this way. But you can understand them in other ways too. For example, Gary Becker will explain the same transactions with reference to utility theory. All such “interpretive frameworks” are just arbitrary. They are chosen based, usually, on the person using them’s politics or ideology. And there is no way to prove that one is more correct than another.

        Finally, on the Eurocentric rhetoric, I find it unbearable. Clearly the West is the most advanced civilisation and so possesses something that others did not. Having travelled quite a bit I also have no illusions about other countries being morally superior to the West. They are not. And I invite anyone who seriously disagrees to go and live elsewhere. As for the critique of Enlightenment, I most certainly agree. The whole project strikes me as being mainly a disaster.

  6. Harman Kirk says:

    On value theory: I was talking about “value theory”from the ethnographic standpoint, not the purely philosophical one, The Hau journal did a very accessible issue on this sometime ago:
    I really recommend this one:
    Toward a critique of cultural economy and posthumanist value theory by C.Gregory:

    There’s also this issue:

    On gift economies: it’s not a question of how the observer can understand the transactions, it’s how the people doing the transactions understand and represent themselves what they’re doing.

    It’s about understanding “people’s own economic construction” as Stephen Gudeman would say, and not imposing some utilitarian nonsense on it.(I refer you Formalist vs substantivist vs culturalist debate in economic anthropology).

    And the fault that all economists commit, even heterodox ones commit is posing that the economy is just market-activity/commodity-exchange (and sometimes they add the state) and ignore almost any activity can’t be represent as a “market”, all the non-market (and non-state) activity that occurs like the so-called “household-economy” which constitutes a huge part of what we call the “economy”, but for the economists it just doesn’t count.

    There are economists who are better on this, like Stephen Marglin in his book “The Dismal Science”, but he still repeats the old mistaken story about reciprocity, overlooking non-commodity and non-reciprocal economic distribution practices like most forms of sharing (If you’re interested in knowing more about this: Thomas Widlok, I think, has written a new book on the anthopology and economy of sharing).

    On Eurocentric rhetoric: I disagree with many things you said.

    First, you seem to contradict yourself on this, your friend David Graeber did a very good piece about “the west” , that I think you should definitely take a look at:

    There Never Was a West, Or, Democracy Emerges From the Spaces In Between:

    And as you obviously know what “the west” “advance” by “taking” rather “possessing” anything (remember colonialism?)..

    And I don’t think Kanth, though I don’t agree with his attempt to simplify stuff too much, was referring to any “society” you could travel to (he was talking about hunter-gathers at one point), and he was referring to certain aspects of these societies that exist even in our society, but that we tend to completely overlook.

    • Yes, the ethnographical viewpoints have all the problems that the philosophers highlighted. We’ve known this since Kant and I believe that Foucault wrote a very nice doctoral dissertation on it. There’s no getting away from it, I’m afraid.

      I get that ethnography is based on self-reporting. But there’s obviously a reporter and a person who prompts, listens and interprets the reporter. This leads to the impossibility of taking an “objective” or “God’s eye” perspective on the situation. I believe that this is basically the post-structuralist critique which I think is pretty self-evidently correct.

      Finally, on the Eurocentric stuff, I certainly don’t contradict myself. I’m quite consistent on this. But yes, I’m aware of the leftist critiques as I used to subscribe to them. But after travelling the world a bit more and being exposed to other cultures I’ve changed my mind entirely.

      • Harman Kirk says:

        Sorry,I meant to say was Not referring to any “society” you could travel to (he talked about “simple societies”), so unless you lived with hunter-gathers or foragers or with people like Zapatistas in Chiapas, Mexico, I don’t what the fact that you travel has to do with this (again .(I refer you Formalist vs substantivist vs culturalist debate in economic anthropology).

        You’re a Foucauldian? Didn’t get that impression from the book, I must admit I’m really not a fan of Foucault, although he had some insights to offer (like in his lectures about neoliberalism), I think he was a really a superficial thinker and his philosophy had a really annoying aristocratic feel to it.

        Although I neither nor a marxist, I really liked “The New Way of the World: On Neoliberal Society” by the two famous Foucauldian Marxists, even Mirowski liked it.

        They also wrote a book titled Commun: essai sur la revolution au XXIème siècle (Common: An Essay on Revolution in the 21st Century), about “commons”.

        On “Commons”, although I know that she’s part of the orthodoxy, what do you think of Elinor Ostrom’s work?

        Do you know of any heterodox economists writing about the commons?

      • No, I get that I can’t really go “back in time” to simple societies. But it seems to me that simple societies suffer from the fact that… well, they never get beyond being simple. I pretty much subscribe to the views that anthropology used to subscribe to before the rise of structuralism, the importation of implicit Rousseaunism and the worship of the “savage mind” (Durkheim etc). That is, I basically think that monotheism is an enormous advance over polytheism. The latter only really produces very primitive societies. While the former gives rise to a whole different dynamic. I think this is where my main disagreements with the likes of Graeber stem from. I think that he and others think polytheism superior.

        I’m not a Foucaldian, no. I think his philosophy is pretty hollow. There’s not really any “there” there. But he wrote interesting things on epistemology – genuine contributions – and I take them seriously. His early essay on Kant’s anthropology is an excellent critique of the anthropological epistemology. I like the way that Foucault shows up the moral presuppositions underlying much of what we call “social science” and I pretty much agree with him that social science is, for the most part, a technocratic ideology designed to manage, control people and construct a “therapeutic state”. That said, Christopher Lasch undertook a similar critique that was far more so grounded in something resembling a coherent moral doctrine and for that reason I think it superior (‘The Minimal Self’ and ‘Haven in a Heartless World’ are underread masterpieces). I only referenced Foucault because of his epistemological critiques of anthropology.

        I’m not aware of anything written by heterodox types on the commons. But then I’m a macro guy so I probably wouldn’t.

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