The Reformation in Economics by Philip Pilkington review: a revolutionary approach

At the beginning of the year the Bank of England’s Andy Haldane boldly declared that economics was in a state of crisis. Although such assertions are hardly new, this was the first time that such an eminent figure spoke the words that were previously the preserve of so-called renegades, dissidents and lefties.

From the failure to foresee the global financial crisis, to the disastrous prescription of austerity as a viable path to growth, all the way through to the litany of failed predictions around Brexit and Trump, mainstream (neoclassical) economics is, as Haldane argues, in need of a radical overhaul. Rather than focusing on “narrow and fragile” mathematical models, the insights of other social sciences and heterodox economic philosophies (Keynesian, Marxian and Austrian) should be incorporated into mainstream thinking.

As if to anticipate Haldane’s remarks, Irish economist Philip Pilkington’s new book, published mere weeks before, purports to do just that. Since 2008 there has been an impressive array of books criticising the obvious shortcomings of mainstream economics, but this is not simply another one for the collection. Those texts mostly sought to reason and to remonstrate with their more conventional colleagues, the impact of which has been negligible albeit understandable. With entire careers invested in those pre-crisis models, a damascene conversion by the mainstream en masse was never likely.

With the same irreverence that Martin Luther once besieged the Church, he castigates his profession for peddling its own brand of simony, nepotism and indulgences

Pilkington dispenses with such appeals by making his pitch to the next generation, those who are currently cutting their teeth in undergraduate or postgraduate courses. And with the growth of global movements such as the Student Initiative for Pluralism in Economics, he has certainly caught the zeitgeist. Seeing economics as ripe for the kind of transformation experienced by religion half a millennia ago and with the same irreverence that Martin Luther once besieged the Church, he castigates his profession for peddling its own brand of simony, nepotism and indulgences.

Rich in historical context, the book is divided into three sections; Ideology and Methodology critiques the ideological nature of microeconomics, while Stripped-Down Macroeconomics and Approaching the Real World sketch out an alternative theory of the macroeconomy and how it can be applied to real world empirical data. So let’s give this “heresy” a hearing.

On Mathematical Obscurantism
Pilkington charts economics' evolution from self-avowed social science displaying a healthy plurality of thought, to the highly mathematicised monoculture of today yearning to join the hard sciences – à la physics. Like physics, economics employs complex mathematical models, but where physics uses the atom as its underlying unit, economics must employ a theory of individual behaviour to achieve the same end; one that finds little justification in biology or psychology.

Homo economicus – or economic man – is a species quite unlike homo sapiens, one which Pilkington disparages as “rational, crystal ball wielding economic supermen with fixed preferences”. Yet through these simplistic behavioural assumptions the same models used in physics could be constructed, and because economists were employing the same method, he argues that they foolishly believed their results engendered the same “truth value”. He amusingly likens this to someone dressing up as a policeman and believing they’d suddenly acquired the powers of arrest.

Anyone doubting his contention should remember economics’ very own “peace for our time” moment, when in 2003 it was declared, largely as a result of these models and the notion of efficient markets which they depicted, that the “question of depression prevention has been solved”. Pilkington is certainly not against the use of mathematics; rather he views it like a language that – when deployed correctly – can illuminate. Unfortunately, as he sees it, much of its contemporary application is like the Latin wielded by the priest caste of Luther’s day, deployed to exclude and to obfuscate.

Toward a new Schematism
Having argued that we should do away with these models, he champions a new kind of schematic approach as sketched out in the philosophy of Immanuel Kant. This involves the use of instruments – a kind of schematic toolkit – that can help us understand the world, without assuming it describes an exact picture. Whilst agreeing with the mainstream on the importance of abstractions for aggregating people; he sees them as going about this backwards. Rather than using abstractions of the individual – homo economicus – and then aggregating these, we should be starting with abstractions of groups – such as "social class".

Social class is a construct that helps us organise and understand the reality we find ourselves in, but it has no real empirical existence. Thus citing the example of workers and capitalists where the former receive income from wages and the latter from profits, Pilkington maintains that instead of arbitrarily categorising existing groups of people – because some workers receive profit income from stock options held in their pension funds – “we should be breaking down income flows and forming abstractions about these”. His approach here is closer to the accountancy framework of stock flow modelling than it is to sociology.

Applying this approach to various real world economic phenomena, he shows it to have greater explanatory power than mainstream theory. Take for instance the attempt to determine the profit margin in a capitalist economy, which you would think is fairly straightforward for a profit-driven system. For Pilkington it is “this tension – this properly class tension – that ultimately determines the profit margin in a capitalist economy”. He contrasts this with mainstream introductory textbooks, which according to a study by the Cambridge Journal of Economics, leaves readers “more confused” about this “than when he/she began”.

For the disaffected student encumbered with a sense that something is amiss with his/her subject, Pilkington's book will seem like a rallying call

Closing with a chapter on free trade, arguably the sacred cow of mainstream theory, Pilkington examines how the mutually beneficial image described in textbooks often doesn’t resemble the reality, as the offshoring of production can undermine worker organisations from the unemployment that’s created. This “rebalancing of class forces” can negatively impact the equitable distribution of income. Helping to contextualise the recent vocal opposition to free trade deals (Nafta, TTIP, etc), as well as more general grievances about globalisation and inequality, the books draws to a close as the reader is imparted with much ammunition to enter the free trade vs fair trade debate.

A new Thirty Years War?
For the disaffected student encumbered with a sense that something is amiss with his/her subject, Pilkington's book will seem like a rallying call. Taking the mainstream to task for its treatment (or lack thereof) of issues such as money, banking, debt and the idea of equilibrium, his call for a "revolution in how we think about the world around us and, more specifically, about the economy" is likely to be well received. This is not a call for "social revolution" and our author undoubtedly leans closer to Keynes than Marx.

However, as he acknowledges himself, the profession has an “enormous apparatus to keep the current ideological state of the discipline afloat – from Nobel Prizes of dubious origins to a system of journals with strict but arbitrary publication rules”. Considering that institutions are by their very nature slow to change, if they cannot keep pace with this newfound desire among students then there could be trouble ahead.

There is a certain synchronicity that 2017 marks both the 500th year anniversary of Luther's 95 Theses as well as the 150th year anniversary of Marx's Das Kapital. Could economics be facing into its own Thirty Years War?
Cillian Doyle is a PhD student in Trinity College's School of Business and a member of TASC's network of economists