very small (the atom), while Newton’s equations work very well in between, and so on.
But in economics, different schools of thought have visions of how the economy works that are fundamentally in conflict. There is no way to partition the economy into sections where Neoclassical economics applies and others where rival schools of thought like Post Keynesian, Austrian or Biophysical economics apply. On the same topic – say, for example, the role of private debt in causing financial crises – these schools of thought will often have answers that flatly contradict Neoclassical economics, and frequently also, each other. These non-mainstream schools of thought, which are collectively known as ‘heterodox’ economics, are followed by a significant minority of academic economists – as many as 10 per cent of the discipline, going on a campaign in France in 2015 to establish a separate classification there (Lavoie 2015b; Orléan 2015).2
The economists who did warn of the Global Financial Crisis came almost exclusively from these dissenting schools of thought.3 Though they differed from each other in significant ways, Bezemer noted that they shared ‘a concern with financial assets as distinct from real-sector assets, with the credit flows that finance both forms of wealth, with the debt growth accompanying growth in financial wealth, and with the accounting relation between the financial and real economy’ (Bezemer 2010, p. 678).
If you haven’t yet studied economics, or you’re in your early days of doing so at school or university, I hope this gives you pause: shouldn’t mainstream economics also concern itself with finance and debt? Surely they are essential features of the economy? Au contraire, the mainstream long ago convinced itself that even money doesn’t really affect the economy, and hence monetary phenomena – including money, banks and private debt – are omitted from Neoclassical models. One Neoclassical economist put it this way on Twitter:
Most people who teach macro do it by leading people through simple models without money, so they understand exchange and production and trade, international and inter-temporal. You can even do banks without money [yes!]. And it’s better to start there. Then later, study money as it superimposes itself and complicates things, giving rise to inflation, exchange rates, business cycles.
This statement was made in late 2020 – a dozen years after the failure of Neoclassical models to anticipate the crisis.
Why didn’t mainstream economists change their beliefs about the significance of money in economics after their failure in 2007? Here, paradoxically, economics is little different to physics, in that significant change in physics does not, in general, occur because adherents of an old way of thinking are convinced to abandon it by an experiment whose results contradict their theory. Instead, these adherents continue to cling to their theory, despite the experimental evidence it has failed. Humans, it appears, are more wedded to their beliefs about reality – their ‘paradigms’, to use Thomas Kuhn’s famous phrase (Kuhn 1970) – than reality itself. Science changed, not because these scientists changed their minds, but because they were replaced by new scientists who accepted the new way of thinking. As Max Planck put it:
a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. (Planck 1949, pp. 33–4)
Here, economics is different, largely because economic ‘experiments’ are different to scientific ones, in that they are historical events, whereas scientific experiments are deliberate attempts to confirm a theory – some of which fail. The Michelson–Morley experiment attempted to measure the speed of the Earth relative to ‘the aether’, the medium that scientists then thought allowed light to travel through space. The experiment found that there was no discernible relative motion, which implied that the aether did not exist. This unexpected discovery led to the rejection of the aether theory, and ultimately the adoption of the Theory of Relativity. This experiment can be repeated at any time – and it has been repeated, with increasingly more sophisticated methods – and the result is always the same. There is no way of getting away from it and returning to a pre-Relativity science, and nor is there any desire to do so by post-Relativity physicists.
In economics, however, it is possible to get away from the failure of theory to play out as expected in reality. An event like the GFC occurs only once in history, and it cannot be reproduced to allow old and new theories to be tested against it. As time goes on, the event itself fades from memory. History can help sustain a memory, but economic history is taught at very few universities. Economists don’t learn from history because they’re not taught it in the first place.
The economy is also a moving target, whereas the physical world, relatively speaking, is a stationary one. When a clash between theoretical prediction and empirical results occurs in physics, the state of unease persists until a theoretical resolution is found. But in economics, though a crisis like the GFC can cause great soul searching when it occurs, the economy changes over time, and the focus of attention shifts.
Finally, unlike physicists, economists do want to return to pre-crisis economic theory. Events like the GFC upset the ‘totem’ that characterizes Neoclassical economics, the ‘supply and demand’ diagram (Leijonhufvud 1973),4 in which the intersecting lines determine both equilibrium price and equilibrium quantity, and in which any government intervention necessarily makes things worse, by moving the market away from this equilibrium point. This image of a self-regulating and self-stabilizing market system is a powerful intellectual, and even emotional, anchor for mainstream economists.
These factors interact to make economics extremely resistant to fundamental change. In physics, anomalies like the clash between the results of the Michelson–Morley experiment and the predictions of pre-Relativity physics persist until the theory changes, because the experimental result is eternal. The anomaly doesn’t go away, but the theory that it contradicted dies with the pre-anomaly scientists. Try as they might, they can’t recruit adherents to the old theory amongst new students, because the students are aware of the anomaly, and won’t accept any theory that doesn’t resolve it.
In economics, anomalies are gradually forgotten, and new students can be recruited to preserve and extend the old beliefs, and to paper over anomalous phenomena. School and university economics courses become ways of reinforcing the Neoclassical paradigm, rather than fonts from which new theories spring in response to failures of the dominant paradigm.
In physics, intellectual crises are intense but, relatively speaking, short-lived. The crisis persists until a new theoretical breakthrough resolves it – regardless of whether that breakthrough persuades existing physicists (which as a rule, it doesn’t). The ‘anomaly’, the empirical fact that fundamentally contradicts the existing paradigm, is like the grain of sand in an oyster that ultimately gives birth to a pearl: the irritation cannot be avoided, so it must be dealt with (Woit 2006).5 It is the issue that believers in the existing paradigm know they cannot resolve – though it may take time for that realization to sink in, as various extensions of the existing paradigm are developed, each of which proves to be partially effective but inherently flawed. It is the thing young scientists are most aware of, the issue they want to be the one to resolve. As their lecturers who stick to the old paradigm age, the students take in the old ideas, but they are actively looking for where they are wrong, and how these contradictions might be resolved.
Once a solution is found, the protestations of the necessarily older, ageing, sometimes retired and often deceased champions of the previous paradigm mean nothing. Ultimately, all the significant positions in a university department are filled by scientists who are committed to the new paradigm. Then, as the new paradigm develops, it first undergoes a period of rapid extension, but ultimately confronts its own critical anomaly, and the science falls into crisis once more, as philosopher of science Thomas Kuhn (Kuhn 1970) explains.6
This is a punctuated path of development. It starts with the development
