Economists claim their assessments are based on settled science. Yet the assumptions underlying their assessments are contradicted by both logic and real-world observation.
The Nobel Laureate economist Joseph Stiglitz suggests that economics, as currently taught and practiced, is less a science than “…the West’s prevailing religion.” Mainstream economists bear major responsibility for promoting what Pope Francis calls “the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose.”
Economists with advanced degrees have become ordained priests who assure us our sins against life and one another will one day bring an earthly paradise of prosperity for all. Departments of economics have become religious seminaries in which novitiates are indoctrinated into the tenets of the faith. Corporate media serve as its missionary arm. The institutions of finance serve as its temples of worship.
The often-cited founders of modern economics such as Adam Smith, David Ricardo, Henry George, Thomas Malthus, and Karl Marx were political economists of great intellectual breadth and depth. In the tradition of Aristotle, they sought to understand how societies organize and manage their labor and natural endowments to meet their needs. The word economics comes from the Greek oikonomia, which means “household management” or “the management of household affairs.” But our current day neoliberal economists have dropped the political and institutional side of the analysis and reduced the broad discipline to an analysis of money and markets.
How did this happen? As documented by the science historian Robert Nadeau in Rebirth of the Sacred, a group of economists in the mid-1800s turned away from this grand tradition of their forebears and began a quest to transform the study of economics into a rigorous mathematical science. Physics was their model. To this end, the founders of what came to be known as neoclassical economic theory took a soon-to-be outmoded mathematical model from physics and substituted economic variables for the physical variables.
Physicists were, at the time, attempting to account for the phenomena of heat, light, and electricity by positing the existence of a vague and ill-defined field of protean energy. After copying the equations from the physicists, the creators of neoclassical economic theory (Stanley Jevons, Léon Walras, Francis Ysidro Edgeworth, and Vilfredo Pareto) substituted ill-defined economic variables for the ill-defined physical variables, reduced all values to financial values to facilitate quantification, stripped away any consideration of political power and interests, and declared economics a science.
Their claim was widely accepted despite being utterly absurd for a long list of reasons enumerated by Nadeau. Subsequent generations of mainstream economists extended and revised this formalism, which to this day they insist makes their theories values-free, even though they have made money society’s defining value and favor policies that enhance the wealth, power, and influence of a financial oligarchy.
As Nadeau elaborated in an e-mail exchange with me:
One curious result was a theory of value premised on the assumption that the real value or “right price” of goods, commodities and services can only be determined by decisions made by economic actors and that all of these decisions can be reduced to and understood in terms of a compulsion to maximize personal utility in the pursuit of selfish interests. Natural resources that could not be valued in these terms were presumed to have no economic value.
In their quest to reduce all economic values to financial values, economists equated money with wealth, making money with creating wealth, and growth of an asset’s market price as it became increasingly scarce with growth in real value and thus an economic positive. They defined people as financial beings rather than living beings and ignored critical distinctions between the accumulated financial assets of individuals and the health and well-being of living communities. They forgot that the only legitimate purpose of an economy is to support households in making a living—not corporations in making a killing.
Money became the measure of well-being. The firm replaced the household as the defining unit of economic organization and analysis. Other streams of economic thought were dismissed as unscientific heresy. The once rich, broad reality-based discipline of economics (management of the household to maximize the well-being of its members) was reduced to what we might best regard as a subdiscipline of finance (management of the financial assets of the corporation to maximize financial return).
After economists reduced all goods and services to financial variables based on market price, they reduced all capital assets (productive resources like land, labor, and technology) to financial assets.
Failing to distinguish between phantom-wealth money and the real-wealth capital that money can buy, these economists call financial assets “financial capital”—or just capital—and treat money as the most valuable resource and the ultimate economic constraint. They thus embrace what economists themselves call a fallacy of composition—inappropriately assuming that what is true for the individual is also true for the society.
For the individual in a “developed” society, a lack of money is a real constraint on access to the necessities of life. If an adequate job is not available to that individual, there is not much he or she can do. However, it need not be a consequential constraint for a country with its own currency and a central bank if food is available in its markets. It can create money in the needed quantity with a few computer keystrokes.
For a society that controls its own money supply, the critical constraints are its human capital (the health and skill of its workers), its social capital (the bonds of trust and caring essential to healthy community function), and its biosystem capital (the living systems essential to Earth’s capacity to support life). The capitalist suicide economy depletes all three, including the most valuable of all: the biosystem capital that is the foundation of life itself.
Knowing nothing of life except for its commodity price, mainstream economists fail to notice that depleting real capital to create financial capital makes society poorer, not richer. This lapse is extraordinary for a discipline that claims to be the queen of the social sciences. Any intelligent twelve-year-old is fully capable of understanding the distinction between a living forest and a system of financial accounts that exists only as electronic traces on a computer hard drive.
By referring to financial assets as “capital” and treating them as if they have intrinsic worth, mainstream economists sustain the deception that Wall Street is creating wealth rather than manipulating the financial system to accumulate unearned and unjust accounting claims against what remains of society’s aggregate pool of real wealth.
Adopting the perspective of corporate finance, mainstream economists align with the interests of Wall Street corporations, whose sole business purpose is making money. They advocate for public policies that grow corporate profits and diminish household well-being—such as deregulating markets, eliminating restrictions on the free flow of trade and international investment, and privatizing the commons.
Our current mainstream economists serve as the well-supported propaganda arm of capitalism and the suicide economy, defending a system of economic relationships that does not and cannot serve society and threatens human viability.
For these reasons, policy guidance from an economist is not only likely to be useless from a societal perspective but actively destructive.
Excerpted and adapted from David Korten, When Corporations Rule the World (20th anniversary edition) (Oakland, Calif.: Berrett-Koehler Publishers 2015), pp. 34-37.
See the Theory of the Firm. The devastatingly destructive consequences of egoʹ-nomics are compounded by the Theory of the Firm, which translates the academically ambiguous theories of egoʹ-nomics into unambiguous support for policies securing the rights and power of profit maximizing, limited liability corporations delinked from responsibility to and for the communities in which they do business.