Brexit and mainstream economics
By Stuart Birks
The Brexit referendum result is just one step in a long process of change, the course of which is by no means certain. There will be lots of speculation and analysis, with those close to the action are likely to be preoccupied with the direct impacts. There are additional points of particular interest to pluralist economists which are worth some consideration. Here are some very preliminary points.
For the vast majority of tertiary students, exposure to economics is limited to a cursory description of societies based on self-interest in the form of maximising utility or profits through market mechanisms and resulting in some “ideal” competitive outcome for the world (see HERE for one possible driver). This is deficient.
In markets people express their preferences through their decisions on buying and selling. In politics preferences are expressed by voting. “Voting power” in the market is based on money, whereas in politics current democracies give the same weight to each qualifying voter. Politics has an influence and the expression of preferences can differ from that through markets, so a solely market-based view is too limited.
In mainstream economics historical and institutional influences are downplayed or ignored altogether. A fixed, stable, underlying structure is assumed, allowing the use of static analysis and with little regard for possible “exogenous shocks” (as through the political forces, for example) that can lead to structural change. Structural stability is essential for econometric estimation, and structural change will greatly reduce the value of past observations for understanding future options.
Where change is considered, this is frequently analysed through comparative static analysis although adjustment paths and times can be very important.
The referendum process has been criticised for the associated simplification and misinformation on both sides. These issues may be widespread and affect markets also. Political processes may be flawed, and markets may also give limited options and misrepresented products. The key role afforded to a theoretical ideal in mainstream economics could be more of a distraction than an aid to understanding.
Those who have a market-based world view should note that there is no guarantee that markets would even provide incomes above the subsistence level. Note also that that private ownership allows windfall gains to individuals from what might alternatively be considered society’s assets. If people have a political voice, there is a limit to what might be tolerated.
How then can economists make a useful contribution in such an environment? More specifically, how should economics change so as to make a useful contribution?
Suggestions will be gratefully received.
From: p.12 of World Economics Association Newsletter 6(3), June 2016