Economic shamanism

The opacity of economics has attributed a quasi-magical quality to the interpreters and doyens of the financial sector. But does the failure to predict or prevent financial crises demonstrate that these powers are fallacious?

 

Science and magic have always had a lot in common. Pythagoras, who is sometimes described as the first ‘pure’ mathematician, ran what amounted to a pseudo-religious cult with all kinds of strange teachings and an interest in esoteric symbols. The first mathematical models of the cosmos were developed by Greek mathematicians for the purpose of astrology. Chemistry grew out of alchemy, whose practitioners included scientists such as Isaac Newton. In the late 19th century, the discovery of the cathode ray tube, with its eerie green glow, seemed to excite the spiritualist community as much as it did the scientific community.

And then there are the moon landings, which some still claim were a staged illusion, but which were certainly performed to amaze the soviets with the magic of American missile technology during the Cold War.
Today, things have changed: magicians are seen as mere paid entertainers, while scientists are revealing the deeper truths of the universe. But if there is one field that seems to remain especially close to its magic roots, it is economics.

Neoclassical economics was, of course, explicitly modelled on Newtonian science, not magic. The idea was to model human society as if it were a kind of machine, ruled by scientific laws. However, as John Rapley noted in his wide-ranging and entertainingly written book Twilight of the Money Gods, this insistence on scientific rigour actually had the effect of turning the field into a kind of religious doctrine based on perceived truths. He observed: “It would prove tempting for many an economist to say their assumptions were beyond question since a century of research had established them, and thus their findings were beyond critique.”

At the same time, their role as interpreters of economic forces has given economists an air similar to that of priests or shamans. Paul Samuelson’s 1948 textbook Economics, according to economist Robert Nelson, was meant to promulgate “a religious commitment to the market” and to “the priestly authority of economists.” It also hardened the role of abstract mathematics as the official language of economics.

Alan Greenspan, Rapley noted, was lauded for his “shaman-like power over global markets”. Similarly, for the quantitative finance experts who designed the complex derivatives that blew up during the financial crisis, he proclaimed: “Like a temple priest using a sacred language or a witch doctor mouthing incomprehensible spells, they sold a fairground trick to buyers who trusted in their authority.”

Blasphemous economists
Like other sects, economics maintains strict control over its members to make sure they do not depart from orthodoxy. In his 2009 book A History of Heterodox Economics, the late economic historian Frederick Lee described how mainstream economists have used their organisational power “to prevent the hiring of blasphemous economists, to deny them tenure, or to directly get them fired for teaching blasphemous material”. According to Rapley, one of the reasons the work of heterodox economists such as Hyman Minsky was considered “heretical” was because it eschewed abstract mathematical arguments; it was “not even written in the temple language in which economists held their debates… [and] you can’t work at the Vatican if you don’t speak Latin”. Things are tough in magic school.

Finally, another thing that makes economists similar to shamans is their strange combination of passivity and activity in the face of the gods. On the one hand, their official policy is that they can’t predict markets. For instance, the efficient market hypothesis states that markets are hyper-rational entities that somehow incorporate all available information, so no one can make better predictions (which is strange, since in other fields – such as transportation – unpredictability is not associated with efficiency or hyper-rationality).

Money washes around the world at an increasing rate, creating storms that seem to come out of nowhere. Economists don’t even try to predict these storms, but instead ascribe them to “random shocks”. Ben Bernanke, for example, mused in a 2009 commencement address: “Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect.” Indeed, economist Noah Smith wrote in 2017 that models typically assume “recessions are like rainstorms, arriving and departing on their own”. Economists are like shamans praying for rain, with the difference being that they know their prayers have no effect.

On the other hand, economists are granted enormous power over our lives. As Rapley noted: “Economists don’t just observe the laws of nature, they help make them.” Furthermore, their experiments are often as disruptive as anything that nature might throw at us. Rapley gave the example of Russia’s adoption of a market economy after the collapse of the Soviet Union, the effects of which could be measured as a sudden decrease in expected lifespan: “In the scale of human suffering, Russia’s conversion to a new creed ended up rivalling many of the great religious crusades of the past.” This magic is powerful stuff.

Now for our next trick
So, how are the economic shamans responding to the financial crisis, which many see as a crisis in faith (apart from advising a punishing programme of austerity to atone for our sins and purge us of guilt)? In concluding his sweeping book, Rapley sounded an optimistic note: “The money gods have fallen. Thus, economists are once again free to begin doing the one thing they have always been good at – finding practical solutions to the problems that the public square has asked them to solve.”

I’m not so sure about the last part. I would argue that economists are failing exactly because they have proved poor at providing practical advice for problems that ail us: inequality, inflation, financial instability, and so on. Meanwhile, the real money gods – namely the financial sector, which created the crisis in the first place – are as powerful as ever.
However, I do share Rapley’s optimism that economics is in for an exciting time. It is certainly time to learn some new tricks.