Most people don’t realise that the economic perspectives that dominate the mainstream media, government, and academia come from just one of many schools of economic thought. Neoclassical economics rules the roost and provides the foundation for our neoliberal economy. So deeply embedded is this ‘conventional wisdom’ that informing people that there is an alternative economic viewpoint can come as a shock. It is like visiting Barcelona and discovering that Espanyol – another top-flight team – also hails from the city.
To the untrained eye, there is much debate about our economy. Hour after hour of TV and radio broadcasts, thousands of column inches, meeting after meeting, symposium after symposium, all dedicated to fierce economic discussion. Or so it seems. Much of it is simply different people telling the same stories.
Poor economics but great storytellers
Conventional wisdom has secured its place within our establishment through many underhanded, manipulative, and nefarious practices. Professor Frederic Sterling Lee (1949 – 2014) dedicated much of his academic life to exposing the tactics of neoclassical economics. In ‘A History of Heterodox Economics’ he painstakingly details how, for several decades, neoclassical economists working with the state and universities managed to ‘cleanse’ heterodox economics from positions of power. Neoclassical economists’ ability to keep telling simple stories was central to the success of this cleansing. The thing is economists in the mainstream know that the truth can ruin a good story. So, it proved best to leave it out.
Any alternative story that attempts to explain our economy and how it works must challenge these ‘professional’ storytellers. But the conventional wisdom has the higher ground. Everyone already knows these stories, and many seem to make logical sense until you look at them in detail.
One of the best ‘alternative’ economic storytellers was the American institutional economist J.K. Galbraith, an economic giant – who was 6 foot 9 inches tall. Explaining the stickiness of the conventional wisdom, he wrote, “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.” So, let’s set out on those troubled seas of thought and tell some stories.
The price is wrong
I need only look at two popular mainstream examples to tell our story. First, the importance of price, and second, the idea that the government needs to tax and borrow to spend.
There is an iron law in mainstream economics. Price is always and everywhere the deciding factor that creates the demand and the supply of any good. Move the price to move demand and supply. This iron law states that changing the price of something is the best way to affect someone’s behaviour.
This ticks the logical-sounding box. If you increase the price of something, you are less likely to buy more. Supply and demand in it? But, in many cases, it is simply not true. In 2024, a group of Sustainability scientists took to task all the major assumptions underpinning the ‘science’ of neoclassical economics. In their paper, “Sustainability scientists’ critique of neoclassical economics,” they discuss the idea that price alone moves supply and demand, concluding that the “approach depends on several assumptions that are not generally valid.” This tends to be how scientists define an untruth.
Demand and supply are socially constructed
Here’s the alternative. The actions of others influence individual buyers and individual sellers as much as changes in the price in many markets. In his fascinating book ‘Butterfly Economics’, English economist Paul Ormerod persuades us that this ‘social impact’ is, in fact, one of the economy’s defining features. But not according to conventional wisdom. So, their story has no room for marketing that multi-billion-dollar industry – nor peer pressure, power dynamics, or social proofing. Just scratch the surface, and the mainstream story becomes a joke.
The story that people are deeply influenced in their purchasing decisions by the actions of others now seems more logical. It is also supported by evidence. You just must look for it. Here is a very recent one. In Edinburgh, there are over 53,000 kids in private schools. Owing to the proposed increase in VAT, the public school sector estimated that “11% of students” would leave private schools and enter the already ‘bursting at the seams’ state schools. Wow! That would be 5,830 kids if all parents reacted to that price increase in the same manner. Last week, The Herald reported that only 58 kids entered public schools from private ones – 58. That is 0.1%. Well, being generous I suppose there is still a one in there somewhere.
We know that many purchasing decisions are socially driven and have nothing to do with price. Private schooling is one obvious example. But still, our policymakers worried that a tidal wave of students was about to hit our public schools. The power and simplicity of a supply and demand curve hold our policymakers’ attention.
There are many stories that we know to be true and cannot be explained by conventional wisdom. Mainstream economists would have to abandon the whole economic framework if they agreed with the evidence. And so, the lies continue.
The government doesn’t need our money
Moving from the small scale to the most important myth. That governments need our money to pay for stuff. This myth ensures that we pay the wealthiest in society interest when the government wants to spend more than it has collected in taxes. You know this as borrowing. There is no more damaging myth. The mainstream says the government needs to borrow money from those who have it spare. So, we are dependent on the wealthy. It’s all a big con. And here’s the real story for you.
The economy needs a continual injection of new currency to keep the wheels turning. When the government creates currency, it decides how best to spend that money, and it tends to spend it on services that are not used by the already wealthy. It also releases that money into the economy at an interest rate lower than currency created by commercial banks.
In a real sense, this public money reduces the need for individuals and firms to borrow from the already wealthy or institutions that pay interest to those with money to lend. A large slice of public money is also spent on things that seldom reach the wealthy, who can provision their needs independently.
There is nothing controversial about setting up the story like this. Most mainstream economists would begrudgingly agree. But here’s where the story shines some light on some rather dark recesses of our economy.
Government borrowing isn’t a necessity it is a policy choice
This process of public money creation – as we are seeing so clearly in Musk’s attack on state spending in the USA – jars with the values of the already wealthy. To use a phrase from The Godfather, this public money doesn’t allow the already wealthy to ‘wet their beaks.’ So, a framework was created to ensure that when the government wants to spend more than it collects in taxes, it must ‘borrow’ from the already wealthy.
If the government wants to spend more than it collects in tax, it must offer to exchange currency that sits in a low-interest earning account for a bond that pays more interest. Much ‘beak wetting’ has taken place. J.K Galbraith knew what secured this form of monetary policy, “It survives…because…at times interest rates will be high – a circumstance that is far from disagreeable for those with money to lend”.
We know that, where possible, those in power seek to manipulate the system for their own benefit. Why would this be any different from our economic system?
Consider this: logically, would you ‘borrow’ something if you had the unlimited power to create it? Of course, you wouldn’t. The same goes for the government.
The true story, and the much more logical one, is that the system is rigged. It has been socially created to ensure that when the government spends money the already wealthy earn more money. It is easy to see why the alternative story doesn’t sit well with those already in power.
As that economic giant J.K Galbraith said, “Because familiarity is such an important test of acceptability, the acceptable ideas have great stability.” The irony is that the stability of neoclassical ideas is causing great instability for us all. The Scotonomics Festival is an alternative economic festival that takes place on 21-22 March in Dundee and online. It has many of stories to tell. Find out more about the festival.
Listen to the full interview on Bylines Scotland Radio
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