The hijacking of economics

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BY LUCIA HUBER | MARCH 8, 2018

Economic theory has been hijacked. It has been taken into the hands of a few, encrypted and manipulated and is being fed to us in a distorted and deceiving way.

The economy is something that affects the lives of every person around the world, regardless of whether or not they know it or understand it. We all carry paper money and coins in our pockets, but how much do we know about the creation of money?

We know that inflation is the sustained increase in prices and we certainly notice when it is around, squeezing our budgets, but what do we know about the causes of inflation? We all pay taxes; most of us loathe it, but do we know how the tax system is structured and do we recognize the implications of a given tax reform?

We all live in the aftermath of the biggest financial crisis of our era, but it still puzzles us how it even came about. What were the forces behind it? How could so much wealth vanish into thin air so easily and abruptly? All these things affect our daily lives in some way, no matter who we are or where we are. And yet we understand very little about how the systems that govern our world work. I believe that this is not by accident.

Back in the Middle Ages society was governed by a feudal system. Interestingly, power was exerted over the masses of people not by wielding the sword, but by controlling their access to knowledge. In that time, the feudal system was sustained by imposing a religious belief that justified it. The Bible was a major weapon of control. Keeping people ignorant about the contents of the Book was a way of consolidating the power of the elites over the many. An illiterate population allowed those at the top — who could read — to use the Bible as a tool, to manipulate and distort its contents, and to feed back to the people a version that suited the interests of those elites.

People were told that the King was sent from God and that it was their duty to obey him, that if they failed to do so, God would unleash his wrath upon them. They were told that only the priests could forgive them from their sins and in order to get that forgiveness they had to pay. Similarly, a flood, a drought or a bad harvest, even a disease was said to be God’s punishment for whatever sins the people might have committed.

So the explanations for whatever evils were plaguing the people were to be sought in themselves, not in their rulers, and not in the system that governed them. This allowed the elites to establish a social order and a structure of power that was protected by the fact that it was unquestionable. It was imperative that the people should not be allowed to read and to interpret the Bible on their own, for if they did, they would find inconsistencies between what was being told to them by their rulers and what they really found there. They might have questioned the whole social structure that was erected upon this belief system.

Part of the rhetoric was fear. When you add fear to ignorance, you get a quite convenient combination that results in easy manipulation. People’s ignorance was used against themselves with the purpose of perpetuating a system of dominance and control over the population and to justify the decisions and actions of those at the top. The ruling class understood that if you cut people’s access to knowledge, you curtail their ability to understand and thus their possibility to question, to rise up and to overthrow the system.

Many things have changed over the centuries. Feudalism has vanished and most of the premises of the belief system that sustained it seem ludicrous today. Knowledge has indeed spread. People have become educated and information is now widely accessible. However, like everything that strives to survive, the pyramidal social structure has morphed; it has evolved and adapted to the modern society. Today we live in a capitalist system that is justified, by those who benefit from it, to those who suffer under it, by means of an economic theory that we know as the neoclassical theory. Just as religious beliefs sustained the feudal system, it is now an economic theory and our inability to abstract from it that sustain the modern capitalist system.

We live in a market system that we are told is governed by an “invisible hand” that allocates wealth in a nearly magical way, rewarding those who work hard and contribute to the creation of that wealth and punishing those who do not contribute. Therefore, what we see in the world is a perfect and fair reflection of individual decisions and the only things that alter this system are government intervention and regulation. The fact that recurring downturns are an intrinsic characteristic of the capitalist system seems to be left out of the conversation. Considering the current state of the world, it should make us wonder why so many people would make so many bad decisions.

Furthermore, we are told that high wages create inflation and hurt the economy. This justifies outsourcing as many jobs as possible to developing countries with record low wages because otherwise the companies are unable to compete in the global market. Rarely do we hear someone point out that the millions of dollars a year that the CEOs of most of these companies earn could be inflationary or reduce competitiveness.

Policy makers and analysts often argue that “populist” measures such as a minimum wage and social security create terrible deficits and are unsustainable, but we never hear about the negative effects of populism for the rich, also known as tax cuts for large corporations. When these tax cuts are put through they are sugar coated with the promise that they will create jobs, when in fact, there is no certainty and very little evidence to support the idea that corporations will use those extra funds to invest and to hire more workers. They could just as well invest in machines instead of people, move their factories abroad or simply pay off to their shareholders. In a similar fashion, austerity is labeled as a “structural adjustment program” to distract from the painful implications of a redistribution that cuts wealth from those who have the least, in order to balance budget deficits that are usually created by giving subsidies to those who need them the least.

There is a deeply-anchored myth that privately-owned enterprises are always more efficient than state-owned enterprises and it has been widely used to justify and promote privatization. The fact is that there are vast examples of successful state-owned enterprises as well as unsuccessful ones and the same is true for private enterprises.

Another almost unchallenged notion is that a booming stock market reflects a healthy economy. But we are not told that this boom is more and more often created by companies buying back their own shares in order to increase their prices, a phenomenon that has nothing to do with the success or profitability of a company.

We measure the wealth of a nation by looking solely at aggregate numbers but not at the distribution of those numbers across the population. Looking exclusively at the wealth produced in a country will give us a distorted picture of it if we fail to analyze how that wealth is distributed among its citizens. Similarly, unemployment rates depend on the basis you use to measure them. Statistics can be easily manipulated to tell stories that distort reality and hide unpleasant truths. The interpretation of statistics is not absolute, a fact rarely ever pointed out.

We are inclined to trust analysts and pundits, but when most of them try to explain us how the disaster of 2008 came about, they beat about the bush instead of laying out how twisted the incentives of the banks were, how flawed the regulations were and how fragile and unstable the entire system was. Large bailouts around the world were financed by taxpayer money, a measure we were assured was the only alternative. Fear of an even deeper collapse dominated among the public, eliminating any chance of major opposition to the bailouts.

Finally, our banking system, so we believe, lends us money that someone else has deposited in it. I think one of the hardest concepts to wrap our heads around is the fact that a bank can create money out of nothing and then lend it to us at interest. It sounds too absurd to be true. By doing that, the bank turns to the government and has that money printed through the Central Bank. While the right to print money is exclusively in the hands of government institutions, private banks have the right to create it. Excessive amounts of money dumped into the system will cause inflation as money loses its value. Because inflation does not build up immediately, those who get this new money early, benefit from it before the prices rise and money loses its value, while everyone else is at the losing end. And so we have ended up with a banking system that benefits a few at the expense of the many.

These are just some examples of what is never said in our classrooms or in our mainstream news outlets. It is all blacked out and there is a good reason for that. As an (in)famous quote by Henry Ford says, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

It is neoclassical economic theory that dominates in the universities, pushing competing theories completely aside. It thus enjoys what can only be described as an endorsement from academics, a fact that transmits the notion to the students that this theory is supreme and has in some way prevailed over the others, which are not even worth being analyzed. It is no surprise that a student, no matter how brilliant he or she might be, will have a hard time breaking out of that mindset.

Moreover, the fact that neoclassical theory is built upon a number of very unrealistic assumptions is disregarded. These may be useful for didactic reasons, but the problem with this is that many economic policies are built on those unrealistic premises and govern our lives.

Adding to that, economics have been infused with often unnecessary complexity and loads of models and mathematics that make it too abstract for non-economists (often even for economists) to comprehend, let alone challenge. Eventually economic jargon around a statement becomes intimidating and makes it seem unchallengeable, so we hear things we do not really understand but we also dare not question. In that way it alienates a vast majority of people away from the discussions in which they should be actively participating because it is their interests that are at stake.

Dominance has become more subtle and subtlety can make things go unnoticed. Fear and distortion are still there, although in a different fashion. There is an embedded belief in our minds, that the way the capitalist system works is the way the world naturally works. We are born into this system and we seem unable to wrap our heads around the possibility of an alternative one. The things we are taught in mainstream theories and the news we hear on mainstream papers and channels sustain this dogma.

Just as Joseph Goebbels said, if you tell a lie big enough, as long as you keep repeating it, people will eventually come to believe it. We are told that we are experiencing an economic recovery and this statement goes around mainstream outlets with very little opposition. We do not see the recovery in our lives, so in the desperate search for an explanation, we are made to look for it in our own individual decisions. We should have studied harder and we would have a job. We should work harder to earn a better wage, even when we already work two or three jobs.

Even ridiculous statements find their way into the discussion, such as the one made by the millionaire Tim Gurner who stated that millennials should stop spending their money on avocado sandwiches in order to be able to afford their own home. It seems that our fortune or misery is in our hands alone and that our situation reflects our “choices.” Even worse, we might be tempted and even encouraged to put the blame on scapegoats. Similar to the bad harvests in the Middle Ages, the meager situation we face today is never blamed on the system.

The difference today is that – at least for now – we have a way of sharing and reproducing information: the Internet. We can make economics accessible, share information and extend our knowledge by opening up the debate, welcoming new ideas and training our collective ability to question. We can make economics inclusive instead of exclusive.

Knowledge must be widespread, because anything we do not understand can be used against us. Many revolutions over the centuries have taken place in the streets and squares, but I believe that the greatest revolutions happen in our heads. If something is ever bound to change, it will start with a shift in our consciousness and our awareness.  More than providing answers, the democratization of knowledge should stimulate us to ask questions so that we break out of the box in which the current debate is kept. What are the causes of the grotesque inequality we see? What is the true nature of the system we live in? Are there alternatives to this system? What can we do about it?

I call upon people to be curious, to question, to challenge paradigms. I believe that in these times of delusion, it is the moral duty of economists to democratize knowledge and to help everyone understand, no matter who they are. If we can do that, we can give power back to the people.


Lucia Huber is a Bolivian-German Marxist economist who specializes in financial crises. Follow her on Twitter: @lhuberm

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