The idea of paradigm change
Even before Covid-19, the multiple crises experienced by western economies over the last decade and more – the financial crash, the climate emergency and rising inequality – have led some commentators to ask whether a new ‘economic paradigm’ may be in the making.
An economic paradigm is the framework of economic theories, policies and narratives which come to define a particular era. In the 20th century two major periods of economic crisis led to changes in the dominant paradigm. Old economic orthodoxies proved unable to provide solutions, and new economic theories and policies took their place.
In the 1940s, following the Wall Street crash of 1929 and the Great Depression of the 1930s, Keynesian economics replaced the previous orthodoxy of ‘laissez faire’, leading to the ‘post-war consensus’ of full employment and the welfare state. In the 1980s, following the economic crises of the 1970s, free market economics became the new orthodoxy. But free market economics seems to have caused the crises we have recently experienced, and to offer little by way of solutions. Is another ‘paradigm shift’ due?
Explaining the origins of the idea of economic paradigms, Laurie Laybourn-Langton and Michael Jacobs describe the paradigm changes of the 20th century. Analysing how the free market revolution was organised, they suggest that comparable conditions exist today.
Martin Jacques traces the political impact of the financial crash of 2008 and argues that it will lead to the end of the free market or ‘neoliberal’ era.
Economist Laurie Macfarlane and colleagues set out how economic theory and policy can be categorised in terms of ‘orthodox’, ‘modified’ and ‘alternative’ paradigms, and survey how economic thinking has been changing in major economic institutions such as the OECD and World Bank.
Political economists Will Davies and Nicholas Gane explain how the political right’s reactions to the covid-19 pandemic could signal a break with neoliberal orthodoxy ”and, in particular, from their overriding concern for the market”.
Laurie Laybourn-Langton explained why the emergency responses taken during the Covid-19 pandemic constitute an "unprecedented break from the norms and practice of the prevailing political-economic paradigm" and reflects on the strategies required for a paradigm shift in an age of coronavirus and environmental breakdown.
The critique of neoliberalism
The free market economic ideas and policies which were first introduced in the 1980s under Margaret Thatcher in the UK and Ronald Reagan in the US came to be known as ‘neoliberalism’. Neoliberalism is the doctrine that economic growth and human freedom are best served by the expansion of deregulated markets and private enterprise, and a reduction in the activities and size of the state. It is often described as the dominant paradigm of the last four decades, effectively espoused not just by right-wing governments but by avowedly centre-left ones which (it is often claimed) failed to reverse or challenge its principal policies.
Neoliberalism has been widely criticised. Its economic policies have led to a significant growth in income and wealth inequality and pervasive environmental degradation. The globalisation of commerce and free trade promoted by neoliberalism has in many countries led to the destruction of traditional industries and the communities which have relied on them. Deregulation has led to a huge expansion of the financial sector, and of the influence of financial objectives in companies and society, a process often described as ‘financialisation’.
Though neoliberalism claims to promote market competition, in key sectors (such as digital platforms and public services outsourcing) it has enabled the development of extremely powerful companies operating as near-monopolies. The process by which wealth is extracted from the economy by a relatively small group of financial and monopoly asset owners has led some to describe the neoliberal economy as ‘rentier capitalism’.
The Adam Smith Institute defends the neoliberal ideal and sets out a neoliberal manifesto for the UK in the 2020s.
The Adam Smith Institute calls for the UK to become a ‘Singapore-on-Thames’. It argues that the UK should adopt a range of free market policies, such as cutting taxes and regulations, to make the economy more efficient. But the bulk of the report proposes greater marketisation and competition in key public services such as healthcare and education, in order to reap the rewards of higher growth and better outcomes.
US writer Robert Kuttner analyses the ‘political success and economic failure’ of the neoliberal project.
Describing the way in which its ideas took hold, the writer George Monbiot attacks the impact of neoliberalism over the past forty years.
The Harvard economist Dani Rodrik argues that the economic assumptions and policies associated with neoliberalism do not represent the thinking of mainstream economics.
Political economist Brett Christophers explains the concept of rentier capitalism and how the UK economy has become ‘rentierised’. (Long version here.)
A new economic paradigm
There is as yet no widely agreed name for a new, post-neoliberal economic paradigm. But those seeking to build one largely agree on its core goals. They seek an economic system which is
- environmentally sustainable, living within the earth’s planetary boundaries in a just and fair way for all the world’s people and for future generations
- focused on improving individual and social wellbeing rather than prioritising economic growth
- structured to reduce inequalities of income, wealth and power, and to eliminate systematic gender and race inequality
- designed so as to spread the ownership of capital and assets, with many commonly owned and democratically controlled
- structurally resilient to shocks, whether from finance, environment or pandemics
In such an economy democratically elected governments would play a significant role, seeking to shape and regulate markets to serve the public interest, and limiting the power of major corporations and financial markets.
These goals cannot be achieved, it is argued, by minor reforms to present economic systems. Fundamental reform is required, a structural transformation which hard-wires these goals into the way the economy works.
The IPPR Commission on Economic Justice, whose members included the Archbishop of Canterbury and prominent business and trade union leaders, provides a comprehensive analysis of the failings of the UK economy and over 70 policy recommendations in a ten-point plan for fundamental reform.
The New Economics Foundation, the Zoe Institute and the Wellbeing Economy Alliance set out a joint plan for systemic economic change in the UK, seeking a fundamental transformation towards a resilient economy promoting equality, environment and wellbeing.
Describing the principles set out in her book Doughnut Economics, Kate Raworth argues that economic activity needs to fall within the two boundaries, social and ecological, that together encompass human wellbeing. Such an economy would be ‘regenerative and distributive’ by design.
The scale and radicalism of US President Joe Biden’s proposals since entering office have strengthened the argument that a paradigm shift is underway in American, and global, economic policy making. Economist Noah Smith (Noahpinion) argues Biden’s policy reforms are comparable to the New Deal or Reaganomics in scale, and offers an analysis of the “unifying philosophy” of Bidenomics.
Tony Danker, Director General of the CBI, gave a speech to its annual conference dubbed as a “damning critique of free-market capitalism”. It exemplifies the new consensus (though not in the Government) around the importance of state intervention and industrial strategy. Danker noted that “we’ve had five decades where the free market has palpably failed” and called for a “partnership with government.”
In its ‘Reset’ report for a post-Covid society, the All-Party Parliamentary Group on a Green New Deal has set out a vision of a new economy, and the principles and policy ideas which could inform it.
The growth debate
New economic thought
The economic crises of the last decade have generated significant reassessment in the discipline of economics. The failure of mainstream analysis to anticipate the financial crash of 2008, the growth of inequality, the unexpected stalling of productivity and wage growth, and the increasing evidence of environmental breakdown, have led to a questioning of the theoretical foundations upon which much economic policy has been based. Mainstream economics has increasingly taken new perspectives on board, while alternative or ‘heterodox’ schools have become increasingly prominent.
In macroeconomics, ‘post-Keynesian’ analysis has emphasised the critical role of the financial sector and of uncertainty. Institutional and political economists have focused on the role of institutions and power relationships. Evolutionary and complexity economists have sought to understand the economy as a complex, adaptive system with a path-dependent history of technological and institutional development. Ecological economics has pointed out the environmental basis of all economic activity. Feminist economists have forced attention on its gendered nature. Behavioural economists have shown how people actually behave, contradicting the neoclassical model of ‘rational economic man’.
These developments have not yet led to any grand synthesis, but economics is in greater flux, and generating more interesting ideas, than it has for a generation.
In a report for the OECD, a group of leading economists describes how a convergence of mainstream and ‘heterodox’ economic thought is enabling a much richer understanding of how modern economies work and appropriate policy solutions.
In an interview with Evonomics, Eric Beinhocker, Director of the Institute for New Economic Thinking at Oxford, discusses how the integration of evolutionary and complexity economics can provide a new foundation for economic theory.
Launching their network of ‘Economists for Inclusive Prosperity’, US-based economists Suresh Naidu, Dani Rodrik and Gabriel Zucman argue that economics needs to escape its fetish of markets, and in doing so can provide important tools to improve society.
The Bruegel think tank describes recent developments in macro and microeconomics which challenge formerly dominant orthodoxies.
Mariana Mazzucato, Director of the UCL Institute for Innovation and Public Purpose, summarises her influential thinking on financialisation, innovation and ‘mission-oriented’ industrial policy.
Changing the economics curriculum
At the same time as neoclassically-based economics has been criticised for its influence over orthodox economic policy, its central role in the teaching of economics has also come under scrutiny.
Complaining that traditional economics courses did not reflect the post-financial crash world they were experiencing, economics students have campaigned for reform of the curriculum. They and others have argued for economic ‘pluralism’, an acknowledgement that there are a variety of economic perspectives, not a single correct one.
New ways of teaching the subject have been developed which start with real world problems and data about them, not stylised theory.
The student movement Rethinking Economics campaigns for a pluralist economics curriculum.
The CORE project has developed a new open-source curriculum for teaching undergraduate and postgraduate economics based on studying real world problems.
Members of Economists for Inclusive Prosperity, Can Erbil and Geoffrey Sanzenbacher explain Why, When, and How to Teach the Fundamentals of Inequality to economics students.
Felicia Odamtten, founder of The Black Economists Network (TBEN), explained that a lack of diversity in economics "can exacerbate the lack of attention paid to the issues faced by particular communities, and ultimately lead to poor decision-making and negative outcomes for these communities.”