Debunking the Myths

Book Review – Economyths: 11 Ways Economics Gets it Wrong By David Orrel


At the beginning of the year, predicted that 2008 would be a year of prosperity, based on forecasts by financial pundits. The growth rate for the year was forecast at 11 percent. No one had even a hint of the impending massive economic collapse. By the end of the year, the S&P 500 index was down 38%. The loss was estimated at $ 29 trillion. The full picture of the financial meltdown began to emerge in September 2008 with the collapse of the Lehman Brothers. Even the International Monetary Fund, which has been described as the guardian of the global banking and financial system, is at a loss as to what is going on. The U.S. economic downturn of 2008 has spread globally and is still exacerbating the crisis.

Is it an isolated incident that failed to anticipate an economic collapse? Anyone who observes the history of the global economy is convinced that it is not. From the collapse of the so-called ‘Tulip Fever’ in 1637 to the Asian Crisis of 1997 and the dotcom Crisis of 2000, economic pundits and experts have only been able to keep a close eye on the economic downturn. They had nothing to do to save that global economy from collapse. Strictly speaking, the economic theories they learned didn’t help them.

Why? Why have neoclassical economics’ claims that economic theories are governed by mathematical laws and therefore ‘risk’ control by mathematical equations failed? David Orrell, in his book ‘Economyths: 11 Ways Economics Gets It Wrong’, discovers the reasons behind this by presenting the basic myths of economic theories.

Orrell is not the first person to point out the fundamental flaws of economic theories. The long line from Frederick Soddy to Kenneth Bowling, Steve Keen, and Ha Joon-Chang explains the limitations of neoclassical theories on many levels. While economists like Chang explain the facts in opposition to free market theories, Orrell questions in his book the economic laws themselves, which are based on the ‘reductionist models’ of Newtonian physics.

David Orrell wrote his first book, Economyths: 10 Ways Economics Gets It Wrong, in 2010, when the 2008 American subprime mortgage crisis was slowly turning into a global financial crisis. The new book is being written as a sequel to the first one. In his new book, published in 2017, he defines what economyth is:

Economyth [noun]: A belief or story that shaped the foundations of economics, and continues to play a key role in economic practice, for example, in the models used by economists-though sometimes in a weakened form. It is usually linked to an essentially supernatural view of the economy, which is characterised, for example, by the ‘invisible hand’, ‘efficient markets’, ‘hyper-rationality’, changes caused by mysterious ‘external shocks’, and so on. And it’s wrong.

Orrell is not alone in uncovering these myths related to neoclassical economic theories. In 2010, American economist James Kenneth Galbraith testified before the U.S. Senate:

Economic theory, which has been widely taught since the 1980s, has failed miserably to understand the forces behind the financial crisis. Concepts including  ‘rational expectations’, ‘market discipline’, and the ‘efficient markets hypotheses’ led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied, and that widespread fraud therefore could not occur. Not all economists believed this-but most did. (Galbriath. Kenneth J, 2010).

The following are 11 points that Orrell highlights as general myths of neoclassical (to some extent classical theories) economic theories:

1.The economy can be explained by economic laws. 2. The economy is made up of independent individuals. 3. The economy is stable. 4. Economic risks can be easily solved using statistics. 5. The economy is rational and efficient. 6. Economy is gender-neutral. 7. The economy is fair. 8. Continuous growth of the economy is possible. 9. Economic growth will make us happy. 10. Economic growth will always good. 11. Economics boils down to barter. Through each chapter Orrell explains why these become mere myths.

Orrell clarifies in the first chapter; “Economics gains its credibility from its relationship with the physics and mathematics. Can the economy be described in terms of mathematical laws as claimed by economists including Larry Summers? the author asks. Quoting Sir Isaac Newton, he answered;  Issac Newton did not think so. As he points out in 1721, after losing most of his wealth in the collapse of the ‘South Sea Bubble’ (the collapse of the British joint stock company South Sea Company in 1720): “I can calculate the motions of  heavenly bodies, but not the madness of people”.

Orrell explains the basic law of economics — supply and demand theory — and establishes that the supply-demand curve taught in all financial schools has never been empirically proven using real data. He says, ‘this curve’ is like a ‘unicorn’,  always drawn but never seen. Orrell’s scientific analyzes shatter the conventional notion that economic theories are governed by objective, non-partial mathematical laws and that any kind of risk can be detected and solved through data modeling. As a mathematician, Orrell, who specializes in the study of complex systems such as climate, genetics, and economics, can easily handle this.

Economists taught that the economy is the net result of the actions of individual investors and that they work independently of each other to maximize their own utility. Such view of economics is similar to the atomic theory of physics. That is, it places the individual at the center and reduces the role of society. The fact is that we are always influencing each other. The author explains; “We buy houses not only to meet the basic need of a roof over our heads, but also because everyone else is buying one, and we are afraid of being thrown out of the ‘housing ladder’.”  Mainstream economists ignore or downplay the herd behavior of the market. The second chapter therefore argues that they fail to predict and properly prepare for financial crises.

It is worth recalling here that the herd behavior of the market explained in more detail in Andre Gorz famous book, Ecology as Politics. Evaluating the social ideology of the motor car, he writes: “In fact, no one has a choice. You have no freedom to buy or not to buy a car” (Gorz, 1975).

Economists taught that the economy is intrinsically stable. Price changes are small and random, so crises are quickly eliminated by the ‘invisible hands’ of market forces. This assumption, except against all economic history, is awesome! Boom and bust aren’t exceptions, they are standard course of things. Orrell argues that the assumption that stability is a feature of scientific modeling of natural systems since the time of the ancient Greeks, and why the dynamic, unpredictable, and reflective nature of the economy should be taken more seriously.

Unless something entirely unusual events happened; Another myth associated with economic theories is that the risks to the economy can be controlled through well-established scientific techniques. But the basis of the problem is the fact that, as theories suggest, such so-called extreme events are not entirely unusual.  Over the past three decades, we have witnessed a series of crises, including the “Black Monday”, the Asian financial crisis, the Russian financial crisis, the dotcom crisis, and the Great Depression of 2007-08. Chapter 4 of the book reveals the dangerous assumptions reached by financial institutions and banks by analyzing the risk models they use.

Mainstream economists taught that economy is built on logic and efficiency. They come to this conclusion based on the idea that individual investors make rational decisions. But Orell argues that there are many contexts in which herd behavior is reflected in the decisions of individuals. He emphasizes, the market survives on trust and confidence. He explains, it is not possible to lend without trust and that one is not prepared to take risks without confidence. He also seeks to discuss new approaches that take into account the reality that money is an emotional stuff.

Independent investors who know their own minds and are not influenced by the opinions of others. The book raises the question of whether orthodox economic theories embrace gender bias by emphasizing rationality and understanding over sensitivity and emotion. Is this why men dominate the arena at the highest levels of academia, business and governance? What are the implications of this not only for economic theory but also for the economy? What would an economy designed by women be different from what it is today? Chapter Six seeks to examine the gender implication of neoclassical economic theories through a variety of questions, including how feminist economists and industry leaders try to rewrite our beliefs about money.

Many feminist economists, such as Mary Mellor(2004), Raff Carmen(1994), and Veronica Benholt Thompson (2001), have already described the various ways in which general economic models make women’s discourse invisible. In his book, Orrell reinforces the arguments of American feminist economist Nancy Folbre (2001) that the global economy, which operates by market forces, is facing a social reproduction crisis.

Economists are taught, as a matter of principle, that a well-functioning market economy is fundamentally fair and that our chances of success depend only on real merit, even if it involves luck and casual results. The whole goal of a competitive market is to have an equal share for all. The ‘logic’ of economics explains to us that these beliefs in internal equality affect everything from tax policies to CEOs’ pay packages. Yet over the last few decades, the income distribution continues to grow. The benefits of increasing productivity are available only to the best few percent of the population. Explaining why, Orrell argues that the market is not ultimately based on justice or equality, but only on the system that makes the rich richer. Chapter eight deals with another myth of economic theories of eternal growth. Standard economics considers the ecosystem only as a subsystem within the economy. Explaining the recent environmental catastrophes and the significant decline in ecological services, the author warns that in the near future will have to witness the collapse of this myth.

Chapter Nine, The Unhappy Economy, makes it clear that little has changed in recent times from the Victorian economic theory that the growth of the economy increases the happiness of the people. It seeks to illustrate the errors that occur in interpreting material growth as human satisfaction and to analyze the vague and often contradictory relationship between money and happiness.

Mainstream economics reminds us that a good economy, one free from the isolation of corruption and market failures, will increase the utility of each individual and create the best possible world. Through the tenth chapter, Orrell explains that this is covering up the perceptions of how a mythical economy actually works. We see so many ideas for building a sustainable economy coming in like a flood.  Many ideas-non-linear dynamics, complexity, Network theory- flow through a variety of streams. Neoclassical theories, however, are rushing to its inevitable downfall.

It can be seen that the Eleventh ‘Economyth’ is not really an independent myth, but was created to justify or enable other myths. This is a fairly harmless one. It states that the economy can only be seen as a kind of barter system. But with this main assumption, everything else goes away. This explains why this is rarely discussed in the right economic circles. The chapter evaluates the role of money in economics or its absence.

Through eleven chapters, David Orrell seeks to assert that recurring economic turmoil is no exception and that they are problems inherent in the very essence of economic theories. In his book, Orrell reliably and convincingly questions the quasi-scientific objectivity and mathematical accuracy that economics claims. His field of study also allows him to handle this subject with ease.

K. Sahadevan is an environmentalist from Kerala. He has been writing on Energy, Economics and Environment for the last few decades. He has authored half a dozen books on different topics and a regular contributor to various journals and newspapers.



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