Theological Economics — Analytical Framework as Universal Worldview

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I am afraid, I used to believe in the equilibrium concept of economically constituted freedom described below until about four years ago. 

By studying the conditions of liberty, eventually I discovered that a free society is by nature a highly politicised organism. I began to realise that economic activities too are inevitably of a politicised nature, regulated and conditioned by power relations and laws etc. that are shaped by human ambition, persuasion and interaction, and collective products such as habits and conventions, all of which being causally prior to and more fundamental than economic action as captured by purely economic models.

Both Hayek and Friedman saw themselves as participants in a battle of ideas against encroaching socialism. In their hands, an analytical framework became a universal worldview: Economics 101 became economism. Economism is the belief that basic economics lessons can explain all social phenomena — that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook. Ideally, students should learn that the competitive market model is just that — a model, which by definition abstracts from the real world. According to the rhetoric of economics, however, the lessons of Economics 101 can be transplanted directly into the real world. The central idea that free markets generate the greatest possible economic well-being for society becomes a universal framework for understanding and answering any policy question.

Economism may not accurately describe reality, but its reduction of complex phenomena to simple concepts was a major asset in the battle of ideas. The political landscape of the United States after World War II was dominated by the shadow of the New Deal and the idea that the government could and should play a major role in managing the economy. Businesses that opposed intrusive regulations and wealthy individuals who feared higher taxes needed an intellectual counterweight to the New Deal, a conceptual framework that explained why an activist government was bad not just for their profits and their pocketbooks, but for society as a whole. Economism filled that need....

I have always been critical of neoclassical and modern equilibrium economics. I only wonder why this scepticism has not made me much earlier doubt the ideological generalisation of the free market model.

As the mantra of free markets, small government, and lower taxes became more popular with voters, Democrats adapted by also paying homage to competitive markets. It was Bill Clinton who said, "The era of big government is over." And Barack Obama’s signature health-care-reform program is centered on the idea of using (regulated) market competition to expand access to health insurance.…

Economism is the reduction of social reality not just to Economics 101, but to just one Economics 101 lesson: the model of a competitive market driven by supply and demand.

If we were to redesign Economics 101, what would it look like? One possibility is to begin not with abstract models, but with the real world. How do companies use technology to produce goods, and how are those companies organized? How are products and services distributed, and how do manufacturers, intermediaries, and retailers set prices? How are wages determined — not in the theoretical model, but in real life? What factors determine the set of opportunities available to different people on different parts of the planet?...

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