## How Economics Must Change — Jayati Ghosh

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### Urgent need for disciplinary transformation
- Humanity faces existential crises, with planetary health and environmental challenges becoming major concerns.
- The global economy was already limping and fragile before the pandemic; the subsequent recovery has exposed deep and worsening inequalities in incomes, assets, and access to basic human needs.
- Resulting sociopolitical tensions and geopolitical conflicts risk creating societies that may soon be dysfunctional to the point of being unlivable.
- The mainstream discipline persists in "business as usual," treating marginal tinkering as sufficient rather than advocating transformative economic strategies.

### Core problems in mainstream economics
- Much of what is presented as received economic wisdom is at best misleading and at worst simply wrong on issues including:
  - how financial markets work and whether they can be “efficient” without regulation;
  - the macroeconomic and distributive implications of fiscal policies;
  - the impact of labor market and wage deregulation on employment and unemployment;
  - how patterns of international trade and investment affect livelihoods and the possibility of economic diversification;
  - how private investment responds to policy incentives such as tax breaks and subsidies and to fiscal deficits;
  - how multinational investment and global value chains affect producers and consumers;
  - the ecological damage wrought by patterns of production and consumption;
  - whether tighter intellectual property rights are necessary to promote invention and innovation.
- The exclusion of the concept of power from mainstream discourse reinforces existing power structures and imbalances (for example, greater power of capital compared with workers; unsustainable exploitation of nature; differential treatment of workers through social labor market segmentation; private abuse of market power and rent-seeking behavior; use of political power to push private economic interests; and distributive impacts of fiscal and monetary policies).
- GDP remains the basic indicator of progress despite "many conceptual and methodological flaws," largely because "it’s there."

### Inconvenient assumptions and methodological limitations
- Mainstream theoretical models often retain unrealistic assumptions—perfect competition, constant returns to scale, full employment—even when claimed to have moved away from early neoclassical assumptions.
- Welfare economics rests on key assumptions that rarely hold in reality:
  - people need to have fixed preferences, including for things that do not yet exist;
  - all goods must be "rival" despite many being nonrival (for example, the atmosphere, public roads, digital movies);
  - no externalities such as pollution or CO2 emissions;
  - no firms can have market power (perfect competition);
  - constant returns to scale as production levels increase.
- Kenneth Arrow’s “impossibility theorem” (1970s) shows that it is never (on very reasonable assumptions) possible to determine the welfare of society as a whole by adding up the welfare of individuals.
- The discipline tends to squeeze complex, historically and politically embedded economic forces into mathematically tractable models, often removing resemblance to economic reality.
- Top academic incentives (the "tyranny of so-called top journals" and employment pressures) divert talent toward narrow technical contributions—"relaxing one small assumption" or slightly different econometric tests—while excluding elements that are harder to model or generate inconvenient truths.
- Randomized trials and micro-focused methods in development economics can erase historical and contextual background, reflecting a shift away from studying evolutionary processes and macroeconomic tendencies to methodological individualism.

### Hierarchy, discrimination, and geographic bias
- Enforcement of strict power hierarchies within the discipline suppresses alternative theories, explanations, and analysis.
- Other forms of discrimination—by gender, race/ethnicity, and location—exclude or marginalize alternative perspectives.
- The mainstream discipline is dominated by the North Atlantic—specifically the US and Europe—in prestige, influence, and ability to determine direction, marginalizing contributions from economists in global majority countries under the implicit assumption that “real” knowledge originates in the North.
- Arrogance toward other disciplines (philosophy, history, sociology) limits cross-disciplinary engagement and weakens economists' sense of history and contextual understanding.

### Evidence, revision of views, and historical perspective
- Personal reconsideration: the author previously subscribed to the near consensus that immigration to the US was unambiguously beneficial with little cost to domestic low-skilled workers, but now rejects that view based on longer-term analysis:
  - inequality was high when America was open, was much lower when the borders were closed, and rose again post Hart-Celler (the Immigration and Nationality Act of 1965) as the fraction of foreign born people rose back to its levels in the Gilded Age.
  - plausible arguments exist that the Great Migration of millions of African Americans to Northern factories would not have happened if factory owners had been able to hire preferred European migrants.
- Economists’ empirical designs often rest on short-term outcomes; longer-term historical analysis can tell a different story.

### Recommendations and desiderata for reform
- Economics needs:
  - greater humility;
  - a better sense of history;
  - recognition of unequal power;
  - active encouragement of diversity (including geographic and disciplinary diversity).
- Economists could benefit from greater engagement with philosophers, historians, and sociologists, reviving the interdisciplinary curiosities of earlier thinkers such as Adam Smith.
- Policymakers must choose courses of action in the absence of solidly grounded welfare economics, underscoring the need for a richer, context-sensitive, and historically informed discipline.

*Source: Jayati Ghosh, "Economics needs greater humility, a better sense of history, and more diversity," March 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-ghosh.pdf_