Why the best economists work against the public interest | Gary Stevenson, Abby Innes, Nadhim Zahawi

Episode Overview

• This debate features a clash of perspectives on the current state of economic theory, centering on whether neoclassical economics is broken and if we need a new overarching theory to replace it.
• The panel includes Abby Innes (political economist criticizing the "machine model"), Nadhim Zahawi (former UK Chancellor defending free-market capitalism and practical governance), and Gary Stevenson (former trader emphasizing inequality and the failure of economists to predict crises).
• The discussion moves from theoretical critiques of economic modeling to practical failures in policy, specifically addressing inflation, wealth inequality, and the disconnect between academic theory and real-world outcomes.
• A central theme is the tension between the desire for a "scientific," mathematical prediction of human behavior versus the reality of a chaotic, unpredictable social world.

Key Concepts

• The "Machine Model" Fallacy: Abby Innes argues that neoclassical economics attempts to treat the economy like a physics problem—a closed, predictable system governed by universal laws. This "social physics" fails because human society is an open system defined by radical uncertainty, innovation, and constant change.
• Analytical Pluralism: Instead of seeking one new "Grand Unified Theory" to replace the old one, the panel (particularly Innes) suggests we need "analytical pluralism." This means using multiple frameworks—ecological, political, sociological, and financial—to understand specific problems rather than imposing one rigid mathematical model on everything.
• The Disconnect Between Theory and Reality: Gary Stevenson highlights a systemic failure where academic economists consistently fail to predict major events (like the 2008 crash or persistent inflation) because their models assume equilibrium. In contrast, traders who bet on disequilibrium and inequality often make better predictions because they are financially incentivized to be right, not theoretically consistent.
• Empiricism vs. Axiomatic Deduction: A major distinction is drawn between the scientific method (observing reality to form theories) and the economic method (starting with assumptions/axioms and deducing what should happen). The panel argues that modern economics has become too detached from empirical observation, leading to policies that look good on paper but fail in practice.
• The Role of Inequality in Forecasting: Stevenson argues that inequality is the missing variable in most standard models. When wealth concentrates, it distorts demand and economic function. Successful forecasting often requires tracking where the money actually is, rather than assuming it flows efficiently through a balanced system.

Quotes

• At 1:58 - "Neoclassical economics... is an attempt to build a universally sound science based on mathematical reasoning from axiomatic deduction. It's not the scientific method... It's based on logical reasoning from assumptions." - Explaining the fundamental methodological flaw in how modern economics is constructed compared to natural sciences.
• At 8:56 - "Increasingly, the average person in this country struggles to simultaneously feed their kids and turn the heating on. Which I don't know whether that was a problem for an 18th-century monarch or not, but I think it's important." - Highlighting the disconnect between statistical arguments about aggregate wealth (GDP) and the lived reality of wealth distribution.
• At 11:37 - "All of the good traders know inequality is destroying the economy. And they don't say anything because they get paid millions of pounds a year not to." - Revealing the incentive structures that keep practical economic knowledge siloed within the financial sector while public policy relies on flawed academic models.
• At 16:55 - "No polling is based on scientific measurement... We are all in the business of modeling. And who can build the best model of human behavior should be the most successful pollster." - Nadhim Zahawi drawing a parallel between political polling and economics to argue that while exact prediction is impossible, better modeling of human behavior is the practical goal.

Takeaways

• Abandon the search for a single economic "truth": When analyzing economic problems, stop looking for one universal theory. Instead, adopt a toolkit approach that uses different lenses (environmental, behavioral, financial) to solve specific, contextual problems.
• Evaluate economic experts by track record, not prestige: When assessing economic forecasts or policy advice, prioritize individuals and institutions with a demonstrable history of accurate prediction (like successful traders or empirical researchers) over those with prestigious academic credentials who rely on theoretical equilibrium models.
• Factor inequality into every economic assessment: When planning or investing, recognize that aggregate data (like GDP or average income) hides the structural distortions caused by wealth concentration. A model that ignores distribution will likely fail to predict real-world demand and market behavior.