Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 19 September 2014

Wishful thinking and economics

Economics is often called the dismal science, and the Scottish referendum showed why this description has stuck. The Yes side appeared full of hope and optimism about what could happen once the constraints of Westminster rule had been cast off, while the No campaign kept on going on about one problem or other, which usually involved economics.

The general meme is that this negativity was a tactical mistake by the No side, but it was a quite understandable mistake, because the economic problems were large and self evident. It is no surprise that the vast majority of economists thought Scotland would be worse off under independence (see here, or here, or here). They had looked at the numbers and issues, or looked at institutions they respected that had done so, and thought this does not look good. Even for some of those economists who are in favour of independence, like Joe Stiglitz for example, it is clear that the attraction is despite, rather than because, of the basic macro and fiscal numbers. (See also Adam Posen’s response.)

This is of course not new. Politicians on the right like to believe that tax cuts will pay for themselves, and it is boring economists who (mostly) point out this is not true. Politicians of all shades thought that austerity would not have much impact on output and growth, while the vast majority of economists knew better. One of the reasons for deficit bias is that politicians believe that their policies will galvanize the economy and raise the tax base, and most of the time the macroeconomy stubbornly refuses to be impressed.

Now it is tempting to say, given this evidence, that politicians will believe anything that suits them. But what the independence referendum showed us is that voters have similar problems. As the campaign progressed the stronger the Yes vote became, and there is some evidence that this reflected additional information they received. As I suggested here, the problem is that this information was superficially credible sounding stuff from either side, but often with no indication from those who might have known better of the quality of the analysis.

For me this has always been the major argument for establishing fiscal councils - independent institutions who are charged with, at a minimum, scrutinising fiscal projections. Although the OBR (the UK’s fiscal council) has a remit that is quite narrow, we also have the highly respected IFS. In Sweden the fiscal council itself has a much wider economic remit.

Whenever I make this point, someone puts forward the argument that this is anti-democratic, or that I want economists to dictate decisions. This is wrong on at least two levels. First, my general argument is not specific to economics, but involves any area that involves technical expertise. Indeed, the case I make here is partly to avoid politicians using the views of a small minority of economists as cover. Second, the problem with democratic accountability as normally defined is that it is very weak: voters make one decision every five years that involves a whole basket of issues. I would suggest that charging an institution with a small set of tasks, where there is effective democratic oversight over the performance of that institution, can make that institution more accountable to the electorate than any politician doing the same.

In the case of Scottish independence, although we did not have a direct assessment of fiscal prospects from the OBR, that organisation’s oil revenue forecasts were used by the equally respected and independent IFS to point out the problematic outlook that an independent Scotland would face. Although the Yes side attempted to suggest that the OBR was part of the very Westminster elite that it wanted a divorce from, I suspect many voters saw this as independent analysis and were concerned by it. In a world where politicians can always find some experts to back their view, I suspect it is only through singular institutions like the OBR and IFS that the views of the majority of economists get to have some influence, and the economics of wishful thinking gets exposed.


  1. No. This will not do. So, in response to the charge that it is anti-democratic, you respond

    "First, my general argument is not specific to economics, but involves any area that involves technical expertise."

    That is not an argument against it being anti-democratic. That is an argument which says screw the democratic process, things will go better if we give the decisions to people trained in the area with technical competence.

    This is precisely the argument Plato made against democracy, and in favour of 'Philosopher Kings'.

    "Second, the problem with democratic accountability as normally defined is that it is very weak: voters make one decision every five years that involves a whole basket of issues."

    That hopelessly misrepresents the nature of Representative Democracy. Yes we only have a vote once every four or five years. That is because we live in a Representative Democracy. We have adopted that system to overcome the very objections to Direct Democracy that Plato identified. In a Representative Democracy, the people who get to decide are the representative we elect through due process. The accusation that your proposals are anti-democratic concern the fact that it is contrary to the principles of Representative Democracy. You are taking the decision away from the representatives. Of course representative Democracy is less sensitive to what people generally think on any particular issue than direct democracy. That is its entire point.

    You'd be much better off openly admitting that your views are anti-democratic (they are) but that you think other values outweigh the need for democratic accountability.

    The Scottish referendum was (and here I suspect we are in agreement) a startling illustration of the problems Plato identified with direct democracy. So, from the Stanford Encyclopedia

    Plato (Republic, Book VI) argues that democracy is inferior to various forms of monarchy, aristocracy and even oligarchy on the grounds that democracy tends to undermine the expertise necessary to properly governed societies. In a democracy, he argues, those who are expert at winning elections and nothing else will eventually dominate democratic politics. Democracy tends to emphasize this expertise at the expense of the expertise that is necessary to properly governed societies. The reason for this is that most people do not have the kinds of talents that enable them to think well about the difficult issues that politics involves. But in order to win office or get a piece of legislation passed, politicians must appeal to these people's sense of what is right or not right. Hence, the state will be guided by very poorly worked out ideas that experts in manipulation and mass appeal use to help themselves win office.

    In relation to the economic and legal issues of independence, that seems to me to be pretty good description of why Yes managed to get 45%.

    Philosopher Kings, whether in economics or other fields, don't like any form of democracy much. It will give you sub-optimal decisions. The history of the 20th Century means we tend to worship democracy as a religion, but it is no good denying that there are not downsides to it, or limits on it that we have to accept.

    Nor is it any good denying that such limits are not anti-democratic. They are.

    1. Mainstream economists believe in the rationality of voters, where rationality is defined as always choosing what is economically best for that person. So economists, by their own definiton, always know what people should do. The logic is a bit circular. On the one hand, it's a very positive view of the world - people are thoughtful and know very much about the world, on the other hand, it's also a very bleak view of the world - people are egoistic and materialistic.
      That 45% of the voters votes 'yes' can mean many interesting things - maybe people care more about values than their own welfare? People care more about society in a distant future than about themselves in the present? People were misinformed or simply irrational?
      As so often, it's probably a bit of everything.

    2. Gosh, this is a very high horse. So back on the ground, in what way does the OBR undermine representative democracy?

    3. It takes the decision away from an elected representative an gives it to a professional. That may be the right thing to do. The MPC is ant-democratic as well. As is, in an entirely different context, the European Court of Human Rights.

      The proper case for doing this is not that they are not anti-democratic (they are), but rather that this is a good thing to do for other reasons.

      In economic terms, the MPC is great. In democracy terms, horrible.

    4. If representative democracy worked perfectly, then maybe you would have a case (although remember the OBR does not control any decision). But in reality it does not. Politicians want to hold on to power, and they can manipulate votes through a monopoly of information. (Due to my brilliant management of the economy here is a tax cut.) The OBR, by providing the public with unbiased information, actually improves representative democracy by reducing the scope for such manipulation.

    5. In defence of Simon's two points: On technical expertise, where he says "Indeed, the case I make here is partly to avoid politicians using the views of a small minority of economists as cover" the argument is that such independent bodies can help make the public debate better and more informed. This is good for democracy.

      Regarding accountability, the point is that the public's influence over those in power doesn't only extend to elections every few years. Public accountability can be less direct than this. If all politicians feared were elections, they would act much more freely in the intervening years. To say that giving any unelected person power is anti-democratic seems like a very narrow definition of democracy to me.

    6. Read the post, then read it again, then drop the persistent prejudices before reading it again, then commenting.
      You conveniently omitted an important caveat clearly raised by SWL regarding the OBR: "I would suggest that charging an institution with a small set of tasks, where there is *effective democratic oversight* over the performance of that institution, can make that institution more accountable to the electorate than any politician doing the same." Not much wrong there, provided it is *effective* of course.

    7. My point is that representative democracies are imperfect. There are good reasons for doing things that are anti-democratic. The OBR is not a decision making body, and so isn't a problem in democracy terms. The MPC and your proposed fiscal councils are. I am not a democratic absolutist at all. What I am arguing is that you need to recognise that your arguments are anti-democratic, but may still be right.

    8. There are lots of fiscal councils around the world, and all are advisory. I was not proposing anything different.

    9. Perhaps I am wrong, but your argument, SpinningHugo, is that "the market" should dictate morality, as it "knows" better than any forms of government?
      To me this argument boils down to the 'tragedy of the commons' vs 'individual optimisation'. If efforts of governance are not perfect it perhaps does not mean that Darwinism is the only alternative. Else we are into TINA country.

    10. I fully support the professor's call for a fiscal council. It really is long overdue. I cannot see there is anything "undemocratic" about a body that makes no spending or taxing decisions, but simply ensures that a government act in a fiscally responsible manner. No different, really, from the decision to allow interest rates to be set by by an independent monetary authority.

      The principal goal is to run a properly constituted, sustainable, counter-cyclical economic policy. By that I mean we need to retire debt when times are good and be able to provide a solid fiscal stimulus when times are bad. The political process inherently supports the opposite. In prosperity, left wing governments will typically spend on welfare measures, right wing governments may cut taxes. Both popular measures. Neither want to embrace the unpopular tax increases or spending cuts needed to pay for them. When things go pear shaped they panic and only then decide to embrace austerity - exactly when it is not wanted. Of itself, this damaging pro-cyclical process can lead to the boom and bust scenarios we commonly see. A fiscal council, with oversight, could ensure the appropriate fiscal stance is maintained over the long term and help prevent these lousy outcomes.

    11. Lots and lots of advice readily available now. You give out lots of it. If it is just advice, with no expectation that the elected representatives must follow it, it wouldn't be anti-democratic.

      That isn't what you want.

    12. Spinning Hugo’s initial point above is ridiculous and ridiculously long. Although Simon’s argument in defence of fiscal councils isn't too brilliant either. That is, there is a VERY SIMPLE reason why fiscal councils do not intrude on the democratic process, and it’s a reason Positive Money have explained over and over, but to little avail. The reason is thus.

      Fiscal councils (and the Money Creation Committee advocated by Positive Money) DO NOT have any say on legitimate POLITICAL questions, like what proportion of GDP is allocated to public spending or how that spending is split between different government departments.

      WHAT THEY DO DO, and this is ALL THEY DO, is have a say on STIMULUS. And for the benefit of those who still don’t get it, let me put that another way, as follows.

      Fiscal councils / the MCC simply tell government by how much public spending should EXCEED tax collected. That has NOTHING WHATEVER to do with how much public spending should be relative to GDP.

    13. Ralph,

      If we really could identify questions that are not political (or is it POLITICAL?) then yes we could just exclude them from the ordinary democratic process without further argument.

      But we can't. The premise of your response is wrong.

      Economic questions like this are just not like maths problems in the way you want them to be.

      In economic terms, I am quite happy to concede that fiscal councils are a great idea. That just isn't the point.

    14. "The logic is a bit circular. On the one hand, it's a very positive view of the world - people are thoughtful and know very much about the world, on the other hand, it's also a very bleak view of the world - people are egoistic and materialistic."

      @stephen. The may be an economics that appears (or reappears) where people's aspirations and what is right for the economy are unified. One where aspiration does not mean self-gain, but something that contributes to a group, such as a community or nation. But it is someway off. Until that way of thinking comes it will mean as SWL puts it, economics and wishful thinking being mutually exclusive things. Currently fashionable economic theory does not handle the contradictions and intangibles of humanity well, and for the moment, "rationality", markets, and obsessions with mathematics and gadgets guiding discussion will predominate.

    15. Tell me Hugo: by these same concerns, should we not enable politicians to meddle with monetary policy?

      You see, defining social goals is what politics should be about, just like picking, if there are many, the ways in which we should achieve them. However, regardless of your opinion, fiscal policy will always have an impact on the economy and only very few people have a good idea of what it might be.

      If you let politicians make it an electoral issue, it can't be managed properly and ordinary citizens cannot filter bs out of their discourses.

      So, without telling governments how to attain a target deficit, there should at the very least be an independent council evaluating how big it should be to attain certain goals.

    16. "Tell me Hugo: by these same concerns, should we not enable politicians to meddle with monetary policy? "

      I think you'll have to re-read me again.

      I explicitly said that the giving monetary policy over to experts is just as bad in democratic terms.

      When the newly canonized Gordon Brown did it, it was without consultation, and without it having been in the Labour manifesto.

      That doesn't meant that there are not other good countervailing reasons for doing it.

      Democracy has limits, as I said.

  2. Occasionally you get economists like JMK who are worth listening too.

    But they are very, very, very rare.

  3. A discipline of unquestioned gadgets and gimmicks is no way to lead a democratic debate.

    The Scots have just squandered their chance.

  4. "First, my general argument is not specific to economics, but involves any area that involves technical expertise. "

    I do not think you really need technical expertise to understand the economic issues of this debate or any other. What, do you mean theories like optimal currency areas?

    Worse than that when you do strip the gimmick away from economic theory, even more so when we get to New Classical and New Keynesian economics, you do not even get common sense, let alone anything profound or substantial that cannot be understood by someone with an absolutely minimal level of literacy.

    Rather than an emancipation of thought, this referendum was won by scaremongering. Scotland has not done very well over the last 50 years, even with oil. As long as the present ideas and powers dominate, it can look forward like the rest of non-London UK to at least another 50 the same.

    1. In what way was the IFS analysis scaremongering? This is an independent organisation with a reputation to protect.

  5. The IFS is a credible organisation that put its arguments across for consideration. What I think is wrong is referring to "the" economic arguments as if there is one and it comes from a singular authoritative source. It is only one point of view.

    The real way Scotland may have got ahead was through a decentralisation of powers. This would come from a different set of theories (and political economy) that emphasise different things and question the win-win outcomes of neoliberalism/neo-classicism and argue that globalisation has tendencies towards concentrations of capital, power and can lead to the alienation of large sections of what was a national community.

    A single currency for an example might have been a desirable transitional first step, purely for practical reasons given the tight integration of Scotland's economy with the rest of the UK. A lot would have to be worked out and there are implications for all sorts of other institutional structures.But to deal with Scotland's problems political sovereignty was arguably a necessary first step. These are issues that have to be worked out. But instead we heard " inevitable economic disaster." For me the disaster is that Scotland has probably lost its once in a generation chance to get out of its rut.

    If you make the argument against single currencies, you could make the argument that separate monetary and fiscal policies should be set up in other parts of the UK; an expansionary macro policy mix that creates demand (and hopefully jobs) in the north creates housing bubbles in London. But before you get anywhere discussing what fiscal and monetary powers you have and how you do it you need the political sovereignty. Scotland will continue now to get governments and central bankers it does not want either way.

    For me there are parallels with the Euro debate. People forget that these countries had a history before the Euro. They do not want to return to their pre-Euro days. But that history seems to be lost on the technicians.

    Now Scots have put their trust in Westminster to get genuine devolution. Let's hope they keep their word.

  6. if only economists would run the world, right? I am glad they do not, economic theory and models are just that.

    1. Aye better leave it to the politicians, or those canny voters eh?

    2. "Aye better leave it to the politicians, or those canny voters eh?"

      I would prefer unelected representatives and computer models.

  7. quality of analysis - objective organisation -OBR -influenced people -absolutely correct; showed too how much such an organisation is needed.

  8. The 'dismal science' tag has stuck but the meaning has been lost. As David Levy points out, the first economists, such as Mill, were branded 'dismal' by white supremacists, such as Carlyle, Ruskin and Dickens, because the former argued that that all men were created equal. It was the progressivism that was tarred as 'dismal'.

  9. So the Yes argument was: "We took you oil and gave the profits to London bankers. We usedoil proceeds to jacj up the exchange rate, destroy british industry and exterminate the british working class, thus finally winning the class war in Britain, tha basic subject pf Karl Marx's writing. Ina few years, there will be no mmore oil and we will call you a peripheric, economically depressed area about which we won't do nothing. As a foreigner, do I read that right?


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