Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 19 February 2015

Greece and educating economists

My first and most important point: pretty well every economist I have read who has expressed an opinion on the matter recognises that a deal which gives Greece at least some of what it wants is both desirable and feasible. Yes, there is some disagreement about how bad a breakdown would be for both sides, but little doubt that both sides would be better off with an agreement that significantly reduces the degree of austerity imposed on Greece. As these negotiations are essentially about economic issues and consequences, that relative unanimity is worthy of an unprecedented intervention from the US President. (Just in case you think that sounds too complacent, in the previous link Ashoka Mody does make it clear the mistakes that some individual economists and economic institutions made getting to this point.)

The second argument I wanted to make was how this example shows the importance of knowing economic history. Defaults are not day to day events, particularly if your focus is on advanced economies, so it is important to know about how these events have gone before, and in particular how debt forgiveness in the past has had positive impacts. This includes Germany’s own history. There seems to be a growing recognition that - at least in some places - economics teaching at both degree and post-graduate levels has involved too little economic history.

Some have used events like the financial crisis to call for a complete overhaul of how economics is taught. Heterodox economists want much more pluralism, and many other social scientists want economists to be much more familiar with what they know and do. I have some sympathy with both views, but - as an economist would say - only at the margin. The reason is very simple: to go even half way towards what these heterodox economists and social scientists want would involve throwing out much that is even more valuable.

That is my third point. What has it got to do with Greece? To be able to say intelligent stuff about what is going on at the moment (which you would hope an economics education would enable you to do), you need to know quite a lot of economic theory. A lot of macro of course, but quite a bit of finance, and also at least some game theory. (Although those who know their game theory should realise that at the moment the last thing on the mind of Yanis Varoufakis is being academically accurate when speaking to particular audiences!) And if you want to get into all those ‘reforms’ imposed by the Troika, you need a lot of micro.

One of the comments on an earlier post of mine said that economists should try and be less like doctors, and more like scholars. I completely disagree. For all our imperfections, economists know a lot of useful stuff. If the last six years has taught me anything, it is how wrong things can go when basic economics is ignored. Those with economic problems to solve know this most of the time (even if advice is often ignored), which is why economics is essentially a vocational subject, not a liberal arts subject.

Of course we are not as good as doctors, and make more mistakes, although sometimes we get blamed for things that probably would have happened anyway even if we had got it right. I rather liked this study entitled ‘The Superiority of Economists’. It ends as follows:

“Thus, the very real success of economists in establishing their professional dominion also inevitably throws them into the rough and tumble of democratic politics and into a hazardous intimacy with economic, political, and administrative power. It takes a lot of self-confidence to put forward decisive expert claims in that context. That confidence is perhaps the greatest achievement of the economics profession—but it is also its most vulnerable trait, its Achilles’ heel.”

When I read this, I think of Greek finance minister Yanis Varoufakis - academic economist, and former economics blogger - and hope on this occasion the confidence is retained, and that his Achilles’ heel is just a myth.


  1. First, some comments on the US intervention. While it is certainly unprecedented I do not think it is helpful.
    One of the more important reasons why the austerity mantra still survives politically in Germany is that conservative journalists and economists were able to frame the debate about "sound" Northern European capitalism vs "unsound" Anglo-Saxon/Southern European capitalism. US intervention only strengthens this attitude, especially at times of growing anti-Americanism (especially of the right-wing/conservative type). I fear that change can come only from within the countries in Northern Europe.

    Secondly, I can support your general line on reforming economics education but I would add one crucial element besides "economic history" as mandatory: "history of economic thought". In my opinion this could satisfy some of the heterodox "demands" and could really increase the understanding of different approaches. Moreover, the best lectures I had, were usually the ones were
    a.) the professor was able to explain why and how the relevant models evolved from previous ones or how the profession got the idea to add this friction, ...
    b.) the professor was able to do math himself or herself.
    A course in "history of economic thought" could actually help to bring the more technical subjects into a broader context and understanding.
    I know that both courses are mandatory or optional at some universities but I wish that this were common more broadly.

    On the self-image I agree with the "doctor" or "engineer" although, as someone who was educated at a highly theoretical department, I would say that the "mathematician" or "theoretical physicists" self-image is still too common. My battle-cry here would be: "More empirics and less "definition, proposition, proof"-type mentality".

    1. Largely agree: too many economists think they are physicists rather than doctors.

  2. I am quite conflicted on Greece.

    On one side I think there is a strong argument that the ECB has mismanaged the EU economy for a long time. This is partly due to institutional set-up (a bad target for one) and part just bad policy. They are currently trying to get better, but I think that's still a lot to do. So the EU institutions have a clear responsibility for the Greek crisis.

    On the other side it's not clear to me that the other European nations have a duty to support Greece indefinitely. Greece doesn't want to leave the euro, which would be the clean way to avoid the austerity. Euro countries did fund the deficits for the last few years (plus Greece is a net beneficiary of EU funding). More loans would have lessened the crisis, but only if wisely invested by the Greek government. Even assuming high multipliers I don't see how it wouldn't have costed other EU countries. Maybe only half the additional loans (as Krugman recently argued), but still extra resources. Greece had no access to markets so all lending would have had to come from the EU. It would have been a fairly risky strategy. I have no problem with private investors losing money, but I think politicians shouldn't be as free to invest money in risky ventures. Given that Greece was cheating on its accounts, some contraction was to be expected. I think it's fair to question the comparisons with other economic crisis: if the GDP was inflated through fraud, keeping it constant would seem unreasonable to me (almost immoral actually). It's true that most people didn't directly benefit from the fraud, but every Greek person benefited indirectly.

    If the Greek government was simply asking to run smaller primary deficits (1.5% rather than 4.5%), I very much doubt they would still be discussing. I think they are asking for much more (e.g. the modest proposal would require primary deficits I think). That's asking for more than they would get if they had their own currency. I don't think the have the moral right to ask for that.

    Greece is still a fairly rich country. They could have gone the Cyprus route of wealth tax. They are not without agency.

    1. An interesting question to ask is why didn't the Eurozone simply tell Greece to immediately default, and seek IMF support for its adjustment to primary balance? Was it perhaps because that default would have damaged other Eurozone countries banks? So maybe they were not really being so altruistic towards Greece.

      By preventing an immediate full default, they share responsibility for the crippling austerity imposed on Greece. You also seem to be reading different stuff from the rest of the world on what Greece is asking for and would accept.

    2. That's a really strange way to look at it Simon. If a default was clearly better for Greece, why didn't it just choose that option? And why doesn't it choose that option now?

      The answer to both questions probably is that Greece would be like Bulgaria or Albania if it had to survive off of its true level of productivity and had a hard time borrowing money. At the current level of "crippling austerity" Greece still has a PPP/capita of $24k. I'd wager (because it's not shrinking anymore) this PPP/capita is pretty much in line with their true productivity, so things would be worse if the country was cut off from the international capital markets.

    3. If a Greek default damaged Eurozone banks, why not just recapitalise the banks from taxpayers money, instead of lending the taxpayers money to Greece? Wouldn't this be cheaper overall?

    4. Maybe it was politically easier for Germany and France to disguise their banking bailout as a Greek bailout. Although it's more expensive you get benefits: 1. Pretend our banks arn't as bad as the feckless anglos. 2. While we pump money to them through the Greek corpse we make an example to encourage l'autres.
      Pure perfidy.

    5. Why do people complain that paying off someone elses debt is "just helping the creditors, not the debtor"? If someone were to offer you to pay off your mortgage or uni debt would you refuse and complain that YOU are not getting handed any free money? And yes, of course germany and France were thinking about their own interests, that's the only reason they even took interest in Greece, what else did you expect? Free, unconditional, development aid for a country with a PPP/capita of $24k while there are still kids starving in Africa?

    6. 'What else did I expect'? I expected this:

      What did I hope for? I hoped for 'the constant improvements of the living and working conditions of their peoples: '

      What I didn't expect or hope was that one party to this contract would use it to export it's deflation and unemployment to the other and then hold him over a barrel wonga style forcing him to sell his assets to make payments on debt he would never have run up in the first place if hadn't been forced into slashing 25% of his economy in the name of moral salvation and some ordoliberal promised land.
      Good lenders depend on the prosperity of their debtors, for that is also their prosperity. Bad ones drive them to the wall, and we all go down.

    7. In other words you expected more money for Greece... Just to keep propping up an economy that runs a 6%+ deficit every year during the global golden years of 2004-2008? Of course on the promise that this would lead to the spectacular GDP growth needed to eventually pay back the borrowed money, even though that didn't even happen during the golden years and would be physically impossible without the kind of reforms that Greek voters keep rejecting. Since this is seems to be an impossible ordeal the only other option for Greece not to decline back to a GDP in line with its actual productivity (the point where it is now) would have been an indefinite transfer union, which would be free money (and here it has to be remarked that Greece was already a net recipient of EU funds before 2009).

      Also, if life is so tough in Greece the government can redistribute from rich to poor, the PPP/capita is still $24k so no one needs to starve.

    8. absolutely. I want to see a glorified currency board morph into into a fiscal transfer Union. I hope that Syria is the first part of a true international euro area political movement that will put the financial surplus of Europe to work, rather than sit in a target balance while jack boots are being polished.

  3. Also I don't think it's true that 4.5% primary surpluses are unprecedented. I am pretty certain Italy run similar surpluses for most of the nineties to get into the euro. I think most countries run similar surpluses in the past given the much higher interest rates. Not sure it's a fair comparison, but 4.5% doesn't sound so incredible to me...

    1. There is a simple test - if the required primary surplus implies wasting Greek resources on a huge scale, it is too much.

    2. If you believe a lower primary surplus would grow the Greek economy quite a bit faster (how that would happen with their dysfunctional system and lack of a technological base is anyone's guess) then you should propose a compromise where the Greeks pay a lower interest rate but over a longer period.

  4. >>As these negotiations are essentially about economic issues>>

    There is a large element of politics in this. For example, German domestic politics and the belief that hard working Germans are bailing out profligate Greeks. For example, the attempt to weaken worker protections, safety net, etc. which has a large ideological component. There's raw political power - the strong imposing their will on the weak.

    1. These negotiations have nothing to do with "economic issues", we passed that stage long ago and are now trying to deal with the real world consequences of duff economics.

      It is now about "accountancy" and "law". It will be the latter two that will be eventually called to give evidence in the Courts of Europe. Nobody is going to call an "economist" to give evidence; they don't call Witch Doctors or Sooth Sayers either. (Acorn)

  5. You say "Of course we are not as good as doctors". Are you sure?:
    The question is: to whom should economists act as doctors? My problem with offering advice only to politicians is that they are often not listening (for reasons we know). Shouldn't economists try to do more to help the public? (It's what I try to do in my day job - but I'm lucky because Investors Chronicle readers have a strong material interest in getting economics right!) Maybe what we need are institutions to better inform the public about economics - a job at which the media are, ahem, imperfect.

    1. I offend enough people as it is, so I want to keep doctors on my side! Agree 100% on the need to get economics across to public.

  6. Maybe the European project could use some examination of the history of the Latin Monetary Union. Would Greece have gotten in with a little more knowledge of economic history?

  7. Simon, how do we Europeans know Obama isn't just trying to weaken America's biggest economic competitor? Why the confidence that the American government has Europe's best interest at heart? We know the American government conducts corporate espionage against European companies and that they spy on our leaders. They may well be trying to manipulate the Greek negotiations.

    Second question. What is your (and the other economists who agree with you) plan for dealing with the precedent that would be set by Greece basically blackmailing Europe into giving it more money? Losing short term to avoid setting precedents is the official policy of the American government, even when it means citizens get beheaded by kidnappers. Now they're telling Europe to disregard that and to help give Tsipras social benefits to his people that Americans do not have access to in their own country.

    P.S. I'm not German but I find comparisons to Germany's past incredibly tasteless. When Greece loses a quarter of its young male population and nearly all of its infrastructure in an event that is unlikely to occur again anytime soon, and with much of the national debt pushed onto them by other countries that actually spent the money (Versailles) then, and only then, those comparisons to Germany's past debt relief may be made. And it's not like Germany has never shown generosity to economically depressed countries with about the same population size as Greece (East Germany has received more than 1 trillion euros of support).

    1. Do you not think you're first question is a little ridiculous? It seems highly unlikely that a US would seek to undermine it's economic competitors through public announcements of bad advice (I happen to think this is very good advice, but there we go). If the US was set on undermining the EU economy surely there are better ways. In any case it seems highly unlikely that the US would want to undermine fellow democratic governments, especially given that the EU is also a major US trading partner.

      The moral question is also iffy, kidnappers are responsible for taking the hostages and to relent need merely release them. Greece did not take hostages it's situation is not of it's own making and needs to do far more than just open the door and free the hostages, keeping to it's agreements as they stand will involve years of economic pain if it's even possible. In addition, the agreements as they stood were made by the previous Greek government, the Greek people have made their voice heard on that subject. Finally, Greece's nuclear option is not an option without pain for them, it is risky and uncertain.

      I'm not sure why you find the Versailles reference offensive, it's simply a reference to Keyne's "The Economic Consequences of Peace" and the fact that the demands placed on Greece like those on Germany in the past would ruinous.

    2. "It seems highly unlikely that a US would seek to undermine it's economic competitors through public announcements of bad advice"

      Why is that, the word of the American president carries weight in such negotiations? Why would this form of manipulation rule out any other form of manipulation (you seem to suggest the Americans can only choose to use one form of manipulation at a time)?

      "In any case it seems highly unlikely that the US would want to undermine fellow democratic governments, especially given that the EU is also a major US trading partner."

      Europe and the US have a long history of interfering in each other's affairs, with the US being the more aggressive party in recent times (having a far higher intelligence budget and being a single government). The US surely values its trade with Europe but that doesn't mean economic interests are 100% aligned.

      Not sure why you look at it from the viewpoint of kidnappers, that part wasn't about who's responsible, it was about avoiding setting a precedent, to discourage future kidnappings. In the case of Greece it would mean forcing Greece to sit through the pain of austerity so in the future the country will do everything in its power to avoid large debts (everyone agrees helping greece with extra money now is the most sensible short term solution, but many people fear Greece will not govern itself responsibly and will be back for more money in the future).

      "the agreements as they stood were made by the previous Greek government, the Greek people have made their voice heard on that subject."

      Yes, and they can nullify the existing deals, that's within their sovereign right, but that also means no more Eurozone money since it's within the sovereign right of the other Eurozone countries to reject some deal that Greece proposes. Note that the Eurozone does not care how Greece pays them back, if Greece wants to tax the rich to get the money that's fine, but in the end the moeny will have to be repaid.

      "Finally, Greece's nuclear option is not an option without pain for them, it is risky and uncertain"

      Which does not matter: the Greek government has no intentions of using this option, they just use it as a threat to try to get what they want.

      "I'm not sure why you find the Versailles reference offensive, it's simply a reference to Keyne's "The Economic Consequences of Peace" and the fact that the demands placed on Greece like those on Germany in the past would ruinous."

      No it's not just that reference. It's also a reference to German debt-forgiveness after WW2 (with part of that debt still stemming from Versailles), precisely as Greek politicians have said on several occasions.

      P.S. Germany actually holds only 30% of Greece's Eurozone debt and as I mentioned Germany already bailed out East Germany.

    3. America bailed out West Germany then West Germany bailed out East Germany and then the Eurozone bailed out the whole of Germany...

      "Germany already bailed out East Germany"... only a German could think this way...

      I fed my children... Now treat me like I am generous

  8. The distinction between economists as doctors and economists as scholars is an interesting one. Let’s think about doctor-patient relationships.

    First, patients volunteer to be seen by doctors. Mostly, we consult doctors when we think we have a problem. Sometimes we consult doctors for health checks, but health checks are also voluntary. Sometimes, after a car accident, we don’t volunteer to consult doctors but that is because we are unconscious. Our conscious selves would agree that we should consult doctors after a car accident.

    Second, when we consult doctors we expect them to talk in plain English. We expect them to listen as we describe our symptoms in plain English. We expect them to tell us of their diagnoses and treatment plans in plain English, and to answer our follow-up questions in plain English. We expect doctors to talk to each other in specialist jargon but to use different language with us.

    Third, when we are unsure about one doctor’s opinion we expect to be able to ask for a second opinion. That does not mean that we think that the first doctor should throw away all of the theory he has learned about medicine. It just means that we want to talk to someone else who might look at our symptoms differently.

    Fourth, we find historical evidence and statistics much more compelling than medical theory in assessing medical matters, particularly with regard to risk. Both doctors and patients acknowledge that many treatments involve risk.

    Fifth, we expect doctors who do not follow a clear code of ethics to be punished by their fellow doctors. Punishment can include withdrawal of the right to practice at all.

    None of these points applies to academic economists who think of themselves as doctors.

    Now let’s think about Greece in terms of doctors and patients.

    Germany thinks that it is the doctor and Greece is the patient. History’s view is that Germany and Greece are both suffering from a joint chronic creditor-debtor disease. In that sense, the first problem is to get Germany to understand that it is also a patient, and to appoint a neutral doctor who would be acknowledged by both Germany and Greece.

    Second, Greece has recently appointed Yanis Varoufakis as its economic doctor by electing him and his colleagues to this position. Democratic elections are the economic equivalent of patients volunteering to be treated by a doctor. Hopefully, the fact that Varoufakis is an economist will mean that he brings his understanding of economic history (and economic theory) to the table. However, as far as I can see, Varoufakis is a heterodox economist who thinks very differently from mainstream economists like yourself. He is giving Greeks a second opinion on their economic problems.

    “The only thing that can destabilise and genuinely challenge mainstream, neoclassical economists is the demonstration of the internal inconsistency of their own models. It was for this reason that, from the very beginning, I chose to delve into the guts of neoclassical theory and to spend next to no energy trying to develop alternative, Marxist models of capitalism. My reasons, I submit, were quite Marxist.”

    I’m not an economist, and I’m not a Marxist, but I admire Varoufakis because he has had the courage to stand for election as an economic doctor rather than sit idly by as a mere scholar. That raises several questions though. Why do we believe that we should appoint mostly non-economists like George Osborne as our economic doctors? Why do more economists not put themselves forward for election as economic doctors? Why do academic economists think they should be seen as doctors without gaining any sort of approval from their patients?

    1. On issues about where the Eurozone needs to go, I think my views are pretty close to those of Yanis: see here for example:

  9. The creation of the euro was first and foremost a political project and was never based on what economic theory might recommend. That’s why crisis resolution is driven by euro zone politics and cares little about what might be right from a purely economic standpoint for Greece (in an ideal word Greece with its weak institutional capacity should not even have come close to thinking about sharing a currency with Germany & Co). A debt haircut would certainly be helpful for Greece, but as long as the Greek state remains a theoretical construct (the IMF politely refers to “procedural bottlenecks”), the impact of debt relief will be meaningless.
    By the way, my guess is Obama could not care less about the Greek economy – he is worried that Greece might turn towards Russia in the still unlikely event of default.

  10. Varoufakis's point is that austerity isn't working for Europe - which Wren-Lewis has been writing eloquently about - and it hasn't worked for Greece. They tried it for 5 years.

    Finally an elected government is reflecting this economic fact. We only wonder why it took so long and if it will catch on in Spain with Podemos:

    As Iglesias points out, the ECB's recent announcement of a one trillion euro quantitative easing is an admission of failure. Austerity has failed to revive growth. Greece has become more "competitive" but at the cost of a humanitarian crisis and high unemployment.

    There is still a question of whether the ECB wants to try to salvage the situation. They just extended the lifeline again. The Troika threw down an ultimatum about Friday and Tsipras called for a parliamentary vote on Friday on Greece's requested extension as well. So Friday may be it or possibly they'll fudge it again.

    It seems to me the northern European politicians, finance ministers and negotiators share in the views of some of the commenters here and are not thinking beyond these limited outlooks. Debts must be repaid. Deficits must be reduced. Raise competitiveness. Mediamacro.

    But if they kick Greece out, it could turn out that Greece returns to growth as its no longer linked to the ECB's gold standard monetary policy. It can devalue. If Greece and Syriza muddle through or even thrive, this could be an inspiration for other European anti-austerity parties like Podemos. The ECB's threats of banking system destabilization will ring a little more hollow. Greece could always rejoin a Europe run on a more rational basis.

    As a supporter of Obama, I am glad he is weighing in. Before the Democrats lost the Senate, Obama had to behave in the interest in the Senate Democrats who were campaigning for re-election. He had to engage in Mediamacro and compromise over deficit spending and austerity. Now he is free to act as he will. No one talks about government deficits or debt any more. His budget increased spending.

    If Europe sinks it will drag down the U.S. economy as well. Already the stengthening dollar is hurting the recovery. The Greek meltdown and debt crisis of 2010 was a gift from God to American conservatives and neoliberals who wanted to changed the Mediamacro conversation to debt reduction and austerity. This is why Obama is weighing in.

    1. Greece has not had a deficit lower than 6% of GDP since 2002 (when it was 5% of GDP). They are quite in a league of their own, observations about other European countries simply do not apply to them.

    2. The Eurozone has barely grown more than 1% on in a single year since its inception in 2001...
      Greece's fault I suppose...

  11. Isn't the difference between Greece and Weimar Germany that

    - Weimar Germany wanted to avoid paying further reparations, i.e. paying money for unproductive purposes, raising unemployment by reducing demand


    - Greece wants to be given more money, supplied by countries that do not owe it a cent?

    1. Greece has a primary surplus. Greece "wants to be given more money" in order to pay historic debt. I would imagine that spending money on historic debt has close parallels to Weimar, and is a definition of "paying money for unproductive purposes".

    2. Greece has a small primary surplus, which they might lose if the new government implements everything it has promised.

      With Germany people knew they could be trusted to not get into debt, as a matter of fact it didn't get into massive debt during WWI either, it was the victorious countries who wanted Germany to pay their own debts as "war reparations". Greece has shown it needs no such forced debt, nor a world war, to get into huge debts. Essentially Greece managed to screw up during the godlen years of 2003-2008 (had they not ran deep deficits in those years they'd have been much better off in the subsequent crisis).

    3. "Greece has a small primary surplus, which they might lose if the new government implements everything it has promised."

      Well there's no guarantee that austerity will ensure a surplus - all it guarantees is misery for the Greeks.

      "With Germany people knew they could be trusted to not get into debt ..."

      That's a curiously nationalistic statement. OK, institutions are important, but it's rarely helpful to argue from nationalistic perspectives - trustworthy Germans versus untrustworthy Greeks.

      Don't forget that one of Syriza's main policies in the election was to make a break with the clientelist and corrupt past.

    4. "Well there's no guarantee that austerity will ensure a surplus - all it guarantees is misery for the Greeks."

      If it's this versus the near-certainty that the way Syriza proposes to increase spending will not yield growth then it's not a hard choice for the creditors.

      "That's a curiously nationalistic statement. OK, institutions are important, but it's rarely helpful to argue from nationalistic perspectives - trustworthy Germans versus untrustworthy Greeks."

      It's realistic. German culture is just very different from Greek culture on that subject and Greece still lacks trustworthy institutions. Perhaps Syriza will begin to change that but it will probably take decades and can easily be derailed again by the next government or the one after that, and so on. The word of a Greek government does not carry a lot of weight these days, it's going to take time to build more trust.

      "Don't forget that one of Syriza's main policies in the election was to make a break with the clientelist and corrupt past."

      Yes, but they're actually backtracking on reforms that would bring Greece into the 21st century. Syriza should go after the rich Greeks and use the tax receipts to fund a higher primary surplus, time will tell if they do that, but I'm not holding my breath.

    5. "... the way Syriza proposes to increase spending will not yield growth ... "

      That is rather ironic when austerity has seen the Greek economy shrink by 25%.

      "... it's not a hard choice for the creditors."

      It's worth repeating that debtors have choices as well.

      While I'd sooner not fall foul of Godwin's Law, asserting the superiority of German culture would have had a rather different reaction if viewed from the perspective of the rest of Europe in the first half of the 20th century - the time of your example.

      The point is that crushing an economy, as Germany will have noted in the past, has dangers in the potential rise of the extreme right. Greece has experience of that as both a internal and external threat, and in that sense Syriza deserve some credit in channeling current discontent within Greece (and their support is currently about 80%) towards a positive outcome for both Greece and the EU.

      Whatever you think - the current policy being imposed on Greece is untenable.

    6. Wouldn't saying that Germans are the most murderous people in human history also fall in the category of realism?

      The accuse the Greeks of feeling they are victims of their political system, but 91% of Germans believe they were victims of the Nazis.

      They have taken it so far that they even feel insulted if you point out how recently the butchered people that they believed they were better than.

  12. When Keynes looked ahead, to what we should probably consider our present day, he expressed the hope that analysis or advice from an economist would become recognised and respected as the technical equivalent of a dentist’s work. And with the Bank of England’s Monetary Policy Committee having been in operation for so long, and now having been joined by the Office for Budget Responsibility as an independent body, surely that day is meant to have dawned.

    Dentistry is a profession. My dentist has to have a ‘licence to practice’, annually renewable only upon the basis of having devoted 50 hours to accredited continuing professional development (CPD) and being required to account for a further 50 hours of self-directed activity. Similarly, the Royal Institution of Chartered Surveyors (RICS) doesn’t just admit people to membership on the basis of an academic qualification (or equivalent in-service learning) but expects them to pass a Test of Professional Competence (a post-entry, post-experience, peer-assessment process) and commit to an annual programme of CPD to sustain membership (there are different grades of membership, my father was a Fellow). Because of this, we members of the public can have some confidence in the standards of professional practice to be expected of dentists and chartered surveyors.

    Economics is not a profession. The Royal Institution of Chartered Surveyors is a professional body; by contrast, the Royal Economic Society is a traditional English subscription society, open to all who can afford its fee (I’ve been a member myself on an experimental basis). There is no Royal Institution of Chartered Economists (RIChE) assuring professional standards and providing for a Licence to Practice on the basis of annual commitment to accredited CPD. So there is no professional body to which the public can turn for assurance about standards of professional practice. And this despite members of the MPC and the OBR (for example) exercising considerable delegated authority (independence) with respect to public policy.

    Unfortunately there is no prospect of economists establishing themselves as a profession. Thus there is no chance for the public to hold official economic thinking to account. The political parties have forsworn critical scrutiny and the public has no professional body that it can appeal to.

    1. I think when I said "Of course we are not as good as doctors, and make more mistakes... " it becomes obvious why we are not a profession in the sense you describe. But that does not stop many people getting advice from economists, so this raises an important issue - how can the public know when a particular policy is supported by most economists are not?

    2. Or, even more importantly, how can the public challenge a consensus amongst 'official' economists (or even "most economists" as you put it) even when there is evidence that the official consensus is wrong (or "most economists" are wrong)?

  13. Simon claims that “pretty well every economist I have read who has expressed an opinion on the matter recognises that a deal which gives Greece at least some of what it wants” is desirable.

    Greece has already been given a big dollop of “what it wants” when EZ governments took over debts owed by Greece to banks. I.e. EZ taxpayers were put on the hook. And how did Greece respond? They renaged on their promise to slim down their bloated bureacracy.

    Give Greece anything and they’ll be back for more six months later. They cheated their way into the EZ in the first place. Plus they’re the world’s worst tax evaders.

    1. "...EZ governments took over debts owed by Greece to banks..."

      and you interpret that as a favor to the Greeks?

    2. Why wouldn't that be interpreted as a favor? It lowered and stabilized interest on existing and future loans and protects the country against attacks by speculators.

    3. Ralph this is such nonsense - have you looked at what has happened in Greece over the last few years? Read some of my posts at least.

    4. Wow, very disheartening.
      Debt crisis and financial crisis are NOT morality plays. Where does this urge to blame the dirty Greeks come from?
      We don't have to beatify the Greeks to realize that the problem is NOT that they are morally inferior and thus deserving of being economically destroyed.

      Long live Yanis! He will go down as one of the great Finance Ministers of all time.

    5. Mr Musgrave, the evidence is overwhelming that wealthy people everywhere and corporations worldwide are the worlds great tax evaders. Those dirty conniving Greeks are but two-bit cheats.

      Chapter 5 shifts the focus to productivity growth with an examination of business tax reform as well as a briefer discussion about the complementary issues in individual taxation. In 2014, the top statutory corporate tax rate in the United States was roughly 10 percentage points above the OECD average. At the same time, the U.S. tax code is riddled with loopholes that benefit certain companies without justification. For example, the tax code gives U.S. corporations the ability to reduce dramatically their tax bills by locating subsidiaries in small, low-tax countries. This pattern is evident in the outsized amounts of foreign corporate profits reported in many of these countries (Table 5-1). The President’s approach would close loopholes in the tax code while making it more attractive for companies to locate and invest in the United States. The chapter describes this and other components of the President’s approach to reform, documenting four channels through which reform can boost productivity and living standards: encouraging domestic investment, improving the quality of investment, reducing the inefficiencies of the international tax system, and facilitating investments in infrastructure.

    6. "Debt crisis and financial crisis are NOT morality plays. Where does this urge to blame the dirty Greeks come from?"

      It was never about morality, it was about not wanting this pattern to repeat itself every 20 or 30 years and not wanting other countries to claim debt relief as well, based on the precedent Greece would set. Up until now the only existing precedent was that of debt relief after a crushing defeat in a world war that leaves a quarter of your young men dead and most of your infrastructure destroyed, with the victors taking away what was left (as well as intellectual property).

    7. Simon,

      Re your question “have you looked at what has happened in Greece over the last few years?”, the answer is (fantastic as this might seem): yes. I’d imagine the least intelligent Sun readers have a good idea as to “what has happened in Greece…”.

      Re your request that I read some of your posts, as you may noticed, I’ve left comments after about HALF you posts over the last 12 months. It’s unlikely in the extreme that anyone would do that without actually reading the posts beforehand. Moreover, I actually BACK one of your ideas on Greece (or rather the periphery in general) and have publicised it on other blogs: that’s your claim that internal devaluation might take place at the same speed in the periphery even if the amount of austerity was halved.


      Thankyou for your revelation that this is “not a morality play”. I didn’t say it was, and I don’t know anyone who has done. However, the morality of someone you’re doing business with is a VERY IMPORTANT CONSIDERATION for anyone with their head screwed on. If a bunch of people are the worst tax dodgers in Europe and cheated their way into the EZ in the first place, and have a long history of welching on their debts, that’s a good reason for thinking that any agreement signed with them won’t be worth the paper it’s printed on. Indeed, the Greeks have reneged (as I understand it) on their undertaking to slim down their bureaucracy which is widely regarded as far too big and inefficient. I.e. they’re busy re-appointing more bureaucrats.

      As to rich tax avoiders, I’d apply exactly the same criteria to them as I do to Greeks: the rich have a tendency to hire smart lawyers so as to evade tax, so I’d expect the rich to do the same in the future. The Greeks have a long record of cheating, so I’d expect them to do the same in the future as well.

    8. Ralph,
      If you believe that the least intelligent Sun readers know what has happened in Greece, it goes to show how much effort you've put into the subject.
      A subject you nevertheless have an opinion on.

      Greeks may have a long record of cheating but the Germans have an impeccable record of believing their own propaganda and starving people to death.
      So we have the world's biggest thief (hardly) against the worlds biggest murderer (definitely)

  14. Simon, you say "My first and most important point: pretty well every economist I have read who has expressed an opinion on the matter recognises that a deal which gives Greece at least some of what it wants is both desirable and feasible."

    My question - and it is not meant to be petty - is have you read many German economists? I recently retired from an institution rather dominated by the 'German School' and the prevailing ethos was that there was no problem that could not be cured by lower government spending and lower deficits, lower taxes and lower impediments to labour 'flexibility'.

    I would very much like to hope that this perspective no longer holds sway in the prestigious German institutions but I have seen no evidence of any Keynsian, neo-Keynsian, heterodox or MMT approaches, any of which would lead to different views on the treatment of Greece than that which seems, even today, to reign in Berlin and Frankfurt (especially Berlin).

    Until "pretty well every economist" starts to include those advising the German government and speaking to the German people I am very much afraid that we will not find a welfare-maximising solution.

    I tend to support the overall thrust of this piece, by the way, but do think 'Stephen' above makes very good points.

    1. They account for the 'pretty well' in my statement, so I rather agree. The big puzzle I have is why, when - to my understanding at least - Keynesian economics is taught in German universities much as it is elsewhere, it is so completely ignored.

    2. I already told you about that, about Schäuble's preference for lawyers instead of economists, and of german ordoliberalism. But I'd like to add a bit of nuance. Ordoliberalism is the german equivalent of neoclassical economics. It is especially at home at Germany's more conservative main party, the CDU. The CDU governed West Germany for 20 years after World War II and that's when the ordoliberalism blossomed. The catholic heritage of the CDU probably also played a role in there. Ordoliberalism was a continuation of cameralism, the german science of governance . Economics was just a part of it, no independent field of study, but always mixed with the legal science. In a way, the field of economics is an import in Germany.
      However, and that's where I want to add the nuance, ordoliberalism is a weaker influence in the SPD, the social democratic party, which is currently in a coalition government with the CDU. Indeed, the german minister of the economy and vice-chancellor Sigmar Gabriel, a member of the SPD, is more conciliant towards Greece:
      There is a Keynesian tradition within the SPD, but since World War II, the SPD has only been the second-most important political force in Germany.

    3. Indeed, and that has been very helpful. I guess what remains a puzzle is the insularity - I'm so used to economics being an international (OK, US dominated) subject in the UK, France, Italy etc, what seems strange is that this has been avoided in Germany. But maybe I'm making a presumption of internationalisation which I should not.

    4. There are many aspects to this, many already mentioned by Alexander and elsewhere on this blog.

      Some aspects which are not yet mentioned: For example one can argue that due to its mixture with law, ordoliberalism's origin lie in "moral philosophy" and not in "political economy", which could explain where the historical origins of the current moralizing come from.

      Moreover, one should not forget that ordoliberalism became the main ideology after WWII because it was the only group left standing.
      "Marginalists" were either discredited because they had been Nazis (e.g. Stackelberg) or they had to flee from the Nazis to the US.

      It took basically until the late 60s to catch up with the US/UK (see "The post-1945 development of economics in Germany" by Hagedorn). There is also the problem that after the war English became the lingua franca of science. Economics in Germany, probably due to its connection with (necessarily national) law, needed many decades to adjust to this.

      One point that Alexander touches is what made ordoliberalism work in practice, is the connection of the arguably quite "free market" approach of the ordoliberalists with the Social Catholics inside the CDU. This made the modern welfare state possible in Germany because it "tamed" the more radical parts of the "pure" ordoliberalism. But it is a different and more authoritarian approach than e.g. the "Scandinavian model".

      Inside the SPD there were always battle between different approaches after the heydays of "globalsteuerung" (under Karl Schiller 1966-1973) and after the oil shocks.
      See e.g. Peter Hall's take in Keynesanism across Nations for this.

      Furthermore, for a very export depended country Keynesianism always made less sense because labor cost play a more crucial role than in countries with closed economies. One should not forget that Germany in some sense was the first "developing country" and has never really given up the natural model of "export-led growth".

      Finally, there is the problem that, except for the leading departments, economics in Germany is always an add-on to "business administration" with much smaller numbers of students and professors (and much more business administration graduates than economists). This leads to the fact that many students have studied "something with the economy" but who are never (or only very superficially in some introductory course) exposed to macroeconomics. In some sense Keynesianism does not fit to this micro view.

    5. It may be asking too much, but can I ask you both the really difficult question - how do you change this situation, where German policymakers and influential economists have a blind spot when it comes to Keynesian economics? Does making clear how this is a minority position internationally help or hinder? Is there some way Keynesian ideas can be incorporated within the ordoliberal tradition? Would it help to explain that Keynesian ideas are really about a particular market failure, rather than a programme to intervene everywhere or increase the size of the state? Any thoughts would be really helpful.

    6. Sorry, I don't see a big difference between economics in Germany and elsewhere. Neither H W Sinn nor M Burda (former president of the Verein für Socialpolitik) or V Wieland or I Schnabel (both members of the Sachverständigenrat), D Snower, C. Fuest are ordoliberals. They may not be ardent Keynesians though they are not blind in 'aggregate demand eye'.

      As far as general economic policy is concerned there is a lot of emphasis on institutional questions. That might be an heritage steming from ordo. German economists favour rule based economic policy. However that's a long story - too long for a blog comment.

    7. @ Volker Caspari:
      I think one also has to make a difference between academic economics and "practical economics". Academic economics has absorbed quite a bit of international thought, but I suspect that the divide between policymakers and academic economists is wider in Germany than elsewhere. On the Sachverständigenrat there is indeed just one true ordoliberal, Lars Feld (the arch-ordoliberal?). There is also just one Keynesian (Peter Bofinger). Volker Wieland is very neoclassical, Schnabel a bit ideosyncratic and Christoph Schmidt more an econometrician. Though I think that this combination of personalities usually results in a combination of neoclassical/ordoliberal views, much like the US Supreme Court at the moment is 5-4 conservative by default, even if there are minor differences within the ideological camps.
      The institutional factor is very important indeed, and I think that this is why Keynesian economics as a research program will not be as important as elsewhere: Firstly, the institutions are set up to accomodate Keynesianism. That was the lesson of Bismarck, I guess. He established social insurance to prevent socialism. It is what Merkel is doing now, she's driving the CDU to the left (in national politics only!) to combat the SPD. Secondly, Keynesianism requires flexibility in spending. The needed flexibility is constrained by institutions. You'd have to kill some institutions to make room for Keynesianism.

    8. @ blub:

      I admit I read the book "Zug um Zug", the interview/discussion between former german chancellor Helmut Schmidt and SPD candidate for chancellor in 2013 Peer Steinbrück. There was one passage in the book where they talked about the "ordoliberals" that Schmidt wanted to replace in his days at the finance ministry. I guess Schmidt was the most important Keynesian in terms of political influence. Today, the SPD prefers not to take an ideological stand. You're probably right about the battle between different approaches.
      You're definitely right about "business administation" vs economics. Ok, today, the MBA is about as popular internationally as BWL has always been in Germany. But it's a relatively recent development whereas BWL (the german science of business administration) has a much longer tradition.

    9. @Alexander Sebastian Schulz
      I almost agree with what you wrote. Only a few qualifications. Volker Wieland whom I know personally, is a newKeynesian; he made his PhD with John Taylor at Stanford. Isabel Schnabel is as "idiosyncratic" as Martin Hellwig. The theoretical background is general equilibrium theory. Christoph Schmidt started as a labour market economist and he did his PhD at Princeton. No ordo smell at all. Lars is a modern ordo, which implies a focus on institutional and constitutional questions.

    10. @ Volker Caspari:

      Hmm..I'm going to sound a bit mean, but Wieland is one of the new Keynesians who like to ignore the old Keynes. Just look at Cogan, Cwik, Taylor, Wieland (2009), no attention to depressed demand. Yeah, I called Schnabel idiosyncratic because her focus on finance but also on economic history makes it hard to classify her.

    11. @Simon:
      To make clear that this is a minority position internationally could help to persuade people inside the SPD to embrace a more pro-Keynesian approach but I do not think it would help for the general public. Many ordinary people believe that every approach that is favoured by Anglo-Saxon economists automatically leads to a society with a bigger banking sector and fewer industrial production, which they do not want. This a product of a very successful frame in the media and a "hangover" of the pre-crisis years. If this frame could be broken it would be very useful but I do not see it how it can be done. The sad part is that today, the SPD stands to the right of the IMF.

      Regarding ordoliberalism, it is not worth trying to fight it because you would be fighting more a public perception than a still used economic theory and where it is still used to some degree (i.e. ministries), change can come only from the leadership.

      What really could help is to persuade the some parts of the old guard in the German economic profession to embrace the aggregate demand point of view more strongly. But how this could be done? I do not know. I am very grateful that Martin Hellwig and some others have publicly argued for a harder banking regulation (which is not that uncontroversial) which shifted the debate a lot but I do not see this with regard to aggregate demand.

      Something that is sometimes overlooked is the fact, which Volker also touches, that many German economists do not embrace Keynesian economics due to not seeing aggregate demand problems but due to the fear of too much discretion in the hands of politicians. This is one of the reasons why rule based approaches are preferred (although this is quite antidemocratic in my view).

      If you want some more detailed opinions of the German economics profession, especially with regards to policy making, you should talk to the German chief economist of CER in London and to Olaf Storbeck (Reuters in London) who covered the economics profession in Germany for Handelsblatt for a long time. But note that he is viewed quite controversially inside the German economics profession.

    12. A quick comment on Lars Feld because my presentation of the German economics profession might contradict Alexander.
      He is the absolute exception which es necessary to prevent the Walter-Eucken-Institut and ordoliberalism from total disappearance. But he is a policy advisor to CDU and FDP.

    13. blub has left a new comment on your post "Greece and educating economists" [which I may have deleted in error]

      Ok, I started the comment after Volker's first comment, so there may be some overlap:
      I think the difference has become a lot smaller, especially for economists below 40-45, but it is still there.
      As I said elsewhere on this blog: Ordoliberalism or "Ordnungspolitik" at German Universities is intellectually dead (i.e. has zero influence) since at least 1.5 decades and is "quasi-officially" dead since the last professors retired in 2008/2009 at Cologne.

      BUT it is NOT dead in the public, in politics and the upper-level bureaucracies.
      Politics: Ordoliberalism und Ludwig Erhart's "social market economy" are all things which every politician still pays lip-service to. Of course it has become a total meaningless concept because it is embraced all across the political spectrum from Die Linke's Sahra Wagenknecht (because of its embrace of strong rules and regulation of the economy) to FDP people (because of its emphasize of free markets within the regulations) but it is still important for the political dialogue.

      Or take journalism: Marc Beise (economics editor of Sueddeutsche) is clearly ordoliberal (probably in the original sense). Welt's economics correspondent (Dorothea Siems) just published an outcry that "Hans-Werner Sinn is muzzled" (due to Handelsblatt's "The false prophet" cover), defending him as the last representative of "ordnungspolitik", although her interpretation of “ordnungspolitik” is probably much more Thatcherite than the original ever was.
      "FAZ-Wirtschaft" has always been more free markets in a general sense but for at least a year they have gone from a very reasonable position to a totally crazy and more sophisticated and intellectual version of BILD's nationalism. There are some good people there, like Braunberger, but the leading figures like Holger Steltzner and Rainer Hanke have gone totally crazy. As FAZ-Wirtschaft was always a very good proxy of the views of the Bundesbank, it makes you wonder what is going on there. My personal take is that they try to get the upper-income part of the AfD supporters as readers but that is just an interpretation.
      "Die Zeit" is the only major publication were you can get a more balanced view but it is, of course, also the most pro-transatlantic publication and therefore in some way reinforces the idea that this is a "Germany vs the rest" thing in the view of the general public
      Handelsblatt also gives you a more balanced view but it is, like the FT, a publication with a very different audience than the general public. But due to its length you can find many reasonable comments (often from international commentators) to contrast HWS et al.

      German economics profession: In my view, Volker, you defend my position because you name several important names who are not ordoliberalists but who are also not New Keynesian. The international mainstream is the position of Marcel Fratzscher not the view of the General Council. The last report defended the net exports again and argued that there is no problem with public investment in Germany or domestic demand.
      The German economics profession would be taken much more serious internationally if they would distance themselves from HWS more often. He often uses clear (national) populism to make his points. The low point, for me, was his article which made the case that the risk for the German taxpayer is 28% of 87% of the total bank balance sheets (!) in crisis countries to produce a big scary number to argue against the banking union.

      Posted by blub to mainly macro at 20 February 2015 at 06:22

    14. @ blub:

      Ordoliberalism is definitely in retreat in academia. But as long as the most prominent german economist Hans-Werner Sinn says things like "America needs Walter Eucken, the father of ordoliberalism", it is still very much alive as a concept. (Sinn also sees a place for Keynes there.)

    15. "Furthermore, for a very export depended country Keynesianism always made less sense because labor cost play a more crucial role than in countries with closed economies. One should not forget that Germany in some sense was the first "developing country" and has never really given up the natural model of "export-led growth"."

      I really enjoyed reading your comment. I am not German and my area lies in the Far Eastern economies (and the Japanese copied the German model, their main inspiration was not Smith or Ricardo, but Freidrich List.).

      Just one thing though, I think we should be careful mixing "export oriented growth" with "developing countries". These are very neo-classical concepts and a good example of value judgements and opinion being misleadingly presented as science in the economics discipline. Japan had a problem of accessing raw materials. For this reason it had to export to get the exchange to buy them, I suspect the same was true for Germany pre-WWI. Britain heavy handedly colonised half the world to solve that problem, and American was naturally well resourced. This put Japan in a difficult position and it was very prone to political instability overseas and supply shocks. For its own security it tried to maintain a balance of payments and foreign exchange cushion - as well as try and push forward industrialisation and growth. This was not easy to do well until about 1965. Like Germany, it had until about 1990 a very rule based system, and this caused a lot of problems from 1965. But it many ways it was still an incredibly well run economy and social system.

      Neo-classical economics is very rooted in Anglo-Saxon history and views of the world.

  15. Economist tend to not look at maps either... Or 3rd parties in elections. Greece out of euro & EU would hardly survive as a country

    1. "Economist tend to not look at maps either... Or 3rd parties in elections. Greece out of euro & EU would hardly survive as a country."

      A very short comment, but a very, very true one. And one that demonstrates very clearly the limitations of macro-theory.

      If Greece wants to become an Albania, just exit the Euro. You will get your own currency and maybe a bit of good inflation - but see what happens in the not too long term).

      Varoufakis is a very well educated and informed man. He is familiar with both Neo-Marxian and Neo-classical theory, but his knowledge extends beyond that and he knows how to put economics into its bigger perspective. This is no gadget-economist.

      He knows the consequence of an exit from the Euro, does not wish for it, and has said as much.

  16. Economists are the Medieval-barber variety of doctor. Their flaky economic hypotheses when put in action over the past 25 years caused the economy to collapse: from 2% inflation targeting which brought back boom-to-bust business cycles, to free trade which only benefited wealthy investors and businessmen by simply allowing them to cut costs by bypassing first-world regulations and labor standards.

    Too bad physicists couldn't just make sh*t up. We'd have flying cars by now. (Or the economist version of flying cars: pretending we have flying cars.)

  17. I wonder if Greece can exit the EU, re-establish its own currency and declare by law that all external debts are now converted to the new currency? (When it falls in value, their debts fall in value.)

    They are getting bled dry by the Germans for no good reason who have conveniently forgotten their own history. (Better a left-leaning democratic government comes to power than a fascist one, the Germans should remember.)

    1. Greece can leave the Eurozone, or even the EU at any time. It could then establish its own currency, but of course this would leave the country just as poor as it is now. They'd also lose easy access to the European markets. They cannot unilaterally pass a law that changes the currency of outstanding debts, they can unilateraly default but that would mean no one will borrow them another cent for many years to come. They're screwed really.

      The only viable options they have is a) honoring the standing agreements and sit out the pain or b) renegotiate the standing agreements to be less painful financially, in return for giving up part of their sovereignty and/or extending the period of its loans.

    2. "... they can unilateraly default but that would mean no one will borrow them another cent for many years to come."

      Hmmm, define "many". One year, maybe two? I think history shows us that once "the market" thinks there is money to made, it returns, and sentiment changes very quickly.

    3. Could be that after 3 years some parties will want to lend money to them, in euros or dollars and with 10% interest...

    4. Argentina in 2001 left the dollar peg, which was as troublesome as Greece leaving the euro to day. They recovered quickly, even if (or because of ?) they stopped borrowing internationally. For all her problems, Argentina is better off today than then. Greece has to reintroduce her currency.

  18. Simon
    Regarding Yanis Varoufakis confidence. He declared his motivations and source of confidence: humanitarian crisis of his fellowman. I trust him that is the reason for doing what makes him scared as he described why he accepted Tsipras' offer to head Finance Ministry of Greece.
    What scares him is puting into practice his theories in order to aleviate humanitarian crisis of Greece. And that is also the motivation to fight fear. That would be enough of confidence provider for me too, to fight and die for my countryman (dieing is optional to cripling).
    This puts him in position of no option but to proceed as YV advocated before being Minister and negotiator.

  19. "The reason is very simple: to go even half way towards what these heterodox economists and social scientists want would involve throwing out much that is even more valuable."

    Why treating it as throwing away? Why not as adding more value, like adding frictions onto original models? Why those frictions were added in the past? Because "heterodox" economists proved falsity of original model to real world and then became part of mainstream.

    MMT does not have developed the whole theory of economics, only about one particular aspect: about finance and money origin and flow which no other mainstream theory offers.
    Mainstream offers only assumptions about government and banking finance as a whole, complementary system, only MMT offers detailed description which disproves those assumptions.
    To be more clear, mainstream economics offer only description of individual trees in a forest (micro) while avoiding description of the forest as a whole and its conceqences. MMT gives description of the forest, the joint banking and government finances and its effects on economy. While mainstream is good about economy but gives only (wrong) assumtions on how joint financial part is affecting economy.

    Why not add that instead of throwing out something valuable? It would give more perspective on what those waluable things you mention should be used for, not apply it on things that is not meant for as mainstreamers do presently.

  20. ..economics is essentially a vocational subject, not a liberal arts subject

    If this is true (and I'm not saying it isn't), then colleges and universities have a moral obligation to their students to discontinue undergraduate programs in economics. It is a cruel joke on those students because they are being encouraged to pursue a degree that won't provide them with the kind of expertise that was promised. Worse yet, offering undergraduate degrees in economics treats students as a means to subsidize graduate programs. Do I expect schools to drop terminal undergraduate degrees in economics? No. Doing so would mean a sharp reduction in enrollments, which would mean sharp reductions in faculty in economics departments. The hard reality is that graduate programs in economics are not self-supporting. They need billpayers, and undergrads serve that function. It's a hard reality, but no less of a moral offense.

  21. Educating economists? Yes, but where is the scientific stuff?
    Comment on 'Greece and educating economists'

    First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem of economics is that many economists are not scientists but agenda pushers of one sort or another.

    The theoretical economist who understands his scientific mission and knows that J. S. Mill was not only a great economist but one of the greatest methodologists (Popper, 1980, p. 19) simply keeps out of politics.

    “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

    But should economists not bring in their expertise? This seems to be a question that has only one answer.

    “To be able to say intelligent stuff about what is going on at the moment (which you would hope an economics education would enable you to do), you need to know quite a lot of economic theory. A lot of macro of course, but quite a bit of finance, and also at least some game theory.” (see intro)

    And here the problem begins because economists do not understand how the economy works.

    “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

    Economists lack the true theory. And they are only dimly aware of this. Here is a simple self-test.

    You apply one of these items
    • supply-demand-equilibrium,
    • general equilibrium,
    • marginal utility,
    • well-behaved production functions,
    • total income = value of output,
    • total income = wages + profits,
    • I=S,
    • behavioral axioms?
    Then you are out of science because of unnoticed material or formal inconsistency.

    Make no mistake, economists have a lot of interesting things to tell, but the informative description of various economic institutions and phenomena, unsubstantiated modeling, psychologism, biologism, physicalism, sheer mathematical toolism, plain observationism, myopic empiricism, historicism, exegesis, rhetoric, or metaphor do not make a consistent and empirically valid theory. Storytelling is not science.

    What, then, is the state of theoretical economics?

    Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014). This is like pre-Newtonian physics before the elementary concepts force and mass were properly defined and clearly understood.

    As professionals, economists cannot be compared to doctors, they are more like the barber surgeons of the Middle Ages.

    Because economists fail to capture the essence of the market economy they have not much to offer in the way of a scientifically founded advice. This is publicly known since Napoleon and there has been no real progress since then.

    “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner, 1963, p. 1)

    Early in his academic life Greece's new Finance Minister Varoufakis, too, has said a lot of intelligent stuff about the practical irrelevance of neoclassical economics in particular (Arnsperger and Varoufakis, 2006).

    Egmont Kakarot-Handtke

    References (omitted because of space restrictions)

  22. You don't need macro-theory to understand Greece.

    That includes the extraordinarily powerful insights of NAIRU, rational expectations and sticky prices.

    Too many economists think with their gadgets think they understand Greece.

    This hubris has to stop. There is a lot at stake here.

    They do not understand the first thing about the country's history, predicament, and how it is going to get out.

    Btw look it up yourself. The Greek Finance Minister himself says game theory is a lot of tosh and as far as theory is useful, Marxian theory is a better explanation of the dynamics of international capitalism

    As someone with real responsibility on his shoulders, I am relieved.

    Do a quick search.

  23. "Indeed, and that has been very helpful. I guess what remains a puzzle is the insularity - I'm so used to economics being an international (OK, US dominated) subject in the UK, France, Italy etc, what seems strange is that this has been avoided in Germany."

    I've worked on Japanese economic history, and there is an English-speaking cosmopolitan elite that do basically say back what MIT taught them. This was also true during the Gold Standard Era.

    But I often find that the German, Swiss and Japanese economies do best and are most innovative when they do things their way.

    Neoclassical economics is not the only one around. It is not for everyone.

  24. You are very naive to think that the Germans do not understand Keynesian economics. They do, and a hell of a lot more. But in looking at the dynamics between Greece and Germany we have entered political science - and not the naive form economists think they understand.

    There is a lot at stake with the Euro and the EU project that relate to international security issues. Even more so with its expansion eastwards and a more chauvinistic Russia.We need to understand something about institutions and the consequences of mixing these "underdeveloped" (not precisely correct - that is a neo-classical/universal values concept - but to cut a long story short) institutions with a credit boom and what Germany and EU leaders think needs to happen for the Euro and the EU project to survive and thrive. Don't waste time with theory, go straight to the history.

    As far as US intervention, as far as the State Department goes (and usually they will when it comes to the crunch trump what Treasury and economists - unless such economists are up the totem pole and understand the bigger strategic picture - say) they will for strategic reasons almost certainly want the Euro to survive.

  25. This comment has been removed by the author.

  26. “Heterodox economics” is a misnomer. Minsky, Kalecki, Marx etc., are just economists, and in Marx’s case, much more too. The arguments of the “heterodox” movement resonate because macroeconomic theory does not appear to have materially progressed in the last 20 years. If anything it seems to have regressed. Macro theory has become much more formally sophisticated, but its policy insights are at best banal, and more often confused. As you have shown repeatedly in this blog, the main policy question in the last five years has been about the appropriate fiscal response to the financial crisis. Frankly, that’s an A-level question, to which the answer is clear (as you have also shown). How to reform banks is a bit more complex, but the debate – on narrow banking, for example – is very old. (To understand the Euro sovereign crisis, you need to think clearly – there is nothing I am aware of anywhere in economics which properly analyses the relationship of QE to sovereign credit risk. De Grauwe got there in the end, most economists are still struggling.)

    For a very good example of great formal sophistication with regressive insight, read Chris Sim’s “Paper Money”. Keynes would probably have taken five minutes to work out that there is nothing new in this paper, most of us a lot longer. It actually models away money by treating it as debt (again, nothing new: Henry Simons did the same in the 1930s). Where theoretical macroeconomics has made progress, and could do a lot more, is in borrowing from other disciplines. Possibly other social sciences, but mainly from psychology. If theoretical economists were forced to sit through the empirical evidence on decision-making, brain function, and collective behavior, they would be unable to return to complex tautologies where monetary and fiscal policy either have an effect because of some rigidities, or don’t because forward-looking agents neuter all policy effects. They would be forced to do some new things.

    Re Greece, does the evidence so far not suggest that knowledge of game theory is a disadvantage? Psychologists would not be surprised by this, nor I suspect would thoughtful diplomats.

  27. Economics should never be studied in isolation from the classics, politics, and law, just as history should not be restricted to the past generation.

  28. What's the point of knowing economic history when one doesn't even follow current events? "Unprecedented intervention" by a US President? Bollocks. The US loves to interfere in European matters. The same US President also weighed in on an entirely internal UK matter, the Scottish vote for independence.

    "little doubt that both sides would be better off with an agreement that significantly reduces the degree of austerity imposed on Greece"

    And bollocks again. Look how much work "little doubt" does; it allows one to assert anything without any justification whatsoever.

    What I find funny is the same people (e.g. Krugman) who were jumping up and down in 2010 saying with glee Greece must and should leave the euro, are not saying the exact opposite, about what a shame it would be. Why is that? Could it just possibly be that in 2010 Europe wasn't prepared and a Grexit would have been damaging to Europe, but now not so much? The Anglo-Saxons are not the friends of Europe. Anything but. They have their own national interests, which in many cases are exactly opposite of what is best for Europe;

    1. Europe, politically speaking, does not exist. European nations do.

  29. so the ecb gives money ostensibly to greece, but in reality directly to goldman sachs et al

    and gradually the amount owed shifts from owing the private creditor toward owing the central bank

    basically making sure that the ones who made the loans dont suffer any for their decision to do so

  30. "to go even half way towards what these heterodox economists and social scientists want would involve throwing out much that is even more valuable."

    Are you serious? LIke throwing away rational expectations and Calvo Pricing? Is that more valuable than knowledge about how societies actually work, people actually think or actually what happened historically?

    You must be joking.

  31. Simon, have there ever been examples where countries borrowed money with an agreement that interest would be lower in the first several years? Could such an agreement not be proposed to Greece, so they can have a lower primary surplus initially and push economic stimulus (that is if one believes such stimulus would be effective, apparently private parties, non-Euro countries or even rich Greeks don't believe this because they're not offering to buy Greek bonds with low interest rates)?

    1. The time span for repayment has been extended to 30 years, interest rates are very low and interest payment has been defered to the year 2024! That's the status quo!

    2. Last time I checked Greece had a small primary surplus but overall still a deficit, so they must be paying interest to someone...

  32. People tend to talk about these issues as if the movers and shakers are all entirely divorced from any cultural context. The cultural context is interesting to consider in some cases. Take, for instance, Herr Schäuble. Schäuble was born in Freiburg im Breisgau on the southwestern edge of Schwabenland, where other Germans characterize the prevailing attitude of the Schwaben with the mocking phrase “Schaffe, schaffe, häusle baue.” (Something along the lines of “Workie, workie, build a housie” in the local dialect. Work and save, work and save.) On, the German-language Google search page, if you begin typing “Sind die Schwaben…” – Are the Swabians … – Google’s autofill mechanism puts “geizig” up as the first choice for the next word: “avaricious, miserly.” If you type “schaffe,” the first autofill choice is “schaffe, schaffe, häusle baue.” Deutsche Welle (German radio) starts one of its articles thus: “’Schaffe schaffe, Häusle baue – das ist wohl der typische Spruch, der beinahe jedem Deutschen über die Lippen geht, wenn vom Schwaben die Rede ist.” (Schaffe schaffe Häusle baue – that’s probably the typical saying that trips off the lips of any German when the talk turns to Swabia.) So Schäuble runs true to form.

    1. You made a big mistake, which however only a German can know about. Freiburg is not part of Swabia but of Baden. There is a little "friendly" hostility between Swabia and Baden. Like Scots vs English only on a more regional level. Freiburg however is the center of ordoliberalism, and there are other cultural issues surrounding Schäuble, mainly that he is one of the last german politicians to come from a generation that regards World War II as a reason why Germany should quit thinking in terms of national interest and instead find fulfillment in the European project. He truly, unequivocally wants Europe to succeed.

  33. Excellent thread from commentators on German academic, media and institutional responses (or lack of responses) to orthodox Keynesianism..

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