Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 3 November 2016

Ann Pettifor on mainstream economics

Ann has a article that talks about the underlying factor behind the Brexit vote. Her thesis, that it represents the discontent of those left behind by globalisation, has been put forward by others. Unlike Brad DeLong, I have few problems with seeing this as a contributing factor to Brexit, because it is backed up by evidence, but like Brad DeLong I doubt it generalises to other countries. Unfortunately her piece is spoilt by a final section that is a tirade against mainstream economists which goes way over the top. Let me just go through the factual errors.
“Economists dictated the terms for austerity that has so harmed the British economy and society over the past ten years.”

The only support she gives for this statement is the 20 economists who signed a letter to the Times on 14th February 2010. She neglects to mention that 58 equally notable economists signed a response in the Financial Times on 18th February arguing the 20 were wrong. Austerity has always been a minority view among academic economists, a minority that has got smaller over time. Of course those that signed the first letter, and in particular Ken Rogoff, turned out to be a more prominent voice in the subsequent debate, but that is because he supported what policymakers were doing. He was mostly useful rather than influential.
“As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternatives.“

In the case of the 20 economists who signed that letter, nearly half did revise their views just two years later. More importantly, for the last few years pretty well every macroeconomist of note, including Ken Rogoff, has advocated a substantial increase in public investment. So this sentence, in so far as it relates to austerity, is almost as wrong as it could be
“[On Brexit} All the heavyweights of the economics profession … were wheeled out to warn the British people of economic facts known, and understood apparently, only to ‘experts’... But the ‘experts’ and the economic stories they tell have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international and in particular European cooperation and coordination are vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets—in money, trade, and labour—must be unfettered, detached from democratic regulatory oversight, and must be left to ‘govern’ whole countries, regions, and continents.”

Where did these heavyweights talk about “economic facts known, and understood apparently, only to experts”? When they were given the chance, they explained the common sense idea that trade would suffer if we left the EU because it is easier to trade with your neighbours, and the easy to understand empirical findings that more trade increases productivity and therefore economic growth. There is no religion involved at all, but rather statistical evidence. If you are looking for religion, you need to focus on the handful of economists supporting Brexit, who really did believe that it could usher in a neoliberal nirvana that would more than offset the costs of Brexit. To the extent that the public ignored the warnings of economists, it was probably because these warnings were ‘balanced’ in the media by this handful.

When Ann talks about the failings of economists related to the financial crisis she has a point, but it is one that she grossly exaggerates. Economists hardly “led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years”. The way was led by the financial sector itself. If more economists had backed up rather than dismissed Rajan’s warnings in 2005, I doubt if anything would have changed. Why do I think this? Because mainstream economists have subsequently argued that the only way to prevent another crisis is to substantially increase the capitalisation of banks, but they have been completely ignored by policymakers. If economists are being ignored after the financial crisis which created untold damage, why should things have been any different before the crisis?

I think the same point applies to globalisation. Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right. It is also true that many of these economists did not admit or stress enough that there would be losers as a result of this process who needed compensating from the increase in aggregate prosperity. But once again I doubt very much that anything would have changed if they had. And if they didn’t think enough about it in the past, they are now: see Paul De Grauwe here for example.

There is a regrettable (but understandable) tendency by heterodox economists on the left to try and pretend that economics and neoliberalism are somehow inextricably entwined. The reality is that neoliberal advocates do use some economic ideas as justification, but they ignore others which go in the opposite direction. As I often point out, many more academic economists spend their time analysing market imperfections than trying to show markets always work on their own. They get Nobel prizes for this work. I find attempts to suggest that economics somehow helped create austerity particularly annoying, as I (and many others) have spent many blog posts showing that economic theory and evidence demonstrates that austerity was a huge mistake.         

28 comments:

  1. https://www.theguardian.com/politics/2013/apr/18/uncovered-error-george-osborne-austerity

    On Rogoff's influence on Osborne. All politicians need policy/intellectual enablers.

    ReplyDelete
  2. Something which voters pick up as "economic consensus" plays an important part in creating "the weather" for politics. This "consensus" is no doubt largely if not entirely a fabrication of other interested parties. Nevertheless, for those who want to change this "weather", mercilessly teasing economists at every opportunity looks more promising than trying to explain to David Dimbleby that "the deficit" is not the most important issue of the general election or to Wolfgang Schauble that the Eurozone is institutionally challenged.

    ReplyDelete
  3. "Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right. It is also true that many of these economists did not admit or stress enough that there would be losers as a result of this process"

    It goes way beyond that.

    For some reason beyond me economists ignore resilience vs efficiency.

    Economists have created extremely non-resilient systems like our current international production system which is a couple weeks away of total collapse in case of a serious problem. Its subversive.

    As to Brexit, you have ignored that we want businesses here with deep roots, not some cog in a globalised wheel that can disappear at the drop of a hat.

    ReplyDelete
  4. "Economists hardly “led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years”. The way was led by the financial sector itself."

    While this is true (economists didn't fight to implement the policies over the protests of the financial sector), you go way to far with "If economists are being ignored after the financial crisis which created untold damage, why should things have been any different before the crisis?"

    The economists give a supposedly impartial, intellectual cover to implement policies certain groups want implemented for their own pecuniary gain. The financial sector wanted liberalization because they believed it would help them make more money. But they can't, politically, get a policy implemented based simply on "we'll make more money regardless of the general effects on the economy." The policy changes have to be couched in the language of impartiality, not particular benefit.

    Economists helped the financial sector to make the argument the changes were good for everyone because efficiency, etc. and most importantly, the arguments weren't "made up" by the financial sector but were the opinions of "impartial" "experts". This gave politicians the pass the policies without seeming to be captured by the financial sector or acting on their behalf in particular because "everyone knows" the changes were good for everyone, economists told us!

    So "why should things have been any different before the crisis?" Because what many economists were saying before the crisis was in the interests of the people who have a lot of political power and after the crisis many economists were saying things the people with political power didn't want to hear.

    Ignoring the way economists were critical to implementing the policies which contributed to the crisis is rewriting history.

    ReplyDelete
    Replies
    1. "But they can't, politically, get a policy implemented based simply on "we'll make more money regardless of the general effects on the economy."" I think that is being very naive - see Brexit. Just talk of freeing firms from red tape is enough - that is the triumph of neoliberalism.

      Delete
    2. "Just talk of freeing firms from red tape is enough"

      How do you distinguish between financial sector liberalization and freeing firms from red tape? They are both types of liberalization. Cutting red tape isn't sold as something that will help businesses at the expense of everyone else. It is sold as something to make the country "more competitive". It is a policy presented as helping the economy in general. The same way financial sector liberalization was presented to the voting public.

      Economists' intellectual cover was essential to establishing political cover and an "impartial" academic sheen to policies designed specifically to help certain people and groups. When has a policy to help the rich ever been presented as helping the rich but hurting everyone else?



      Delete
    3. It's enough because the paradigm is already in place - after 40 years of repetition, of course it's almost pavlovian. But it took time to build this, to craft the story, and there, in the process, highly normative claims couched in quasi-esoteric language by economists definitely helped.

      All economists? Obviously not, but that's not the point - the charge cannot hold or fall according to that. Let's concede that precise formulations of this charge to mainstream economics are hardly ever provided by heterodox commentators. One possible formulation is that economics as it came out of the formalization process it underwent during the two world wars, provided extraordinarily malleable and flexible with respect to the needs of the neoliberal turn in politics. Little resistance was found, many concepts were just perfect tools.

      This not because counter-concepts were absent, they were not, and heterodox ignore them for sake of their own imprecise claims, but in practice at their perils. However, empirically, the counter-concepts made for substantial complications in a field that already had enormous problems in testing hypotheses with very little empirical content, where huge existential claims on unobservables (functional forms, shape of errors, behavioral assumptions etc.) were made at the very foundational steps of the theory, and where in the end most tractable problems where the simple ones, data available invariably failed to be decisive, and most research was conducted at two levels: writing mostly inconclusive papers, and then going beyond actual results in a rhetorical realm where advanced theoretical speculation was allowed - mostly unsupported.

      However, all this is also a factual matter. One should review the way certain general problems have been absorbed into economics, shaped, discussed, studied, and see what happened. Privatizations, the labor market, foreign trade, healthcare, whatever. The basic view that markets are efficient in some constrained sense has prevailed virtually everywhere. This is what many wanted to listen, but it was also almost always possible to satisfy their desire.

      Would it have been the same, had a socialist turn taken place instead of a neoliberal one? After all, modern economic theory has more believers in almost unfettered free markets than believers in almost total planning not because of any coherent, clear result of the theory, but due to the exogenous insight of Hayek - a figure outside the paradigm and the conventional method, arguing from first principles. His claims have been formalized somewhat, although for the time the problem was being discussed, counter-claims abounded. At some point, the discussion basically disappeared - and not with an empirically sound corroboration against socialism. So the question is legitimate: would economics be equally unable to resist "capture" by a left-wing turn? That's an interesting question to me.

      Delete
    4. "Economists' intellectual cover was essential to establishing political cover and an "impartial" academic sheen to policies designed specifically to help certain people and groups. When has a policy to help the rich ever been presented as helping the rich but hurting everyone else?"

      Precisely

      Delete
  5. "I think the same point applies to globalisation. Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right."

    And you say you are not neoliberal. Facepalm.

    ReplyDelete
    Replies
    1. I'm certainly not neoliberal, but I do follow the evidence.

      Delete
    2. The evidence is mostly from declining poverty rates in China. that takes up the bulk...

      Delete
    3. Your claiming that evidence on your side in this case itself is a statement of that ideology. Time will tell.

      Delete
    4. Only if you think the scientific method is an ideology.

      Delete
    5. Haha. Did you read Furman's paper on fiscal policy. Major shift. So scientific before!

      Delete
    6. "Only if you think the scientific method is an ideology."

      'Neoliberal economics is not based on the'scientific method'?

      "The critics of neoclassical economics agree that economics should be about economic reality and should be demonstrably relevant to it. This will strike the non-economist as obvious. However, it is not obvious in mainstream economic thinking: the neoclassical school of thought is based on the deductive approach. This methodology argues that knowledge is brought about by starting with axioms that are not derived from empirical evidence, to which theoretical assumptions are added (again not empirically backed), and on the basis of which tools of logic (mathematics) are utilized to prove theoretical results. There is an alternative approach. This approach examines reality, identifies important facts and patterns, and then attempts to explain them, using logic, in the form of theories. These theories are then tested and modified as needed, in order to be most consistent with the facts of reality. This methodology is called inductivism."

      http://www.palgraveconnect.com/pc/doifinder/view/10.1057/9780230506077


      Delete
  6. "She neglects to mention that 58 equally notable economists signed a response in the Financial Times on 18th February arguing the 20 were wrong."

    That's the joke about economists made real..

    ReplyDelete
  7. I think the mystery here is solved by realizing that many commentators when they talk about the views of "economists" are actually talking about the understanding of economics brought to policymakers often through the prism of "law and economics" a specific subfield of empirical economics devoted to policy issues. As far as I can tell this subfield was created with the purpose of retarding the effect of formal modern (read game-theory-based) economic analysis on policy. This agenda has been remarkably successful, because few lawyers or judges have any understanding at all of the implications of game theory (or 20th century economics more generally) on economic analysis.

    Because so much policy analysis is built on a perverted form of economic analysis, economic policy making is handicapped. And the economics profession is blamed.

    So my advice to you is: focus on cleaning up "law and economics" and maybe the economics profession will stop being tarred with the faults of the "law and economics" subfield.

    Note different Anonymous from 6:55

    ReplyDelete
  8. Ivory towers!

    'I find attempts to suggest that economics somehow helped create austerity particularly annoying,' - at least it hasn't made you suicidal/homeless/reliant on foodbanks etc.

    ReplyDelete
    Replies
    1. So you think blaming austerity on mainstream economists when most were against austerity helps these people!

      Delete
    2. Mainstream economists do not advocate for full employment, they advocate for NAIRU. So there are still poor people. Do you want there to be no poor people Simon?

      Delete
    3. No, mainstream economists say that if you allow unemployment below the NAIRU for some time, inflation will rise. Of course we would like to reduce involuntary unemployment.

      Delete
  9. "Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right."

    This sentence proves Ann Pettifor right, because it couldn't be more wrong. The vast majority of the world's population have been on a losing streak for the last few decades and there's real suffering out there. But if you can't bear to watch, just look the other way.

    ReplyDelete
    Replies
    1. That is just sanctimonious. The evidence is that globalisation has helped far more people than it has hindered. If you reversed that, you simply increase global poverty.

      Delete
    2. See this for example

      http://voxeu.org/article/know-your-facts-poverty-numbers

      Delete
    3. Thanks for the link. It doesn't tally though with what I know from relatives in west Africa whose lives have changed little over recent decades by all accounts, please see link below. Perhaps the people of, say, China and Canada are fairing better but the findings in your link for sub-Saharan Africa appear to be well wide of the mark. I'm wondering how they come to their conclusions.

      https://www.theguardian.com/global-development/2016/jan/26/ghana-success-gold-oil-cocoa-economic-downturn

      Delete
    4. http://voxeu.org/article/know-your-facts-poverty-numbers

      Thanks for that.

      Delete
  10. "There is a regrettable (but understandable) tendency by heterodox economists on the left to try and pretend that economics and neoliberalism are somehow inextricably entwined. The reality is that neoliberal advocates do use some economic ideas as justification, but they ignore others which go in the opposite direction. As I often point out, many more academic economists spend their time analysing market imperfections than trying to show markets always work on their own."

    Neo-Liberalism is a theology that transfers wealth and power upwards, which historical data shows.

    The oft expressed facts that rich and the mega rich in particular have seen their wealth increase exponentially whilst the poor have also increased in similar proportions evidence the widening gap between rich and poor since 1970- when Neo-Liberal doctrinaire philosophy first began to be felt here in Britain.

    The reality of economics is that it can only record measures that have been taken and cannot predict future events, as like the weather, unexpected changes forces different outcomes.

    As much as governments and economists may ideally choose to regulate events in order to bring about a desired effect, nothing can guarantee it happening.

    The 21st century perspective should by now know that the only guarantee of the economy serving peoples interests is spending directly into the economy when and where it is needed and taxing that out again if inflation takes hold.

    The idea for instance that a sovereign government like ours needs to borrow it's own money is simply ludicrous. The financial sector is totally out of control and whilst we prop it up with QE, we should instead allow it to fail and replace the need to finance its failures by supporting the pension funds and other social commitments, directly out of public expenditure, restructuring those commitments so that they can be legitimately funded beyond the Casino.

    In short we can manage any need that serves peoples interests, without resorting to the casino economy, money is not the problem, it is the political will that is the problem.

    Poverty is a political policy, not a necessity. We spend according to need and tax according to the rate of inflation.





















    ReplyDelete
    Replies
    1. "In short we can manage any need that serves peoples interests, without resorting to the casino economy, money is not the problem, it is the political will that is the problem."
      This is Prof. R. Werner's 'solution'.

      “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power - something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”
      http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

      Delete

Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time.