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Brexit and mainstream economics

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By Stuart Birks

The Brexit referendum result is just one step in a long process of change, the course of which is by no means certain. There will be lots of speculation and analysis, with those close to the action are likely to be preoccupied with the direct impacts. There are additional points of particular interest to pluralist economists which are worth some consideration. Here are some very preliminary points.

For the vast majority of tertiary students, exposure to economics is limited to a cursory description of societies based on self-interest in the form of maximising utility or profits through market mechanisms and resulting in some “ideal” competitive outcome for the world (see HERE for one possible driver). This is deficient.

In markets people express their preferences through their decisions on buying and selling. In politics preferences are expressed by voting. “Voting power” in the market is based on money, whereas in politics current democracies give the same weight to each qualifying voter. Politics has an influence and the expression of preferences can differ from that through markets, so a solely market-based view is too limited.

In mainstream economics historical and institutional influences are downplayed or ignored altogether. A fixed, stable, underlying structure is assumed, allowing the use of static analysis and with little regard for possible “exogenous shocks” (as through the political forces, for example) that can lead to structural change. Structural stability is essential for econometric estimation, and structural change will greatly reduce the value of past observations for understanding future options.

Where change is considered, this is frequently analysed through comparative static analysis although adjustment paths and times can be very important.

The referendum process has been criticised for the associated simplification and misinformation on both sides. These issues may be widespread and affect markets also. Political processes may be flawed, and markets may also give limited options and misrepresented products. The key role afforded to a theoretical ideal in mainstream economics could be more of a distraction than an aid to understanding.

Those who have a market-based world view should note that there is no guarantee that markets would even provide incomes above the subsistence level. Note also that that private ownership allows windfall gains to individuals from what might alternatively be considered society’s assets. If people have a political voice, there is a limit to what might be tolerated.

Keep-calm-and-carry-on2

 

How then can economists make a useful contribution in such an environment? More specifically, how should economics change so as to make a useful contribution?

Suggestions will be gratefully received.

 

 

From: p.12 of World Economics Association Newsletter 6(3), June 2016
http://www.worldeconomicsassociation.org/files/Issue6-3.pdf

 

Download WEA newsletter Volume 6, Issue No. 3, June 2016 ›

6 responses

  • greg gerritt says:

    Economics needs to include ecology. It also needs to integrate the idea that keeping land in the hands of those who are the original inhabitants works better than any other system for keeping forests productive and places that absorb carbon.

    Economists also need to talk straight. instead of a shrinking economy they talk of negative growth. The obsession with growth is no longer appropriate on planet Earth, so everything they do is biased if they do not include ecology, climate change, and food security. I pointed out to The Economist the other day that economists are no longer valued in the community because they mostly act as lap dogs for the rich and powerful. Until economists start their analysis from the perspective of the 99% they will never get things right.

  • Einar Velarde says:

    By: Einar J. Velarde, MA, MBA
    The solution of poverty and wealth distribution is a moral issue more than an economic issue. When the 1% begins to realize that their excess profits should be placed in the hands of the 99% through a special distribution system and also the 1% begins to absorb the increases in production costs instead of transferring to the 99%, then and only then we will see the beginning of a new moral and economic system which should bring prosperity in the quality of life of the 99%.
    Thank you.

  • Marco Saba says:

    Economics must be in touch with reality of money creation by the banks. Accounting is the problem. The arrogance with which both the Swiss National Bank and the European Central Bank this year (2016) suppressed the publication of their Cash Flow Statement by telling the public that cash flow accounting is unnecessary in the special case of central banking, and the fact that the economists and the commentators failed to spot the absurdity of this behaviour tell it all. The money created by the banks (both commercial and central banks) must be accounted for in their balances as a cash resource of the same bank before being lend or spend or swapped for assets else we cannot see the seigniorage involved in the operation. Money creation by the banks should be a liability to the National Treasury of the state where the banks operate. The Treasury should expose an equivalent asset under the name ‘seigniorage received by the banking cartel’ or similar. While today we have unresolved liabilities from money creation that are fictitious and irredeemable (i.e. “client deposits” for commercial banks and “banknotes in circulation” in the central bank). This state of affairs is despicable and the moral hazard consist in the fact that when the public will be aware the blow-back will be for BOTH the banking system and the public Treasury. People will question the authority about the unnecessary public debt once seigniorage from electronic money creation is considered… The institutions, and the economists should consider coming clean on this as soon as possible to better manage the whole situation.

    • Stephen I. Ternyik says:

      The monetary observation of Marco Saba is one very decisive technical detail of any economic reform , and I fully support the direction of political critique, concerning the ‘hidden curriculum’ of accounting.

  • Stan Wiggins says:

    1. The inquiries to Google after the vote suggest broad public ignorance even of what the EU is.
    Here in the colonies, one survey determined that 65 percent of citizens in the 24-54 age group
    were functionally innumerate–didn’t understand compound interest and other basic concepts.
    So a preliminary question is, how do economists either rectify or overleap the basic limitations
    of political audience. (Other volumes have indicated a substantial disinterest in political matters,
    estimated from 25 to 40 percent of populace, confirmed by apparent failure to explore what
    Brexit would actually mean, even by the generation whose prospects are most directly affected.
    See, e.g., Stealth Democracy, a volume from around 2001.)

    2. Rectification would require an organized campaign of public education, in both schools and
    media, on the scale of organized propaganda over decades that made neoliberalism seem
    appealing and emotionally resonant. Steve Keen’s work and other debunking manuals are
    excellent for those already literate in econo-speak and underlying concepts, but not so much
    for the general audience that wants a comic-book version, if it’s willing to even consider that.
    The emotional impetus favors instinctive hostility to a scapegoat rather than the slow and
    more demanding reflection of the frontal lobes. Weintrobe’s volume on “engaging with
    climate change” suggests the range of psychological and emotional obstacles to confronting
    complex and, for many, unthinkable crises.

    3. Overleaping the general audience’s indifference/acquiescence (in the U.S., the deliberate
    disabling of organized labor undermined the single most effective source of focused,
    alternative analyses in the political arena). Stiglitz and a co-author have estimated the
    total cost of Iraq misadventure at $3T. The domestic losses to redistributive policies
    favoring the financialization of the economy and speculation over genuine productivity
    and innovation are harder to estimate, but there really are limits to growth and
    artificial wealth from rentier activities and public policies. The level of debate would
    be greatly advanced by a serious effort, supported by respected economists, to
    estimate the lost/diverted value of decades of neoliberalism. The lead item, I
    think, would be an estimate of how much wealth was redistributed to individuals
    and speculative financial entities in the years before the 2007-2008 collapse, that
    was not recovered by remedial measures and ultimately represents a burden on
    general taxpayers for which no useful production of any sort was received. This
    is a separate estimate from the social costs of neglecting authentic innovation
    and R&D in favor of artificial financial ‘profit,’ as Frederick Soddy pointed out
    several years before the Great Depression. And there are other, exogenous causes
    for the dispossession of the American middle class. But the beginning of remedial
    education for journalists requires: (i) a critical disavowal of neoliberalism, based
    both on conceptual incoherence and the demonstrated effects; (ii) a credible
    estimate of the consequences of Reaganomics and Thatcherism in terms of both
    redistributive impacts and resulting social instability; and (iii) a focused description
    of alternatives that stop short of full-on social democracy, but call out to the wider
    moral focus of classical economists and the abandonment of that set of values
    by the new orthodoxy.

    I’ve messaged a couple liberal think-tanks, suggesting they explore #3, but haven’t
    gotten nibbles. (I’m not proposing myself to be involved in such an effort.) I’m
    sure it would offend some financial contributors, but it’s hard to imagine there’s
    no liberal/progressive benefactor prepared to support a serious
    exploration of these questions and the distillation of the result into a publicly
    digestible message. The piece parts are already published, including Michael
    Hudson’s work and numerous others, but no one has attempted, so far as
    I know, an estimate of what might have been done with the $3T spent in
    Iraq, or the considerable wealth diverted to and retained by Wall Street parasites “doing
    God’s work,” under an administration not hampered by the privatization of Congress.
    It’s an undertaking worthy of Polanyi or some other historical figures.

  • Frank Stilwell says:

    Three excellent points in the article by Stuart Birks immediately strike me:
    1. the recognition that both economic markets and political elections have ‘imperfections’ arising from inadequate or misleading information;
    2. the more egalitarian character of political elections because the basic principle is ‘one person one vote’, rather than ‘one dollar one vote’ in markets;
    3.the recognition that, in a market economy, there are recurrent private gains derived from public assets (even without ‘privatisation’).
    I draw the general inference that it is important that public interests regularly find expression through political processes, and that these expressions should constrain the operation of private interests through markets. This is indeed a case for a more ‘democratic economy’, even if the collective political decisions sometimes (perhaps often) run counter to a more narrow conception of ‘economic rationality’, as may be the case with ‘Brexit’.
    Having said that, something approaching workable consensus is usually to be preferred to straight majority voting. But that requires building a high degree of political understanding and commitment through education and social processes that foster a collective spirit. This is yet another reason for prioritising a more egalitarian distribution of income, wealth and power, thereby creating the precondition for a more cooperative society. Because mainstream economics does not do this, it is part of the problem, not part of the solution….

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