We’re all economists now…just don’t expect difficult questions
One of the unexpected benefits of the global financial crisis is that economics has become much more widely discussed. Talk about economic theories, previously heard mostly in tutorial classes at universities, has moved into offices and bars and nearly everyone, from Delhi to Detroit, seems to have a view about the causes of the crisis, the value of quantitative easing and the fate of the euro.
In many ways, this surge in interest in the “dismal science” should be welcomed. Modern economic ideas lie behind many of the world’s social and environmental challenges and, correctly tuned, they can also help us solve them. The debate about the role of economics in society should not be restricted to ivory towers, obscure econometric journals or library bookshelves.
To be useful though, this public debate needs to be well-informed. It should have access to accurate, timely and relevant information. People should understand what economics is for and what it can achieve. They should understand where it went wrong and why. And they should know where the discipline’s limits lie.
Unfortunately, because much of the insight offered in the popular news media and specialist economic press is poor, the standard of public discussion is often woeful, particularly in the English-speaking world. It is generally better in continental Europe, where fundamental questions are frequently asked, even in the mass news media. But, for years, many American and British economists, politicians and journalists have only provided a simplistic and one-dimensional view of the discipline.
Readers of the British and American financial press (as well as those living in Australia, New Zealand, Hong Kong, Singapore, Ireland and Canada and a few other countries) have been encouraged to think that economics is a well-grounded subject, governed by a set of simple, almost self-evident, rules. It may not yet be a hard science, backed up with solid mathematical formulae, like physics or chemistry, but it is portrayed as a subject that is evolving in that direction.
Growth is the goal: it is not just desirable, but essential. Costs should be minimised and returns maximised in the short, medium and long term, regardless of the implications for society, jobs or the environment. The consumer should always be seen as “king”, because growth requires rising consumption, even if that means scarce resources are wasted. State intervention is portrayed as being bad, even where it reduces duplication and improves efficiency. Competition is always shown to be good, even when it leads to oligopolies in food production, aviation, the auto industry, retailing, high-street banking, smart-phone operating systems, pharmaceuticals and computer software for example, when it creates companies that abuse their market power. Readers are also told that companies and markets should always be lightly regulated, even after this led to a catastrophic and entirely avoidable economic bubble. The “invisible hand” remains in charge because to try to guide it, they are told, would be “socialist,” and bad. British and American readers have even been persuaded that a third round of quantitative easing will somehow stimulate a recovery and that austerity in Europe simply will not work.
There is almost no serious debate about the role modern economic ideas played in the creation of the financial crisis. Few bother to ask why, if this is a precise discipline, the crash was anticipated by only a handful of economists. As Hudson and Bezemer note in their WER paper (Vol 1 No 1), today’s macroeconomics actually ignores the role the finance sector plays and yet, until now, few have bothered to ask why. Moreover, no one seems willing to discuss the logical flaw of the policy responses in the US and UK. The economic growth achieved in western countries during the last two decades was mostly down to ever-rising consumer borrowing, fuelled by easy bank credit. Real wages stagnated or fell. It was the borrowing that created the debt bubbles in the consumer and banking sectors, and the crisis. Governments responding to this by printing money do not address the problem. The over-leveraged balance sheets remain, making a return to consumption-driven growth impossible. The only sensible way to fix these problems requires Tolstoy’s “two most powerful warriors” – patience and time.
The reason that this flaw is overlooked, of course, is not just because of a pro-Keynesian clique who still want to fight the last war. It is that the entire modern western economic edifice depends on the belief that there can be ever-rising consumption – and production. Like people addicted to drugs, businesses are dependent on continuous growth, to keep their profits rising and their shareholders at bay. Governments even seem to believe that growth is necessary for them to create employment. Without more consumption, there cannot be more jobs and there cannot be more progress.
This highlights another logical flaw. If economic growth depends on ever-rising production and, by definition, ever-rising use of resources, it cannot continue indefinitely when these resources are scarce. As John F. Kennedy’s environmental adviser, Ken Boulding, so eloquently put it more than 40 years ago, “anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad – or an economist”.
Worse, by underpricing the raw materials we use today, by ignoring or under-valuing many of the economic externalities, we have been drawing down on future growth. Because modern economics has underplayed the costs of environmental degradation and the fact that our grandchildren will pay more in real terms for many of the depleted raw materials than us, we have penalised future generations and the planet to have the consumption-driven engine running faster now, breaking one of the ground rule of classical economics in the process.
The pressure for more open markets through WTO has also pushed aside any meaningful debate about the value of trade barriers in the short- and medium-term. Developing countries in Africa, South America and much of South-east Asia have been tricked into selling their raw materials on the cheap. Because tariffs have been removed, they will never be able to compete with developed countries in complex manufactured goods in the long term unless, like China, India and South Korea, they erect non-tariff trade barriers to protect their emergent industries.
Most obviously of all, almost no one has asked why the growth of the last 20 years has actually increased income inequality globally when modern-day economists had promised it would do the opposite.
The poor level of discussion in the English-speaking news media about the sources of the west’s economic misery has also encouraged politicians to prescribe the wrong medicine. It has helped them pretend that there is a quick fix, even now, five years into the crisis when there is little to suggest that their policies are achieving very much at all. Some even pretend that the crisis is mostly over. This means that the citizens of many countries in the western world are not just ill-informed. They are also badly ill-prepared for what is to come.
Graeme Maxton is a Fellow of the Club of Rome and the author of The End of Progress, how modern economics has failed us (Wiley 2011).
From: Pp.10-11 of World Economics Association Newsletter 2(5), October 2012 https://www.worldeconomicsassociation.org/files/newsletters/Issue2-5.pdf