Friday, 3 July 2009

We always need sceptical economists

Paul Sweeney: There is a growing consensus that the collapse in the world economy is due largely to the failure of the liberalisation, privatisation, de-regulation and tax cutting polices. Yet many economists are in shock. Conservative economists’ intellectual belief in the self-correcting workings of the free market has exposed the inadequacy of their theoretical foundations. Life – the real economy – has badly let them down.

This week, the British Government, after three big bail outs of the profitable East Coast Railway, had to renationalise it; the operator walked away because the profit was not big enough. The cost of off-balance sheet PPPs has had to be realised, while plans for additional ones – such as the mooted privatisation of the Royal Mail – have had to be cancelled.

The lack of scepticism among many economists, their incredible confidence in their own beliefs - as if they were scientifically based - has always puzzled. It may be due to the lack of knowledge of economic history and the history of economic thought, and/or to the narrow focus on econometrics. This latter adds to the illusion of scientific rigour but is not a substitute for intelligent, rigorous analysis of real world economics.

There is also the narrowness of real economic debate in Ireland’s universities and in the media. The neo-classical training of economists appears to engender a deep conservatism, a lack of intellectual curiosity and a fascination with technical detail, which ignores the fundamental, policy-relevant issues.

So where are the sceptical economists? I immediately think of four popular economists, three in the US, Paul Krugman, Jamie Galbraith and Joe Stiglitz and Will Hutton in the UK. All have been battling for a new Keynesian economics for some time. They favour a stimulus package amongst other actions, while conservatives want to cut public expenditure.

Last night on Newsnight Stiglitz described the current economic system as “Casino Capitalism.” He said that the weak response by the state on both sides of the Atlantic to the banking crisis was due in large part to the power of financial capital. Even a popular government like Obama’s has not done enough on tackling the power of the banks, he claimed. This is strong comment. We seldom get such strong critical comment in Ireland, though Morgan Kelly of UCD has not minced his words.

While the left has never believed in the self-correcting market, it is important that it is also sceptical of the operation of the state on economic and social matters too. PPARS, useless voting machines, nursing home scandals, poisoning women with bad blood, facilitating the physical and sexual abuse of children for decades, and overflowing sewage works are just some of the more costly state failures. And the money, billions of our tax euros, is not the only cost of these failures by our public service and the politicians who make the main decisions.

But in financial terms, all state failures pale in comparison to the costs of the disastrous economic polices pursued in Ireland between 1998 and 2005/6. The strongly pro-cyclical, tax-cutting policies in a domestic boom, along with adherence to the efficient markets theory by many in our own Department of Finance and the Financial Regulator, allowed the banks to compound our economic collapse; the vast costs of these mistakes are impossible to estimate.

Had key powerful economic state officials been more sceptical of the markets, we might have had some internal opposition to PD McCreevy’s tax cutting policies, and we might have had better bank regulation. The result would have been a more manageable economic downturn. The state was supposed to protect us from the worst excesses of the market. The state let us down, so badly, that the cost may run for decades.

While this failure was largely due to the “intellectual capture” of the cream of the state’s economic establishment by the free market fundamentalists, the reasons are of little comfort to ordinary people. But we must try and learn the political and economic lessons of why this occurred.

How did an economic ideology become so dominant that it captured the minds of so many? McCreevy, the PDs and many in the media sold the pup. But why did so many generally conservative public servants and others buy it?

While progressives can take heart that much must now change, unless we come up with much more coherent strategies Ireland and Europe are likely to end up many cul-de-sacs in the road to building a new economic system that works. This has to include a new paradigm of utilising the best of the public and private sectors.

The excoriation of the public sector by the defeated, retreating storm troopers of new-liberalism has served to distract from the consequences of the abject failure of their market fundamentalism. Yet these attacks have taken us up the first alleyway, away from addressing real economic issues.

The emergence of popular debate on economics in a number of Irish blogs is most welcome. However, the print media, especially the Irish Times, which took comment from academic economists for a time, is again reverting to promoting the utterances of the PR economists from the stockbrokers and finance capital as “fact”. There is no scepticism there – a few facts and self-confident, Big Opinions, rooted in “economic science”! The late Paul Tansey is sorely missed for fairness, accuracy, and most of all, for his perception, which was rooted in a degree of healthy scepticism.


Aidan said...

One of the biggest myths of both neo-classical economics and several critiques of 'neo-liberalism' amongst the left is that the market is an autonomous system, seperate from state institutions. But, the empirical reality is quite the reverse (both conceptually and in practice).

Markets are, and always have been political-social constructs. They are a network of institutions. Most economists would agree with this , it is the political neo-liberals who think otherwise. The precise role and method of institutional formation changes over time.

The political project of deregulation and privatisation in practice leads to an active role for the state in the market economy. It is not a role of service delivery but a regulatory role. This can be witnessed in the proliferation of agencies and regulatory bodies in Ireland and the EU. De-regulation leads to re-regulation for competition.

Regulation is a tool of market capitalism, and a mechanism to institutionalise, moderate and socialise it. State's have been more active during the past 20 years in the market not less active. What we have witnessed is the emergence of a new governance regime, that is now facing a legitimation crisis.

Once we deny the myth of a state in retreat, and the myth of a self regulating market, the question becomes: what role do we want states and public bodies to play in the market. These will of course be determined by bigger normative questions surrounding 'why do we have an economy in the first place?'

karl deeter said...

I think statism and states sponsored capitalism are as much to blame as 'free markets', the idea that you can have a goldilocks effect by getting rid of the free market is really misguided.

When people read market signals badly and they rush towards an asset you get a bubble, the puncturing of which is the rebalancing effect of the free market, but the markets are not truly free because governments then rush in and try to control the outcome, via monetary and fiscal policy.

It's not to say they shouldn't, that would be akin to not helping people on a sinking ship who are dying of cancer, the fact that the adjustments will likely come along anyway doesn't mean you shouldn't reduce misery in the meantime.

Foreign Affairs magazine recently had an excellent article on the rise of state sponsored capitalism and it points out quite clearly that free markets still remain the best option.

'casino capitalism' scares me, about as much as 'keynesian russian roullette' which is what we'd be engaging in if Krugman or Stiglitz had their way, their concepts are largely untested and while the ethical stances is admirable the outcome may not be, huge recovery programmes cost money, and you have to have buyers of debt in order to get that money (the current waltz between the fed/treasury/congress can only last so long before the music stops). To constantly do this means you would likely see a dollar decline and/or increased rates payable which will in turn lead to dollar decline and inflation.

free markets have won out over government sponsored intereference - the irish govt fascination with property (good for upfront taxes) and incentivisation of same (s48, s23, s50 etc.) meant money poured towards property and the free market corrected the problem, but now that the free market is going through the correction suddenly it is to blame as well?! It's akin to a person blaming a surgeon for them being in pain as they save them.

failure in the running of public finances and that of procyclical policy is not a failure of the free market, it is a failure of the structure of government, the regulator didn't regulate,the government didn't govern, and at the base of this the very solution suggested is to put more control in those very hands!