Nat O'Connor: Martin Wolf, chief economics commentator at the Financial Times, was in Dublin yesterday, to deliver a talk to the TCD Phil society. TASC helped sponsor the event. The topic of his talk was "The State of Economics". Despite refering to this as the "most arid" of the topics that he had offered to speak about (and you can blame the TCD Phil committee for the choice), Mr Wolf made a number of observations that confirm, in his estimation, the need for a major rethink of economics.
"We did not know what we thought we knew" about the economy. That was one of the strong themes of Martin Wolf's presentation. He talked about his own, belated, interest in the work of Hyman Minsky. Minsky posed a deceptively simple (and for years ignored) question to macroeconomists. Minsky argued that for any model of the economy to be realistic, it had to allow for a Great Depression as one possible outcome. Yet, orthodox macroeconomic models of recent decades were simply incapable of allowing for that. In other words, no matter what configuration of variables were used in those models, they did not and could not allow for a major crash. Little suprise then that the crash was not predicted and, moreover, that many prominent economists thought that inflation control had eliminated the possibility of such a major crash occuring.
Mr Wolf has come to the conclusion that the macroeconomic paradigm "failed" and the orthodoxy was simply "wrong", in relation to the importance it gave to inflation targeting and the mistaken belief that "cleaning" after a crisis would be cheaper than "leaning" against one, in terms of Government policies to prevent a crisis from occuring.
What this implies, he said, is that a good deal more leaning against risky behaviour is required by governments, including regulation of banking, less risky financing of property, and much larger counter-cyclical capital investment.
In hinting at what a new economic paradigm might look like, Mr Wolf used the analogy of a bridge building project. Although the fundamental laws of physics apply to the construction of bridges, we do not ask theoretical physicists to undertake their design. Rather, we employ the profession of engineers, who have an array of practical skills, including rules of thumb, that better qualify them to oversee the construction of a durable bridge in the real world. By analogy, we need more "economic engineers" in future rather than theoreticians to advise governments and business about how the economy works in reality, rather than according to the idealised, orthodox models (the same models, I might add, that failed to allow for the possibility of the major economic crash that we just experienced).
In relation to Ireland, Mr Wolf noted that the interests of taxpayers were "sacrificed" for senior bondholders, seemingly due to pressure from the EU. He described this as "insane" and "immoral" and noted that the blanket guarantee was a "catastrophe" that resulted in Ireland holding a great deal of debt that we shouldn't have. With that said, Mr Wolf did express the view that Ireland's economy was doing better than others, such as Spain, with their unemployment over 25 per cent and youth unemployment over 50 per cent. He also expressed concern about the French economy. Crisis in France would of course strike to the heart of the Euro zone and EU economy, which will accelerate the need for changes to EU-level economic policy.
The question I would then pose is whether the EU is capable of seeking a new paradigm, with a greater role for practical "economic engineers", or whether EU policy (to Ireland's disadvantage) will continue to be dictated by a failed, theoretical economic orthodoxy.