In an end of the year piece, the biographer of John Maynard Keynes, economist Lord Robert Skidelsky writes that “Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?”
He goes on: “Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t.”
Skidelsky lays the blame for this on the state of macroeconomics – he reminds us of the now infamous visit of the British Queen Elizabeth to the London School of Economics at the depth of the Great Recession in 2008 when she asked a group of eminent economists: why did they miss this coming? (see my book, The Long Depression). They replied that they did not know why they did not know!
Skidelsky goes on to consider various reasons for the failure of mainstream economics to see the crisis coming or now to know what to do about it. One reason might be the concentration of economics education on unrealistic models and mathematical formulas, rather than grasping “the whole picture”. He reckons economics has cut itself off from “the common understanding of how things work, or should work.” This analysis follows that recently argued by Paul Romer, the new chief economist at the World Bank, who, on resigning from academia, also attacked the state of macroeconomics today.
Skidelsky’s second reason is that mainstream economics views society as like a machine that can achieve equilibrium of supply and demand so that “deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal.” What this fails to recognise, says Skidelsky, is that there are human beings operating in an economic system and they cannot be fitted into an equilibrium model or machine. Mathematics then gets in the way of the big picture with all its human unpredictabilities and changes. What is wrong with economics, according to Skidelsky is that there is a lack of “broad education and outlook”. Economists need to know about wider things in social organisation and behaviour and the history of human development, not just models and maths.
While Skidelsky’s arguments have more than an element of truth about them, he does not really explain why mainstream economics has become divorced from reality. This is not a mistake of education or lack of recognition of wider social sciences like psychology; it is a deliberate result of the need to avoid considering the reality of capitalism. ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others. But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality. Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.
As Marx succinctly put it: “Once for all I may here state, that by classical political economy, I understand that economy, which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.”
What is wrong with mainstream economics is not (just) that economists of today are too narrowly mathematical and focused on economic models – there is nothing inherently wrong with using maths and models – or that most economists do not have the wider “erudition and multiple talents” of the classical economists of the past. It is that economics is no longer ‘political economy’, an objective analysis the laws of motion of capitalism, but an apologia for all the ‘virtues’ of capitalism.
The assumption of economics is that capitalism is the only viable system of human social organisation that will deliver the wants and needs of people. There is no alternative. Capitalism is eternal and it works as long there is not too much interference in markets from outside forces like government or from ‘excessive’ monopolies. Occasionally, the task is to control ‘shocks’’ to the system (neoclassical view) or make interventions to correct ‘technical problems’ in capitalist production and circulation (Keynesian view). But the system itself is fine.
Take Paul Krugman’s reaction to Skidelsky’s piece. What upsets Krugman is the suggestion from Skidelsky that mainstream economics reckons that fiscal contraction (austerity) was necessary to “restore confidence” after the Great Recession. Krugman, as the modern doyen of Keynesianism, disagrees with the biographer of Keynes. Mainstream economics, at least the Keynesian wing, argued the opposite. More government spending, not less, would have got the capitalist economy out of its depression. This is basic macroeconomics, Krugman says.
He then goes onto to claim that austerity is “strongly correlated with economic downturns”. Actually the evidence for that claim is weak indeed, as I have shown in various places on my blog and in papers (published and upcoming). The great Keynesian solutions of easy money, zero interest rates and fiscal spending have come well short of delivering an end to the depression when they have been tried (and all three have been tried in Japan). Krugman, of course, tells us that they have not been tried, at least not enough. Policymakers “refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do. And yes, some economists gave them cover. But that’s a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore.”
In my view, policy makers may have chosen to ignore fiscal spending to solve the ‘technical problem’ of the Long Depression partly “for political reasons”. But there are also very good economic reasons for arguing that in a capitalist economy, increased government spending and running budget deficits would not get an economic recovery if the profitability of capital is low.
Skidelsky mentioned the other great blindspot of mainstream economics: the claim that the free movement of goods and capital, globalisation, works for all. Angus Deaton,winner of the Nobel Prize for economics in 2015, is an optimistic defender of globalisation. Deaton’s 2013 book The Great Escape argued that the world we live in today is healthier and wealthier than it would otherwise have been, thanks to centuries of economic integration. In an interview in the FT, Deaton says that “Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result”.
I have discussed Deaton’s arguments in previous posts. Deaton represents all that is best in mainstream economics now, as he looks at the big issues: globalisation, robots, inequality and human health and happiness. He is now worried about the threat of robots for labour’s share, the growing inequalities from “rent-seeking” and the deteriorating health of Americans from over use of drugs pumped into them by pharma companies. He reckons that “happiness effectively peaked once a person was earning the equivalent of $75,000 a year.” Of course, most don’t have even that, as Deaton knows. But he remains confident that capitalism is the best system of social organisation as it has taken a billion people “out of poverty” over the last 250 years. So capitalism works, even if its apologists ignore its workings and cannot explain when it does not work.
The FT interviewer left Deaton and wandered back to his car “There is a limp, wet parking ticket stuck to my windscreen, a $40 fine. I smile. I’m also drawn back to the advice Deaton offered when I first sat down and mentioned my fear of a looming ticket. “I’m sure you can get out of it,” the Nobel laureate told me. “Just tell them the system was broken.”
Well, the system is broken and the economists cannot get us out of it.