by Alan Harvey, Institute for Dynamic Economic Analysis
To say that economics is broken is also to say that reform has, to this point, failed – failed to provoke debate and failed to deliver resolution of key questions on debt, how money is created, how the real economy is connected to the financial economy, and more. It has failed to communicate to the public and politicians, and so has failed to affect policy in any meaningful way. Perhaps “failure” is too harsh, but in our view the need for reform is urgent, not simply for the intellectual integrity of the discipline, but for the survival of a civil society. And reform too late is not meaningful.
As James K. Galbraith has more articulately expressed (see “The Final Death and Next Life of John Maynard Keynes”), there was an opportunity in 2008 and 2009. The profession was shuddering from the manifest failure of its forecasts, explanations, diagnoses and treatments. As Galbraith says,
“Economists who had built their careers on inflation targeting, rational expectations, representative agents, the efficient markets hypothesis, dynamic-stochastic-general-equilibrium models, the virtues of deregulation and privatization and the Great Moderation were forced by events momentarily to shut up. The fact that they had been absurdly, conspicuously and even in some cases admittedly wrong even imposed a little humility on a few.”
But only a few, and only temporarily. The imperative of maintaining personal and professional standing discouraged most individuals and virtually all institutions from making the hard steps.
It is imperative to train economists better and to correct the fallacies and flaws of existing education. This is a field not unlike climate science, where we need competent, trained people to manage a challenge, with potentially devastating outcomes if we fail. As with climate science, those outcomes are assured unless we actually allow those people to manage.
At present, of course, the training in the Neoclassical orthodoxy actually frustrates competence. But one can imagine a hopeful scenario where programs like that at Kingston University and those being demanded by student groups like ISIPE are established and widespread. One can further imagine that managers and analysts are selected for competence rather than for connections or for the prestige of the university granting their certification.
Reform has not only failed, it has also succeeded. Relevant economics is available and well developed. Again following Galbraith, three of the best systems can be marked by the work of three great economists: Hyman Minsky, Wynn Godley and John Kenneth Galbraith.
Minsky’s was an economics of financial instability bred by stability. Steve Keen, having combined Minsky’s Financial Instability Hypothesis (FIH) with dynamics to create an authentic mathematical model of FIH, is the most persuasive voice along this line. This dynamic, monetary economics has a huge advantage over the non-monetary Neoclassical view in an economy in which money, credit and debt are central.
Godley’s work, as Galbraith says, has operated
“… in the Keynes-Kuznets-Kalecki-Kaldor tradition of macro models attentive to the national income accounting identities and to consistency between stocks and flows. The virtue of this approach is clarity and a comparative lack of overreaching ambition. Models of this type say nothing false, a huge advantage over the mainstream starting position which consists of nothing true.”
The work of the elder Galbraith followed from Keynes as well, but was also rooted in the pragmatism of the New Deal and in an older Institutionalism. Institutions – and their breakdown in forms like regulatory capture and fraud – are the reality on the ground. The younger Galbraith developed this analysis with his dark picture of the exploitation of public institutions for private gain.
There is no example of economics reforming itself from within. Quite the contrary, the more it has been left to itself, the more the discipline has ossified around abstraction, distraction and irrelevance. Even the so-called Keynesian Revolution was brought on not by an epiphany among established scholars that Keynes was right, but by the proofs of the effectiveness of the New Deal policy in place during the Great Depression, and then with the mobilization of the war. (Not as some have said, for the mere size of the project, but also for the organization and efficiency brought in by the New Deal economists.) It was ratified by the period of prosperity and stability that followed the war. These were times when government was respected, financial excess was circumscribed, aggregate demand was in focus, full employment was the law, and the dysfunctions identified by Galbraith, Minsky and Godley had yet to flower.
The failure of reform can be laid, as with every reform, to the power of entrenched interests and the ignorance of the body politic. The academic’s interest in his own personal and professional capital is small beer compared to the proprietary interests of the banks and what is sometimes called the rentier class.
Finance dominates government and economics at present, yet many finance professionals are disturbed by the patent disconnect between financial markets and the real economy and by the distortions brought in with the current monetarist experiment. In spite of misgivings, they are compelled to dance, in the now-famous injunction, “so long as the music is playing.” Central banks seem to have no other plan than to keep the musicians in their seats, so the game is played of reaching for yield in a stagnant economy and piling on debt which – however cheap – is not connected to an increase in productive capacity. Speculation still rules. The evidence of fraud, manipulation and regulatory capture is only slightly diminished.
Corporations and businesses in the real economy, who should be natural allies of reform, have become instead regimes of financial engineering themselves, continually extracting profits without growing top-line revenue. Share buy-backs, borrowing to pay dividends, mergers and acquisitions are the avenues to higher stock prices, the score of the game.
Fiscal and monetary policy is largely dominated by the financial interest. Austerity politics and the maintenance of buoyant markets preoccupy central banks and the sponsored politicians. Some may know that economics is broken, but cannot see the alternative, particularly with the leading voices lined up behind TINA, “There Is No Alternative.”
It is no wonder there is confusion and cynicism among the public.
The willingness to change seems to require a crisis to expose the flaws and to gain acquiescence among competing interests. Where crisis is present, such as in Spain and Greece, political opportunities arise, as evidenced by Podemos and SYRIZA respectively. Where crisis is at bay, a grinding dissatisfaction is expressed in any number of ways, only one of which is looking at the underlying economics and campaigning for change. (Positive Money in the UK is a singular success in the temporary absence of crisis. It has done yeoman’s work in educating people on the reality of endogenous money, and now in bringing the debate to the floor of Parliament.)
No matter how well economics is taught and learned, translating it to the public is not easy. Attempts to popularize often simply repeat error. (At IDEA, we are sponsoring a graphic novel rendition of Steve Keen’s monetary dynamic framework. We hope that will help.)
But we should also recognize that economics is not understood by most citizens in the concepts economists use. It is understood by metaphor. People use metaphors to simplify all complex issues. There is no logical connection between metaphors and the material to which they are applied. Metaphors are analogies. If an analogy is faulty, then its usefulness is absent, and it becomes obstructive. So long as you accept that a government must operate like a business, you have eliminated all effective policy.
The most destructive metaphor today is that of the market. So ubiquitous that it is not even seen as a metaphor. Search the real and financial economies from top to bottom and you will find only small and insignificant examples of the phenomenon. Transactions take place in the context of imperfect information, restricted competition, contracts and other arrangements based on nothing resembling the open bargaining evoked by the metaphor. Public goods and services exist, of course, largely without transactions (until, that is, privatization efforts ride in under the banner of “bringing market discipline“).
But once accepted, the metaphor filters a person’s perception. Education and persuasion become not an intellectual process, but one of framing. There is at present no compelling or widely accepted metaphor for how the economy actually works.
Yet there is evidence that awareness is rising. The contradictions of the real world are ever more manifest: widening income and wealth disparities, stagnation in wages and incomes, increasing poverty, the challenge of climate change going unaddressed (and even exacerbated by a fever for perpetual “growth”), repeated fraud and manipulation in financial markets, decaying infrastructure in an era of idle workers, and so on. This is motivating people to engage in the debate, some from the hard sciences who can apply rigorous and sophisticated methods and others from the social sciences who are not blinded by the primacy of self-interest. And not least, students themselves see that much of it simply doesn’t make sense.
A further problem for reform is the factionalization or disorganization on the side of the alternatives. The critique of the orthodoxy unites, but the policy remedy divides, and then observers are confused, with the result that each policy is muted. Again using the example of Positive Money. While they have done well in educating and mobilizing around endogenous money, the group’s policy prescription has more than a few critics. We appreciate the difficulty. Policy statements become lightning rods. Any policy stated clearly will meet the same fate. Yet it is around policy that political will gathers.
Galbraith lays out three essential elements of what he calls “a new line of resistance:
“First, an understanding of the money accounting relationships that pertain, within societies and between them, so that we cannot be panicked by mere financial ratios into self-destructive social policies or condemn ourselves to lives of economic stagnation and human waste.
“Second, an effective analysis of the ongoing debt-deflation, banking debacle and of the inadequate fiscal and illusory monetary policy responses so far. In America and in Europe this is a crisis primarily of banks, not of governments, and it is for us to call attention to this fact.
“Third, a full analysis of the criminal activity that destroyed the banking sector, including its technological foundation, so as to quell the illusion that these markets can be made to work again.”
Although I agree, these are offered here as examples only of what economists and researchers and educators need to be about. When it comes to engaging the public, again for example, a better list might be: money matters, debt matters, and the financialization of the economy needs to be reversed. These beg the “Why?” and lead to the necessary discussion.
There are other, better venues for theory and subject. Our purpose here was to lay out the scope of content you will likely see here, and to expose the editorial bias. (Though articles will not be restricted by that bias.) We hope to examine critically how economics is taught and learned, explore the tactics and strategies of reform in how policy can be changed, and look into the sociology of the controlling institutions.
Reform begins with the training of young economists. A relevant economics should develop along the pluralist lines that have proven out. But we should realize that reform will not be driven by men in corduroy jackets with laser pointers, and reformers need to attend to political change in the broadest sense.