One of the great economists, J. M. Keynes, observed that we are ruled by ideas and very little else. This is simple and true: even in the tribal state, one individual can’t dominate a group for long without the vital tool of an idea. To those of us who enjoy tinkering with ideas, the thought seems comforting only until we reflect on the quality of ideas currently in circulation.
In our times, economics provides the belief system for developed societies. We’ve tried feudalism, the divine right of kings, theocracy, collectivism based on notions of equality or national identity: history has even known brief experiments with democracy. In the end we come back to Leviathan: the people make willing submission to a system that may be oppressive, but is deemed better than no system, or any alternative that has so far been tried.
It turns out that Leviathan requires articles of faith as much as any other system – “because I’m telling you to” just isn’t sufficient for most of us. We need a unifying, all embracing theology to sustain our collective fantasy that we live in a rational world (even if that means denying the parts of the actual world that are beyond the scope of the subject. Economics provides the sacred books and theological doctrine of our secular societies – specifically, of capitalism – and the reassurance that all is being done for the best in the best of all possible worlds.
Politicians still argue about this and that; but their language is couched in terms of economic theory that they regard as self-evident truth even when they barely understand it. For us, to deny the imperative of Economic Growth is equivalent to a medieval person denying the Word of God. Even urges that are seemingly built into the species have been sublimated to this purpose – with our tendency to warfare frustrated by mutually assured destruction, we live out the fable of nations struggling for supremacy through the competitive Global Economy (also professional sports, which every day more resemble just another area of business).
Of itself, this shouldn’t matter. We’re all hard-headed and practical materialists now and we know that money makes the world go round; we’re entitled to hold a creed that reflects our understanding of the world as it really is.
Except that none of the above is true. The world actually goes round in accordance with principles of nature, of which science can give us some glimpsed understanding. As for human nature; we may have understood (as a logical conviction at least) that transcendence of the spirit is a human invention and that we are tiny creatures with a brief span that is less than a flicker in the grand scheme of things, but this thought makes us neither practical nor hard headed. We invent big ideas to be ruled by because we are terrified of freedom that burns for just a short time. The economic theory of our capitalist societies is just one more in a series of comforting rulebooks, as dangerous as any other big idea that is supposed to explain everything. Here’s why.
First I should say I don’t object to anyone wanting to study economics, in the same way as they should be free to become a student of media or lepidopterist. Pseudo-sciences become dangerous only when True Believers take them as the guiding principle of their actions, like Freudians or those nineteenth century oddballs who went about feeling bumps on skulls, giving “scientific” credibility to notions of racial superiority. Unfortunately there are True Believers in every sphere of human activity – those individuals who only want a few simple ideas to believe they have found the key to existence and the solution to every real or imagined problem.
Economics, unfortunately, is not a real science. The conditions for applying the scientific method do not exist. In science, you make a hypothesis that should be consistent with observable facts; then design experiments that tend to prove or disprove the hypothesis. Experiments isolate measurable variables and evaluate their effect against a control state in which there is no variation.
There are no control experiments in human societies. There is only time’s arrow and the knowledge that whatever happened was inevitable only in the sense that it, and not something else, is what did happen. Certain kinds of obsessives like to re-imagine historic battles, like Waterloo, adding their own little “what ifs” that could have changed the result; but our particular time/space continuum has only experienced one actual outcome, so the “what if” states are meaningless – and think that battles (like sports) are determined by relatively few factors so seem reasonably predictable, unlike say, my decision as to whether to buy a car this month and what model to choose.
Because of time’s arrow, there are no economic experiments that can be repeated, or from which general conclusions may safely be drawn. And there is no area of study where the recently discovered principle that the process of observation changes what is observed has more effect than in the “dismal science”.
A “social scientist” may admit that human variations make general conclusions from individual cases near useless, but he or she will claim that with a sufficient pool of data and sensitive handling of statistics, it is possible to glean valuable knowledge; by which I mean knowledge in a scientific sense, rather than an opinion that has some numbers attached. And I’d agree with that proposition. The problem for economics is that its subject matter isn’t the sociological peculiarities of a mass of individuals that average out, but the behaviours of a few complex social units (the developed capitalist societies) each at its own stage of development and on its own geopolitical/historical track. Here, aggregation of time and space is more likely to mislead than inform.
On the other hand the aggregated behaviours of individuals are relatively meaningless, in terms of economic analysis, without the context of the society in which they occur.
I’ll be criticized here, because economics sub-divides into all manner of macro and micro disciplines. I’m not an academic so I don’t care. I’m more concerned that I live in a world in which it is claimed that this set of theories and speculations that is grouped under the heading of Economics, holds the key to how our societies work and provides tools to manipulate their workings, supposedly providing Archimedes’ with that lever he wanted (“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world”).
In reality, for practical purposes, economic policies more resemble one of those kiddie dashboards that used to be clamped to the seatback of cars so that the brat could play at steering and make an irritating noise with the toy horn. It makes a show, but isn’t connected to any working part of the vehicle.
To be a little more kind about it, there have been extremely talented economists who have erected an impressive superstructure of learning onto the founding principles of the discipline, backed by rigorous observation and precise and highly detailed calculations. These have been the Jesuitical order of the secular faith; though other more worldly souls have spread its gospel and issued its papal declarations. It would naturally seem to our times that a study so firmly rooted in numbers must have rock solid credibility; but reflect that this is supposed to be a study of what people actually do.
For the better part of humanity’s history, some of its best brains devoted their time to precise and detailed calculation of the celestial cycle, for the purpose of astrology. It turns out that the trajectories of the planets and stars, however interesting, have little impact on our individual lives and fortunes, but the illusion of mastery is compelling and most of us fall for it. Isaac Newton may have been the world’s greatest scientist to date, yet even he seems to have believed in God, alchemy, prophecy and for a time, astrology (in fact, Keynes said that Newton was not the first scientist, but the last magician). A psychological explanation may lie in Piaget’s work on the perceptions of the world that young children have – up to a certain age we all believe that we are so important that the sun and moon follow us around (The Child’s Conception of the World a fascinating book). It took the species a long time to progress from that to knowing that the earth was flat with a conveyor belt of sky moving sun and stars over and under it continuously.
Astrologers made wonderfully exact calculations for their time, but they were wrong because their fundamental assumptions about human nature and its relationship to the natural world were without foundation. There is little evidence that economists are not in precisely the same state.
In the end we believe Newton, not because of the elegance of his formulae (of which I’m not qualified to judge) but insofar as his conclusions and the phenomena they imply match with what we know of the physical world. In Economics, although there is never a shortage of (often competing) economic analyses of what is happening, what should be done and what results may follow our actions; still the theory cannot be verified and there is little empirical evidence that such prescriptions as are swallowed have the desired effect.
For example, I personally believe that the Great Depression of the thirties was made worse by governments cutting back and following “beggar my neighbour” strategies – effectively nations undercutting each other on price at the expense of their working populations (the world returned to this approach in 2008, though generally in a more measured way than the rhetoric of the day suggests). Equally, it seems to me that the policies proposed by Keynes and adopted by governments of his time – short term pumping of money into economies, investing in infrastructure, easing the supply of money (also adopted post 2008 but in a secretive, shamefaced way outside of China, so as not to scare the markets) – were successful in ending that Depression. However, if it suits, you can make a respectable argument that the world was coming out of depression in the thirties anyway, or that the interventions were too minor to make much difference, or that the big change that pulled the 1930’s out of depression was the imminence of World War II and all the military investment that implied. Too many moving parts to know.
If a policy seems to fail, there’s always an economic rationale/excuse: it was implemented poorly/too much/too little/at the wrong time. The rival economists retain their own brand of the faith unshaken. In political terms, the incumbent party takes the credit in brief periods when times are deemed good and the blame in other periods (once it has exhausted its line of credit in blaming its predecessor). Perhaps there is cause and effect at work somewhere, but its operation in the system is opaque.
In extremis, policy makers have an established get out when policies fail, because in the end everything is down to “animal spirits” – of which more later.
And policy makers (or “rulers” as they used to be called) fail to take account of the rule of regression to the mean (at least when making speeches). Statistically, we know that the average performance is … average. Regression to the mean enables actuaries (another species of modern soothsayer) to enjoy highly remunerative careers in the business of offering reassurance (through tables produced by sophisticated data modelling) that over a given period of twenty years or so, everything more or less evens out; unless of course something unforeseeable should happen, in which case read the small print and don’t blame them – to quote Keynes once more, in the long run, we’re all dead.
In other words, if times are bad (worse than average) they’re likely to get better and if times are good (better than average) they are likely to get worse; whether or not someone tries to do anything about it. Otherwise the average wouldn’t be the average. The government that claims credit for its “austerity” policies, if and when an economy eventually emerges from recession, may have done no more than prolong that recession by its actions – or not; we can’t say for sure.
What Economics ignores
Economists don’t pretend to have universal knowledge, except when politicians and media have made them feel really important, or when (most dangerously) they also fancy themselves to be philosophers. This is not to criticize: optics, for example, is a real science that contributes positively to humanity in its limited field and economics could have been the same. Unfortunately, somewhere further up the line, we got on a track of believing that this one field of study can answer all our questions.
Economics is a study of means not ends. An economist is a man who is proud to know the price of everything and the value of nothing. But in our real world, the means have become ends in themselves. The priesthood that provides unrestricted capitalism with its veneer of intellectual credibility has persuaded itself that the world reduces to goods and services. Those few items that the credit card company adverts tell us are beyond price are merely not (yet) quantified in value. The job of governments is to make sure that markets are smooth and open, so that supply and demand can establish a market value for all goods (using that word in its widest sense). Restrictions on the market are not only wrong, they are immoral, since this process of sifting the most and least valuable is how a people exercises its democratic right to determine what matters most to it and which shoes are cool.
On this basis, I should be free to export nuclear missiles to Iran. I understand I can make a good profit on the deal and that demand is strong. In the real world, the way this dogma plays out is that the man whose job it is to persuade me to buy a new mobile phone, that is shinier than the perfectly good one I already own, lives in a bigger house than my doctor can afford. Anyone reading this who really believes that all human values can usefully be expressed as a monetary value and that it doesn’t matter at all what we spend our money on, get off this page now: you’re wasting your time and time is money, apparently.
In any case and of course, it is nonsense to say that the price of goods is set by a market. Most of my money gets paid out to the state one way or another and I have little control over how it is spent (probably rightly so). The True Believers say they want to cut back the state (not at the expense of police and military spending) but in practice the difference they could make to this condition of affairs is insignificant, at least without some kind of culling programme applied to the non-productive elements of society.
This touches on the next issue – Economics ignores large sections of human behaviour, but those it does admit as relevant it consistently fails to understand. But meanwhile, I’d like to propose that a discipline which depends for its practical utility on understanding how people will respond to given stimuli dooms itself to incoherence when it neglects to take into account motivations that actually drive living people and contents itself with mapping theoretical responses.
In case anyone thinks I’m bleating about ethical concerns and moral issues; some practical examples around the Gross Domestic Product. In modern times, GDP relative to the performance of other countries has assumed the same fetishistic importance as was placed on the number of Dreadnought class battleships each of the major powers had in their fleet in the years prior to World War I. I’ve commented before on the stupidity of this – some commentators speak of Japan as if it were a basket case, because GDP is not growing much, although the population is falling so fast (126 million to 87 million in a few decades) that individual Japanese are becoming wealthier faster than countries where GDP and the birth rate are exploding. If politicians had any interest at all in the prosperity of citizens they govern, they would report GDP per head of population, not some absolute. In fact we used to talk more about the “standard of living” in different countries, but that’s a phrase you don’t hear so much these days – it’s not measurable so it’s not important.
It’s the obsession with growing GDP that leads top civil servants to advise government to promote immigration. More people boosts consumption and that makes the country “richer” on this spurious measure, though most of its citizens may be poorer in terms of shared services (roads, schools, hospitals, housing). For example, there is no official policy or objective study on what size of population would be ideal or long term sustainable for the UK – and insofar as there is debate it is couched in a discussion of whether immigrants bring a net economic benefit or dis-benefit (and whether or not those who want less immigration are xenophobes). Unofficial studies, based on what life the island could support without outside help, suggest that UK should have 20 million people. The official population is 62m, rising to 70m over the next fifteen years. Most of the cost associated with that degree of overcrowding doesn’t show on a balance sheet.
Or to put it another way, national GDP has not much to do with my happiness. If I go to work and park my car on a stretch of waste ground, and next week someone who has title to the land tells me I have to pay £10 a day to park in the same place, then GDP increases and (if the revenue can track the landowner) some tax may be paid, but no one has produced anything useful. I’m just a bit more miserable and looking for a pay rise to cover my extra expenses. For the same reason, governments want mothers of young children to get jobs so that they can pay other women to look after their kids. Those who feel that this is somehow wrong are reduced to arguments about net benefit that have to be framed in economic terms, trying to set some sort of monetary value for looking after your own family.
All other things being equal, it would seem to be in my rational self interest to live in a country that has a feeble GDP, especially if I have a fixed income. My money will go further, property will be cheaper, and the poorer countries tend to have better climates. The counter argument is that if I live in a rich country, the trade off is that health, education, transport etc should be better. If all that infrastructure goes to hell as the supposed cost of improving GDP and my own country becomes even more overcrowded as a short term policy fix for low growth, what’s in it for me? If we really believe that everyone pursuing their own self-interest will make things better, then appeals to patriotism or dare I say altruism, should fall on deaf ears. It is regrettable if this paragraph reads like a UKIP electoral message, but that is where the logic goes, once you accept the flawed premise that the prosperity of the nation state overrides such intangibles as standard of living or happiness.
It’s said that in war, truth is the first casualty. In an economic crisis, we’ve learned that the sacrifice starts with a range of victims; solidarity, compassion, concern about climate change, public health and a truck full of similar disposable ideals that George Orwell would probably have bundled under the heading of “decency”.
And what it does take into account, it gets wrong
At least the Pope represents a brand that claims to have all the answers you will ever need. Economics acknowledges its own limits and then proceeds as if they did not exist. And while Catholic doctrine may be regarded as irrational, it is more accurate to say that it proceeds rationally from supposed insights of which, however unlikely they may sound, there can be no proof or disproof (for most of us, that is enough to make Catholicism seem useless). Economics cannot claim as much; yet it displays an alarming capacity to be demonstrably wrong while maintaining pretensions of infallibility (not unlike the papacy in that respect).
There are many subsidiary articles of faith in Economics, but the Market, Supply and Demand are the secular trinity. Supply more or less does what it says on the tin. Demand is imbued with an ineffable “animal spirit” rather like a holy spirit. We already know that free Markets don’t exist (see above) except in an ideal sense – like unicorns.
In late stage capitalism, a lot of ingenuity has been wasted, for what looks suspiciously like ideological purposes (although of course some people have got rich as well) in trying to create the semblance of a market where none exists – for example multiple train companies running on the same track charging prices that depends on what the government of the day feels it needs to extract from each company for its franchise. Normally some worthy with a CV that suggests business experience is charged with making sure that the benefits of “competition” are passed on to the customer. The UK railway system is a monopoly that goes around wearing different funny hats and false beards for disguise. The True Believer will always seek to adapt the world to his theories rather than the other way around.
In the UK, as in other NeoCon/NeoLiberal economies, our imaginary markets include energy. Electricity flows into the shared National Grid and from there it is sold on to individual consumers (via shared infrastructure) by companies that provide competing stationery and introductory offers. Prices are as much as the supposedly independent “watchdog” can be prevailed upon to sleep through. The various executive teams and shareholders do well. When it turns out (normally) that all the companies charge the same prices; that shows competition is working. If they’re not all the same, the outlier is “abusing” the system and likely to be brought into line. How this state of affairs is better than one provider delivering the supply through a common system with one cost base has more to do with metaphysics than economics, but the myth of the market has been preserved.
As regards supply and demand, the central assumption is that Good will result, because resources will be allocated to satisfying needs and wants according to everyone exercising rational self-interest. Unfortunately all the evidence shows that rational self-interest does not enter into our decision making. The struggle to have this research accepted is described by Daniel Kahneman in his excellent “Thinking Fast and Slow”. He documents and demonstrates our non-rational decision making beautifully, but what is striking for current purposes is that the truth, now universally acknowledged, is consistently ignored.
There’s no conspiracy; it’s just that our society has set off down the track with a box of tools for thought, including one labelled “rational self-interest” and we prefer to work with what we think we know. We reject complexity and ambiguity even if the world is complex and ambiguous (why so many charlatans with a simple message get elected). Until we’re offered a simple alternative tool that replaces RSI and fits in the same space in the toolbox (and that doesn’t disturb the prevailing ideology) then we’ll stick with the imaginary steering wheel, indicators and horn that we currently use, even if the car seems to do what it likes. We make the occasional nod to “behavioural economics” and carry on as before.
There is a darker side to this conundrum, that comes under the heading – Knowledge is Power: but Fake Knowledge is More Powerful (see below).
Why have we been so quick to be sure that we’ve been on the right path for the last 150 years? Surely this was another unforeseen consequence of Charles Darwin and Alfred Russel Wallace. The modern age starts from the moment when natural selection became widely accepted as accounting for the Origin of Species (more or less on publication of Darwin’s book, though a reaction set in later as its implications for religion became clear). Evolution in nature was an idea that spawned the notion that the aspects of human life must also be subject to implacable mechanisms, capable of being understood like any other mechanical problem. Ideas of social evolution, eugenics and other reductive approaches that eventually had an ugly denouement in the mid to late twentieth century all gained mass appeal around that big event. The mechanism of Market, Supply and Demand can be understood as an analogy of natural selection (the ideas, but not their cultural pre-eminence came before Darwin’s). Like all analogies, the comparison is dangerous: you could equally compare Marxist dialectic, with action, reaction and synthesis. Reality is more complex, but long answers bore us. Give us those big levers, and a fulcrum if possible.
Most economists seem to be somewhat distanced from the world as it is; a phenomenon which is observed most readily in the activities of the IMF and World Bank, where Economics is inflicted, more or less unmediated, on the undeveloped world that has few natural defences against it.
At this level, orthodoxies are applied. Nobel Prize winning economist (and highly entertaining author) Joseph Stiglitz describes in his “Globalisation and its Discontents” how the World Bank managed the transition of the Soviet Union into Russia. Theory was applied without reference to local conditions. The USA (as underwriter of the Bank and Chief Global Capitalist) felt the priority was to liberalize the economy, which meant privatising all the state industries. It was accepted there’d be profiteering and corruption en route, but the negative effects of this would, according to the orthodoxy, be outweighed by the benefit of breaking up state monopolies. In a commodity rich country, grown accustomed to corruption, presided over by an ailing drunk who would sign whatever his pals at the Moscow tennis club put in front of him once the second bottle was opened, the result was the kind of bloody scramble for valuable monopolies and descent into general gangsterism that the IMF/World Bank routinely oversees on the African continent, but here on a much greater scale.
Stiglitz describes the surprise that the Bank’s experts experienced as they pumped millions of dollars of cash (desperately needed to keep the new state solvent) into the Russian government in the morning; and watched the same cash show up in private accounts in Cyprus by the afternoon. Why were they surprised? We are living with the results of these idiocies today.
At the very basic level, things are even worse, especially where there is no strong civil society to temper the implementation of the orthodoxy. Africa has suffered more than most: there’s a good even though I disagree with much of it) short book called Dead Aid by Dambisa Moyo, that has some haunting examples; like the locally owned factory that was starting to contribute jobs and investment in the area making mosquito nets, until it was put out of business when the developed world decided for humanitarian reasons (and to keep some of its own workers employed) to donate nets.
There is a pattern that develops when the missionary True Believers move in, with their aid budget and advice. Small business gets ignored (in Africa it is often fringe activity and driven by women) because it’s easier to pump in mega-dollars through a few big projects and economists don’t distinguish between ten grants of $50 and one grant of $500. Inevitably, corruption swarms round the big numbers like flies round elephant dung, quickly wiping out whatever fragile good government may have emerged. The advice is all about creating a cash economy, so subsistence farming gets pushed out to make way for cash crops, dams to produce power that isn’t used, factories that will never manufacture anything because the working capital has been stolen. With luck, not too many farmers starve in the aftermath.
In the developed world, politicians practised in the art of the possible mitigate the worst impacts of True Believers, except when an eminent person happens to be a True Believer (but I’m trying to stay away from Reagan/Thatcher). Nevertheless in a crisis, we get to see examples of the same breathtaking naivety.
In 2008, enough banks were effectively insolvent that it was assumed that the banking system could collapse (why this was so readily assumed is another matter). Economic orthodoxy states that banks are vital to the system in order to match investors to entrepreneurs – capitalism can’t work without capital. The sky was falling – banks must be saved or economies would collapse with them.
We know now that this was wrong, because in the years since that time, economies have effectively been continuing without the services that banks are supposed to provide – they haven’t actually been providing those services. The free money that has been gifted to them at taxpayers’ expense has been used to boost their capital (ie recoup what they squandered) pay the senior management sufficiently well to ensure that those whose disastrous strategies brought their businesses down won’t be tempted to take their skills elsewhere; and to make a few no-risk investments at a ridiculously high margin until it’s safe to bring out the roulette tables again.
In the “high interest rate” years, banks were paying 11% to investors for the use of money and lending it out at 13%. Now they get the money free and charge borrowers 6%+ for a domestic mortgage loan of not more than 70% of the value of their house . Doesn’t seem like low interest rates to me.
So yes, the banks all had to be saved, even if they don’t actually provide banking any more, for some reason that I’m too stupid to see. But still the economists were confused – they couldn’t understand why the system had collapsed, when there were so many clever people who’d had all the data they needed to see how things were going off a cliff.
It is truly staggering that the Economists needed to find the answer to this problem in forgotten, out-of-print books written by an economist who lived through the 1930 crisis; Hyman Minsky. The author had lived in the real world and saw how stability in the system created, not equilibrium but an ever increasing sense of self-confidence that progressed from prudent, through imprudent to fraudulent, leading eventually to disaster. It turns out that bankers are not True Believers who recognize and are content to perform their allotted function in the great Theory. Instead they are individuals who are driven by greed or just the prevailing culture to go further and further out until they find they are running in mid air above a hundred foot drop.
Just about everyone I’ve ever worked with in banking has known that this is what always happens. They even know when they and their own businesses are getting to that point of inevitable disaster, but there is nothing they can do about it. No one stops until everybody stops. As Keynes said, the sound banker is the one who is ruined in the company of his fellows. In the long term it’s better to pursue a sustainable business strategy, but in the long term we are all dead. And anyway it’s not as if it was their own money.
To be an expert on money without knowing what money makes people do is to be no kind of expert.
Knowledge is Power: but Fake Knowledge is More Powerful
I hope it is noted that I am arguing against the damaging ascendency of Economics rather than criticising economists, the poor dears, although sometimes they don’t help themselves. There’s a more general problem in our times (James Lovelock and other distinguished scientists have commented on it). Since we decided that meaningful academic research into almost any subject is an activity requiring a team of not less than forty people and a budget in at least seven figures, what gets looked at in the world of academics; and how it gets looked at, has changed.
So, for example, scientists who know perfectly well from the available data that climate change is a man-made issue will very quickly find areas of doubt that can only be resolved by expensive and lengthy investigative processes if encouraged to do so by the availability of a large grant for the purpose from the petrochemical industry. Modern economics has retreated from the empirical world into mathematical abstraction, in pursuit of credibility: it prefers formulae over words; swathes of current data to comparison with past events. With a tenuous connection to the real world, increasing reliance on patronage; and a subject matter that is so crucial to the body politic, the somewhat naïve practitioners of this art are at the mercy of vested interests.
Most politicians have not moved on from their school debating societies or whatever similar process brought them on. In the case of the current UK government it seems that all the old school chums have moved into the big jobs together. When they are making a speech, the important thing is to win the debating prize. A quote from a respected authority is something to beat your opponent over the head with, not to understand or take in context. Politicians are, generally speaking, natural liars; so in the unlikely event they have troubled to understand fully what an academic or technical adviser had to say (as opposed to sifting it for sound bites) they will not normally have a problem with misrepresenting that argument to suit expediency. Statistics are employed in this largely rhetorical fashion, either selectively quoted or invented on the spur of the moment.
The representatives of business have even fewer scruples than the politicians in this respect. Even if they are decent people in their private lives, the ethic of the Market is that they must do whatever is needed for their company to win. Anyway, they’ve paid for the advice and they’ll use it as they damn well please. If we could be bothered, we’d go back to the source and check everything these gentlemen tell us. Instead, we assume that they are gilding the lily, but not to the point of telling barefaced lies, which is a dangerous assumption.
When I say that the economists don’t help, I can’t think of a better example than the modelling that was used to support the Austerity Fantasy. Anyone who follows Prof Paul Krugman’s marvellous blog will remember that warnings from the Nobel Prize winner and other eminent economists that the cheerleader research for the policy of cutting government expenditure sharply and deeply in response to our current crisis seemed wrong. The politicians jumped on this one piece of research and effectively it is the intellectual underpinning for the strategy of cuts that has been imposed across the capitalist nations.
It’s not fashionable for Economists to look at history (ie what happened when governments cut everything but their own throats back in the 1930s). Instead a prophecy was spoken; a formula which demonstrated that due to different applicable multipliers, the negative (recessionary) effects of cuts would be more than offset by the beneficial consequences (supposedly the private sector, freed of some of the burden of supporting the state, would more than make up the difference almost immediately). As events unfolded, Krugman noted that the data was following the path that he and others had expected, rather than realizing the prophecy. What he had too much respect for colleagues to suspect; and what was eventually uncovered by an undergraduate student who didn’t know enough not to shout that the emperor was not wearing any clothes, was that the reason for failure was simply that the calculations had been wrong.
Austerity policies have in fact no valid economic rationale; they were based on a single, flawed study. Other explanations and critical reviews were available, but politicians and other powerful groups seized on this rather obscure piece of work because it suited their purpose (of which a few words later). They made it and its authors famous and the authors were too flattered and enjoyed the attention too much to properly question their own work. It’s a too familiar story.
I was going to continue with “when the truth came out…” except that it didn’t. The errors were made public, if anyone wants to check, but as the media know, if you shout something loudly for three years and then whisper that your reasons for shouting were wrong but basically you still just know that what you were saying was right even without any actual evidence, then what you were shouting originally is likely to stay true. The official line was that details of the calculation may have been wrong (ie it was less than useless as research) but the fundamental conclusions were valid. Austerity continues and the beatings will carry on until morale improves.
As I conclude this rant, a respected academic is under fire for daring to suggest that the rich are getting richer and the poor are getting poorer; as every objective measure seems to suggest. The rich are modest in their demands; climate change is natural and benign; and smoking tobacco is both good for you and cool. The apologist for power will always have the biggest soapbox and the loudest megaphone no matter how bankrupt his argument.
Why it’s bad for you
Lots of what passes for knowledge is false or useless, but even I still read a newspaper now and then. Where’s the harm? – remember Keynes’ “we are ruled by ideas and very little else”. Just about every decision taken by the rulers of the developed nations is justified by Economics. Scotland is about to vote on whether to remain part of the UK or not; and every argument is about whether or not Scots would be financially better off independent – surely that is secondary when you are considering sovereignty. The Catalan independence crisis in Spain looks more and more like a tactic by the separatist party to secure more cash for the region from the central government – a shakedown operation that the professional politicians on both sides know is really about money.
Meanwhile Economic commentators make assured (and conflicting) assessments of the economic impacts to be expected. According to Spiderman, great power brings great responsibility; but there is little evidence of actual and self-proclaimed experts developing humility or even circumspection appropriate to their influence. Instead the expert who shouts loudest, with the most impressively resonant tone, with content that best reflects the prejudices of the powers that be, will come to be regarded as most authoritative; by the world at large if not by his peers.
So we have an art that pretends to scientific certainty, with biddable practitioners, prone to be used as an intellectual bludgeon by those in power; that is unverifiable and excludes from its concerns so much of human motivation as to render its conclusions questionable; and that prevents us from considering properly such questions as how do we actually want to live. I’m not even going into the obvious point that an unquestioned assumption that unbroken economic growth is a good in itself will kill the planet sooner rather than later. It’s pointless to say – we seem comfortably reconciled to the prospect of our species rendering the only inhabitable planet that we know of incapable of supporting life.
On a smaller scale, you see evidence of harm every day. I read some idiot politicians arguing that children should be kept in school not less than nine hours a day on the basis that this is what happens in South Korea and if we don’t respond our economy will be overtaken. I don’t actually want my children to be South Koreans and I don’t really mind if I live in a country that is still rich, but not as rich as some others might become. This whole going out to buy a slightly better car because your neighbour has just parked a shining new machine on his drive is where life starts to go wrong. And I can’t express the disgust I feel around the notion that we must prove how much we love our children by turning their education into a process of battery farming – Let’s save the future by sacrificing those who will live in it. If we really cared about our kids, would we tolerate the levels of youth unemployment currently existing in Europe, or accept the situation that there is no stretch of land however green that can’t be built over if someone can see a small profit in it?
The dishonesty of it is galling. The UK last made a surplus in its dealings with the world in 1984, coincidentally George Orwell’s annus horribilis and the year in which Prime Minister Thatcher resolved the country’s thorny labour relations issues by destroying its industrial base. Since then, we’ve been living on tick, dependent on the City of London continuing to leech off a sufficient proportion of the world’s economic activity so that the crumbs from that feast dribble down to the rest of us; as we buy and sell each others’ houses for ever greater prices in order to feel rich. Of course this doesn’t stop all the talk of needing to balance the books (currently we collectively owe about 500% of what we produce annually). The process continues independent of the rhetoric.
There’s always a current consensus with which professional economists connive even as it shifts. In 2006, Gordon Brown had been running the British economy for nine years – light regulation on the banks, make friends with the city – that was the ticket. The establishment supported the approach; in fact his opposite number wanted even less regulation. But by 2009 all right thinking people had persuaded themselves that they’d always believed that Brown was an idiot and that debt must be reduced drastically (as it still has not been; but now it seems this is no longer the issue).
It’s difficult to see what practical utility there is in a study that simply tracks these shifts of public opinion without offering any fixed perspective. To this observer it looks as if the banking crisis offered a convenient nexus for a political change that was disguised as an economic policy – effecting a massive transfer of wealth from the not so rich to the very rich, while safeguarding at all costs (to the taxpayer) the deposits of the latter in threatened financial institutions. Economists are not directly responsible – they just wring their hands and say, like Doctor Pangloss, that it’s sad but whatever happens is for the best in the best of all possible worlds.
Finally, there’s the problem of what Economics is supposed to know, which according to Keynes (again no one has come up with a better description) is how to stimulate the animal spirits, on which everything depends. In recent policy, that amounts, as Professor Krugman has noted, to praying for the appearance of the Confidence Fairy. If everyone believes in Tinkerbell, she will live and all will be well. If confidence dies, the lights go out.
In short, very many clever people have put a lot of effort into proving that we behave like sheep: which many of us had believed was already sufficiently clear. It turns out that most of what the finance ministers and heads of national banks do and say is no more than the observance of a ritual designed to calm the spirits of the ancestors. And the ritual dance is where Economics gains its greatest influence. The True Believers solemnly intone what must be done in response to certain portents. The Chief takes heed and speaks the magic words so that the tribe may stride forward with renewed vigour. Every medicine man and shaman in history has known how to work the self-fulfilling prophecy. This kind of Economics works to the extent that we all believe it works.
The above does cause me to reflect that in a ship on a stormy sea, if everyone keeps running to the other side every time the boat begins to list one way, the rotation will increase until the movement is eventually be enough to capsize the vessel. There are too many directions being shouted to do this or that urgently, or there’ll be a disaster. The last thing that the economic ship of state needs is to amplify the herd instinct. The lemming like tendency to run with the group is even more dangerous in a stock market, because every lemming wants to be just a few paces ahead of the others. In such a condition, the most useful thing ministers and their advisers could do, would be to keep perfectly still and say nothing, assuming they’re incapable of disappearing altogether. You might also think it would be sensible for them to put in a few barriers to slow down the giddy rush from side to side (or speculation, as it’s more commonly called) although such a suggestion is heretical.
Even so, I’d be happy if economists continued their studies, especially if they took more account of history, just to check that their beautiful graphs are linked to some part of reality. I’d only ask that they remember Hippocrates’ physician’s oath – “I will prescribe regimens for the good of my patients according to my ability and my judgment and never do harm to anyone”. The primary requirement, to be sure of doing no harm when you intervene, is crucial. Meantime, the patient should keep in mind that facility with numbers and a PhD confers only limited invulnerability to error.
For the rest of us, it should not be too much to ask that we first agree what kind of societies we want to live in, before proceeding to consider how we can organize them to the best economic advantage? With globalisation, we’re not even sure any more what we mean by our society, but we don’t seem to talk about that kind of thing. It is really strange that capitalism has so readily adopted the idea of Marx that the modes of production (and consumption) are all that drive change in societies as if everything else was self delusion.
Mankind survived until almost the end of the 15th century without double entry bookkeeping –an Italian invention followed twenty minutes later by the first example of cooking the books. There’s no reason to suppose that our current preoccupations will be more enduring than the obsessions of the past that we now regard as superstition. Every age believes it understands the world. And in fact, as Max Weber noted, the whole “whoever dies with most toys wins” approach to life originated from a new christian belief (Protestantism) which decreed that god’s favourites should prosper in this world rather than wait for the next. Faith produced the mechanism; and now it runs perfectly with just a small empty space in the middle where the faith used to be.
In this sense, Max was right and Marx was wrong – the world had to change inside people’s heads before the new means of production could change the world (maybe neither of them paid enough attention to the modes of consumption and the rise of shopping). It’s a cold hard fact that all –isms including capitalism start in the mind; but now we’re supposed to believe only in what is material. Nowadays, to suggest that governments should consider the value of things before concerning themselves with the price sounds a little too new age for comfort – unless you reflect that in our private lives we consider it normal to measure our need before we look at the price tag.
Of course you may be one of those people who buys whatever is on offer with the largest discount, regardless of whether it’s needed; in which case congratulations – to an Economist you are an ideal human being and for a True Believer you are performing the sacred duty of consuming. For the rest of us, I suspect that our growing disillusionment with conventional politics is at least partly rooted in the nagging and unvoiced suspicion that global competitiveness and gross domestic product and all the other fast food slogans have very little to do with how we might choose to live our lives.