Real World Economists Must Lead
from Robert R Locke
I think the people in this blog need to show more leadership. That might be hard to understand for those who are use to thinking of the economy as a self-regulating mechanism and of economists as observers and thinkers. But the economic crisis is too important to be left to passivity.
The problem area is not difficult to identify. It is not socialism versus capitalism or free enterprise versus government, as neoliberal, tea party ideologues would have it. The problem that real world bloggers need actively to investigate and manage is a massive system of private investor capitalism at the heart of today’s economy. It emerged from five post WWII mostly noneconomic phenomena: First the information revolution that spun out of the Pentagon during the Cold War, which allows twenty-four hour a day trading of financial packages on money markets worldwide. Two, the end of the Cold War, which opened up vast stretches of the former Communist world to private investor capitalism in an integrated system of stock markets and financial service, Three, the growth of institutional investors in associations like private pension funds that funnel unprecedented amounts of money into private equities, hedge funds, and investment banks. Four, the rapid growth of business schools and departments of finance economics that preach an ideology of unrestrained private investor capitalism and furnish investor capitalism’s skilled labor force, and Five, the development of neoliberalism in economics that justifies the ethical bankruptcy of investor capitalism.
The need for intervention arises not just because the new system of investor capitalism badly distributes the “wealth” the economy generates, thereby making a major contribution to the growing gap between the rich and poor (a subject that many blogs cover), but because it inherently destabilizes markets and is crisis prone, witness the subprime mortgage crisis, the GFC, and the Sovereign Debt-Euro crisis that followed on each other. Economists should not stand around as neoclassical theory specifies and wait for a system that is in fact permanently out of equilibrium to stabilize itself; imbalance requires economists’ active intervention.
The interventions should take three forms.
1.The intellectual critique.
Bloggers have devoted much space, too much perhaps, to a critique of the scientific credentials of neoclassical economics. The orthodox economists, when they bother to reply, usually say that the real world economists have no science to replace neoclassical economics, which for the former ends the debate. But why should this debate be important in the first place. Economics does not have to be science to be useful or admired. It could be a skill, what the Germans call a Kunstlehre or a Technik (a combination of knowhow and science) without the subject being compromised. In Germany engineering is called a Technik not a science but degrees in the subject are just as respected as those in science; whereas in England traditionally a degree in physics is much more appreciated academically than one in engineering, because of a lingering disdain for nonscientific craft based qualifications (which engineering was much longer than in Germany) compared to academically earned science degrees. Neoclassical economists are probably clinging to this sort of academic prestige when they insist on economics being a science. In any event, the discussion distracts bloggers from the sort of careful observation and discussion needed to evaluate the applicability of economics to the management of economies in the real world and from the sort of shape economics would have to assume for it to management crises effectively.
2.The institutional critique.
Also not enough has been said in the blogs about the shortcomings of the institutions charged with the implementation of economic policies (IMF, World Bank, ECB, Federal Reserve, etc.). Fullbrook has pointed out elsewhere that all these institutions are filled with econometricians and neoclassical economists, who are reluctant interventionists. This subject needs to be more thoroughly aired. Nor has much been said about the business schools and departments of economics that house economists. Most people acknowledge that real world economists have little voice in the prestige departments and have problems publishing heterodox articles in the prestige journals of their field. But nothing much is said about how this could be changed.
Of course, rarel if ever do those within an educational citadel engage in radical change, mostly it is forced on them from outside, from the greater academic community, government, political circles, or the community at large. Examples of this extra-mural pressure for change can be found in this blog, where so many of the critics of neoclassical economics are non-economists, i.e., mathematicians, scientists, systems thinker, historians, etc. There is some comment as well from non-economists in the literature about the dysfunctional nature of educational institutions. In my own work on business schools (Confronting Managerialism), my co-author and I recommend reforms that would make BSs less subservient to business and financial interests and more responsive clients to the needs of community.
It is unacceptable that a discipline like economics that has been so discredited in its science should be left in the hands of neoclassical economists who practice and defend that discredited science, thereby preventing economics from playing any effect role in solving financial and economic crises. People in the blog need aggressively to discuss institutional change
3.The political critique.
Since they are primarily concerned with developing a system of formal logic for a self-regulating market-driven system, for neoclassical economist’s pro-activism is a nonstarter. Since real world economists think the economy is often if not always in disequilibrium, they are advocates of intervention. Such intervention requires in the current financial context the implementation of a host of wealth redistributive, fiscal regulatory, taxation, and other measures that could turn investor capitalism into a system of finance that supports a robust social market economy from one that now underpins the internationally predatory system of investor logic in London and New York.
At present the rather anemic discussion is directed at people in the English speaking world and Europe, as if the political constellations favoring reform were similar in both. They are not. In the USA the regulatory acts needed to control investor capitalism cannot be passed because of the ideological hold the Right wing has on the electorate. In the UK, where the Labor Party embraced the City, the situation is hardly better. In Continental Europe, however, investor capitalism only scored a half-victory when it took over investment banking in the 1990s. Center-Right politicians and Brussels’ bureaucrats, many of whom were trained in neoclassical economics, are allies of UK and US finance capitalism; they back the austerity policies that are being saddled on the peoples and governments especially of Southern Europe in the interest of investor capitalism. But the European Left is still strong and the Center Right austerity policies not only unpopular but economically dumb inasmuch as they shrink economies and increase unemployment and social misery. There is a good chance as in France that Center-Right parties supporting austerity will be defeated in future elections, thereby ushering in expansionist policies and finance reform by the Left.
If this happens European governments would be pitted against government policies protective of investor logic in the English speaking world. Such an outcome might pose painful political choices to bloggers. Would they in the interest of countering the UK-US anti-social financial control, support radical reform of banking and finance in Europe that could end up with Europeans opting out of the current UK-US dominated financial system, or would they support maintaining the UK-UK system, thereby destroying the social market economy in Europe, fatally weakening European cohesion, and leaving the world to the mercy of the gnomes of London and New York?