Home > RWER > RWER issue 54: Manifesto of the appalled economists

RWER issue 54: Manifesto of the appalled economists

Real-World Economics Review, issue no 54
To read the whole manifesto go to  http://www.paecon.net/PAEReview/issue54/Manifesto54.pdf

Manifesto of the appalled economists

First signatories: Philippe Askenazy (CNRS, France) ; Thomas Coutrot (scientific council of ATTAC, France) ; André Orléan (CNRS, EHESS, president of the French Association for Political Economy) ; Henri Sterdyniak (OFCE, France).
English translation: Gilles Raveaud (Paris 8) and Dany Lang (Paris 13), September, 24th, 2010. The translators are grateful to Edward Fullbrook (Real-World Economics Review).

You may sign the manifesto at
https://rwer.wordpress.com/2010/09/28/sign-manifesto-of-the-appalled-economists/

Crisis and debt in Europe: 10 pseudo “obvious facts”, 22 measures to drive the debate out of the dead end

Introduction

The world economic recovery, permitted by a massive injection of public spending into the economy (from the United States to China), is fragile but real. One continent lags behind, Europe. Finding again the path of growth is no longer its priority policy. Europe has embarked on another path: the fight against public deficits. 

In the European Union, these deficits are certainly high – 7% on average in 2010 – but this is much less than the 11% in the United States. While American states whose economic weight is greater than Greece’s, such as California, are virtually bankrupt, financial markets have decided to speculate on the sovereign debt of European countries, especially those of the South. Europe is in fact caught in its own institutional trap: states must borrow from private financial institutions, which obtain cheap cash from the European Central Bank. As a consequence, the markets hold the key to the funding of the states. In this context, the lack of European solidarity gives rise to speculation, all the more so when the rating agencies’ game accentuates the mistrust.

It took the downgrading, on June 15th, of the rating of Greece by the agency Moody’s, to bring the European leaders to use the word “irrational” again, a word that they had used so much at the beginning of the subprime crisis. Similarly, we now discover that Spain is much more threatened by the fragility of its growth model and of its banking system, than by its public debt.

In order to “reassure the markets,” a stabilizing fund for the Euro has been improvised, and drastic as well as indiscriminate plans of cuts in public spending have been launched all over Europe. Civil servants are the first affected, including in France, where the increase of their pension contributions is a disguised cut of their wages. The number of civil servants falls everywhere, threatening public services. Social security benefits are severely reduced, from the Netherlands to Portugal, as well as in France, with the current pension reform. Unemployment and the lack of job security will necessarily increase in the forthcoming years. These measures are irresponsible from a political and social perspective, and even in strictly economic terms.

This policy, which has temporarily brought down speculation, has already very negative social consequences in many European countries, especially on the youth, workers and the most vulnerable people. It will eventually stir up tensions in Europe and thereby threaten the European construction itself, which is much more than an economic project. The economy is supposed to serve the construction of a democratic continent, peaceful and united. Instead, a form of dictatorship of the market is being imposed everywhere, and especially today in Portugal, Spain and Greece, three countries that were still dictatorships in the early 1970s, only forty years ago.

Whether it is interpreted as “the desire to reassure markets” on the part of frightened governments, or as a pretext to impose choices driven by ideology, this submission to dictatorship is not acceptable, since it has proven its economic inefficiency and its destructive potential, both at the political and social levels. A real democratic debate on economic policy choices must be opened in France and Europe. Most of the economists who participate in public debates do so in order to justify or rationalize the submission of policies to the demands of financial markets. Admittedly, all governments have had to improvise Keynesian stimuli plans, and even sometimes to nationalize banks temporarily. But they want to close this parenthesis quickly. The neoliberal paradigm is still the only one that is acknowledged as legitimate, despite its obvious failures. Based on the assumption of efficient capital markets, it advocates reducing government spending, privatizing public services, flexibilising the labour market, liberalizing trade, financial services and capital markets, increase competition at all times and in all places…

As economists, we are appalled to see that these policies are still on the agenda, and that their theoretical foundations are not reconsidered. The arguments which have been used during thirty years in order to guide European economic policy choices have been undermined by the facts. The crisis has laid bare the dogmatic and unfounded nature of the alleged “obvious facts” repeated ad nauseam by policy makers and their advisers. Whether it is the efficiency and rationality of financial markets, or the need to cut spending to reduce debt or to strengthen the “stability pact”, these “obvious facts” have to be examined, and the plurality of choices of economic policies must be shown. Other choices are possible and desirable, provided that the financial industry’s noose on public policies is loosened.

We offer below a critical presentation of ten premises that still inspire decisions of public authorities all over Europe every day, despite the fierce denial brought by the financial crisis and its aftermath. These are pseudo “obvious facts” which are in fact unfair and ineffective measures, against which we propose twenty-two counterproposals that we would like to bring into the debate. Each of the proposals is not necessarily unanimously supported by all the people who have signed this manifesto, but they have to be considered seriously if we want to drive Europe out of the current dead end.

Pseudo “obvious fact” # 1: financial markets are efficient

Today, one fact is obvious to all observers: the crucial role played by financial markets in the functioning of the economy. This is the result of a long evolution that began in the late seventies. However it is measured, this evolution constitutes a clear break, both quantitatively and qualitatively, with previous decades. Under the pressure of financial markets, the overall regulation of capitalism has deeply changed, giving rise to a novel form of capitalism that some have called “patrimonial capitalism”, “financial capitalism” or “neoliberal capitalism”.

The theoretical justification for these mutations is the hypothesis of the informational efficiency of financial markets (or Efficient Markets Hypothesis). According to this hypothesis, it is important to develop financial markets, in order to ensure they operate as freely as possible, because they are the only mechanism allowing an efficient allocation of capital. The 

You may read the whole manifesto at    http://www.paecon.net/PAEReview/issue54/Manifesto54.pdf

  1. Dick Burkhart
    September 28, 2010 at 6:33 pm

    Much of this analysis and many of the recommendations are very solid, but critical facts are missing.
    (1) The first fact is that modern economies, and especially their growth, ultimately depend on cheap energy more than anything else. In other words, “when cheap energy ends, economic growth ends”.
    (2) The next fact is that modern finance, especially extreme leverage, depends on economic growth. In other words, leverage is like “printing money”, which leads directly to inflation of one form or another unless there is enough growth in the real economy to pay off the loans or other financial instruments in full.
    (3) The final fact is that with peak oil imminent (within 5 years) or having already occurred in 2008 and with other fossil fuels only a decade or two behind, the era of cheap energy for the world is rapidly coming to a close. Major investment in renewable energy and energy efficiency is essential for survival, but there are no signs that this will restore the era of cheap energy unless something like nuclear fusion finally fulfills its early promise, which now seems doubtful.

    What this means is that we cannot count on economic growth to come to the rescue – to pay back the bulk of either private or public debt. The global economy and most national economies will stagnate for a while, then things will get worse. Budget cuts and prioritization of investment will become the order of the day. Ideally progressive taxation and forms of debt cancellation will make societies more egalitarian and keep them functioning. Otherwise we could see massive impoverishment in an attempt to keep up the lavish lifestyles of the elites, likely accompanied by harsh repression.

    Progressive economics says that it’s OK to take on debt during recessions because it can be paid off later. If this is not the case, then we need different measures. Over a long period of “de-growth” you would even need budget surpluses, produced by heavy taxation on high incomes, wealth, luxuries, and fossil fuels, combined with incentives and investment directed toward basic human needs, renewable energy, energy efficiency, and related infrastructure and practices.

    In addition, all forms of banking should be at least semi-public, with no leverage of any kind allowed unless explicitly permitted by government policy, to guide investment along the lines indicated above. To be really effective, such financial regulation would have to be global in scope, at least covering the major world economies by some means or other and shutting down of off shore banking and the like.

  2. Dave Taylor
    September 30, 2010 at 11:29 am

    It is encouraging to see such honest, balanced and significant analysis from French economists; disappointing to an appalled citizen of suffering Britain that they seem to equate Europe with the eurozone, for the anglo-american Trojan Horse within that needs to be acknowledged.

    The introduction gives the gist of the argument. “Europe is in fact caught in its own institutional trap: states must borrow from private financial institutions … The economy is supposed to serve the construction of a democratic continent, peaceful and united. Instead, a form of dictatorship of the market is being imposed everywhere”. Less obviously, at #7, we learn how. “At EU level, the financialization of the public debt has been included in the treaties: since the Maastricht treaty, central banks are prohibited from directly funding states, which must find lenders on financial markets.” Revoking that, surely, has to be at the heart of Measure 14. Equivalent proposals in Britain and the US recognise that money is created by private banks rather than governments simply authorising credit, which should be financing national public works rather than global banking and speculative profits.

    At #1 we find a superb criticism of the justification of Financial Capitalism. “The major flaw in the theory of efficient capital markets is that it transposes the theory used for ordinary goods and services to financial markets. .. [For real goods] competition produces what is called “negative feedbacks”, i.e. restoring forces that go in the opposite direction from the initial shock. The idea of efficiency arises from a direct transposition of this mechanism to financial markets. However, for the latter, the situation is very different. When the price increases, it is common to observe, not a decrease but an increase in demand! … This herding phenomenon is a process of “positive feedbacks” which worsens the initial imbalances”.

    My only problem here is that the agenda for the practical measures then proposed is still determined by the faulty assumption of the theory: that money and other economic entities can be transposed. Unless the theory is recast in a form justifiable at a deeper level than economics, what is to stop a future generation of half-baked economists from reversing any measures taken?
    The discussion here borrows the ideas of negative and positive feedbacks from control theory but doesn’t follow up the implications of group theory in Wiener’s Cybernetics and electronic models of PID servomechanisms in electronics, so it fails to recognise nature, industry, consumers and thinkers as forming subgroups, each with their own aims, which live off and need to regenerate surpluses, trade in different ways with each other and account for their surpluses in banks. In short, there needs to be theoretical discussion focused on the options for Kuhnian paradigm change, in economics and indeed in philosophy of science, where Hume’s measurement-statistic method is at the root of today’s problems and Lakatos’s Methodology of Scientific Research Programs and its context should be required reading.

    Gems from #2 thru #6 point out that “today, on the whole it is firms that fund shareholders instead of the contrary. … The operators of publicly traded companies now have the primary and exclusive mission to satisfy the shareholders’ desire to enrich themselves”. ” Financial evaluation is not neutral: it affects the object it is meant to measure, it initiates and builds the future it imagines”. “The average public deficit in the euro area was only 0.6% of GDP in 2007, but the crisis has increased to 7% in 2010. In the same time, public debt increased from 66 % to 84% of GDP”. “Macroeconomics is not reducible to the economy of the household”. ” The public debt service in France represents 40 billion Euros each year, almost as much as the revenue generated by the income tax”.

    If #7 spilled the beans on Maastricht, #8 raises an issue of which few in Britain other than a few Catholics old enough to remember the origins of the EU seem aware of: “The European experience is ambiguous. Two visions of Europe coexist, without daring to compete openly. For Social Democrats, Europe should promote the European social model, which resulted from the post World War II social compromise. … The currently prevailing view in Brussels and in most national governments is rather that of a liberal Europe, whose objective is to “adapt” European economies to the needs of globalization.”
    But the original vision wasn’t of a compromise, the mutual giving-up (e.g. of sovereignty) seen as the only option by one-dimensional modern thinkers. It was of dynamic subsidiarity harmonized in solidarity, in which different rather than opposing actors, like players of different wood-wind, brass, string and percussion instruments in an orchestra, can play their full part at the appropriate time. Read Aristotle’s Politics: curiously insistent on musical education. The reality is two-dimensional, with four ways in which active and static can interact; not a one-dimensional ambiguity between goodies and baddies in a Marxist class war. So interpreted, the apparent clash between private and social interests resolves into a partnership between geographical and functional communities – towns and firms – of more and less local scope, with government neither a composer nor a player but a conductor. Here the role of the banks is to print and look after the music, not to restrict its supply at the whim of tone-deaf salesmen familiar only with a few titles.

    And so to the conclusion of this encouraging manifesto, which initially seems to be about rejecting pseudi-facts (often deliberate and mischievous misconceptions) and pursuing realistic measures. But Rome was not built in a day: the realist measure finally proposed here is what Kuhn called paradigm change and Tony Lawson Reorienting Economics:

    “The neoliberal doctrine, which rests on the now indefensible assumption of the efficiency of financial markets, should be abandoned. We must reopen the space of possible policies and discuss alternative and consistent proposals that constrain the power of finance and organize the “harmonisation while the improvement is being maintained” of European economic and social systems (art. 151 of the Lisbon Treaty)”.

    I entirely agree. All I would insist on is that to “reopen the space of possible policies” we must (in reality, rather than in economists-talk) abandon the now indefensible argument that economics is only – rather than incidentally – about trade and the acquisition of money. It is primarily about nature, its transformation, biological necessity and using our existing surplus wealth to make space for human thought: and that not least about how best to communicate and maintain the regeneration of the wealth we already have.

    Key to all this is provision for fair sharing of time and education between different activities and actors, which can’t happen without separating out abstract and complex variables in ambiguous terms. Without such analysis (for which methods exist) we cannot see the whole space of possible policies. Nor can we see the significance of our all being hitch-hikers, where humanity survives by mutual giving of lifts: that our indebtedness may not be to those we borrow from. Monetary credit for subsistence is repaid by our performing our duties, and excellence is often motivated and rewarded competitively by honours and prize-giving for actual achievement.

  3. October 15, 2010 at 12:56 pm

    The critique is fair enough as far as it goes, but I miss some stronger remedies. The authors seem stuck in the equilibrium discourse. I would like this manifesto to deal somewhat in the need for an industrial policy aimed at creating new resources, like it used to be from the 13th century onwards. Not only to give good advice about how to share the existing ones.

    After all, “economy” used to mean “how to develop better ways of feeding ourselves”. I think it was when this insight got lost and the neoclassics began to preach their maths this crising society was born.

  4. March 1, 2015 at 8:01 pm

    Reblogged this on My Desiring-Machines.

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