I should start with a disclaimer, I am an economist who likes to think that I am generally honest. What I am protesting against is the tendency of many practitioners of my profession to lie. They lie when faced with problems to which they have no solution, by claiming that to have policy solutions that in practice are unrealistic or untrue.
Rousseau in his writings used the term amour-propre, words which have many synonyms in English and they include pride, self respect and vain glory. It is the last which is a fault that afflicts so many economists. They are the self acknowledged experts on the economy and are never willing admit that they are stuck for an answer. When a problem occurs they will look for an answer from their memory bank and choose one which seems to be offer the best solution. It is not an original solution, but one borrowed from the collective memory bank of all economists. What matters to the economist is that their answer will be judged as correct by their fellow economists not that it is the correct solution to the problem posed by the economy. Given the complexity of the economy, they can always blame the failure of their policy recommendations on unexpected events. The familiar its somebody else’s fault excuse is always available as a defence for a failed policy. In this case its either the fault of the economy when they claim that the fault lies with unexpected changes in internal or international economy, or its the politicians who fail to understand the policy prescriptions and implement them wrongly. When the great reforms of the 1980s were imposed on the British economy which led to a decimation of the British manufacturing sector; economists introduced another lie, which was that the pain being endured now would lead to a better future in which a revitalised economy which would work to the benefit of all. A future which never materialised.
What I am leading is a campaign for economists to say I don’t know. A willingness to look at each situation afresh and use the skills of economic analysis to come up with original and new solutions to economic problems. Unfortunately the majority of economists believe that the economic toolset was largely completed in the time Alfred Marshall, whose most influential book the ‘Principles of Economics’ was published in 1890. All that is now required is a tinkering with the toolset left by Marshall to develop the economic policies needed for today. (Marshall systemised the study of market economics, developing a series of tools of economic analysis which are widely used today.)
The great change in the practice of economic policy making in the 1980s was the introduction of monetary economics associated with the American economist Milton Friedman. What was not realised was that he was merely adapting the quantity theory of money which was explained in a book published by Irving Fisher in 1911 to the world of the 1980s? Plagiarism in economics is not frowned on but worshipped, so long as the correct work in plagiarised.
Perhaps self censorship might be a more accurate term to describe the practice to which I am objecting. However every economist when studying the subject at university will either be taught about the flaws in the dominant model of economic analysis or would have come across them in one of the texts that they have studied. Yet once they leave university to practice their profession, they suppress their knowledge of the weaknesses or flaws of the favoured method of economic analysis. The act of forgetting probably becomes second nature to the practising economist. Deliberately ignoring the evidence that might suggest that their suggested policy remedies are flawed is an act of dishonesty. Lord Oakshott the former Liberal Democrat Treasury Minister once said that the British Treasury is populated by free market fundamentalists. What he was saying was that Treasury economists were excluding from their economic policy making any evidence or thinking that was contrary to the free market model of economic analysis. This suggests that economic policy making by the government will be constantly subject to error, because of the wilful deception practised by Treasury economists.
Image courtesy of randalrauser.com
What every economics student used to learn at university was how difficult it was for leaders to make policy decisions on the economy. The effectiveness of policy measures were uncertain and the time lag in implementing these measures meant that when they came into effect they were often addressing yesterday’s issues. What we learnt was how difficult it was to understand and manage that highly complex human institution, which is the economy. In one of our seminars it was decided that there were no economics was not a science comparable with physics and that economic theory was at best a good guess as to how the economy worked. Consequently economics for the student in the 1960’s was very much a work in progress. It was Churchill who said that if you asked four economists for a solution to a particular pressing economic problem you would get five answers and two of these answers would be from Keynes. (Keynes was the outstanding British economist of his generation. This humility did no fit well with the demands from politicians for policy solutions, as exemplified in the words of Margaret Thatcher who said she wanted answers not problems. There was a group of economists responded eagerly to such requests and began to supply answers that were not hedged about with caveats about what might possibly make the policy ineffective.
Economists had to know and there was a school of economists that knew. These new economists where named variously as the Chicago School of Economists, Monetary Economists, Free Market Economists or Neo-Liberal Economists. They took inspiration from the economist Milton Friedman the doyen of the Chicago School, who in turn was inspired by the economist Friedrich Hayek. What this group offered was a solution to the one problem that dogged the Western economies of the 1970 and that was inflation. They offered two solutions to the problem of inflation, they said that inflation could be controlled by controlling the money supply and by supply side economics.
Monetary economists could supply answers to for example that of inflation, which reached 27% pa in 1976. Politicians could understands that if the money supply increased faster than the supply of goods, more money would be chasing relatively fewer goods and so prices would be pushed up. If money supply was cut inflation would fall and the economy would continue to grow on a smoother trajectory. What they did not want to know was as any non monetarist economist could tell them demonstrated a relationship between increased money supply and inflation is not the same as demonstrating a cause.
However once politicians began to follow the policies advocated by these new economists, it became obvious that these new economists did not know. Britain was one of the first countries to practice monetary economics as suggested by Milton Friedman. In doing so one huge problem was discovered no Treasury economist was able to define what made up the money in circulation and what was the total money supply. The government came up with five possible measures and from this they selected one as their preferred measure which they called M3. M3 was chosen which was the total of currency in circulation plus bank deposits. They chose this one because it was the easiest to measure, after all the banks regularly published accounts showing their total bank deposits. They then made one huge assumption that all other measures of money supply would change in the same way as their preferred measure. However there was no evidence that all the other possible measures of money supplies the bank identified, would change in the same way as M3. It was a hope that all the unmeasured changes in money supply would follow M3, but the evidence for this was lacking.
In desperation the Treasury and Bank of England gave up trying to account for changes in money supply and instead adopted a new practice. Admitting they could not count the money in circulation they opened for controlling the demand for money by changing interest rates. They believed that the supply of money was determined by the demand for money, therefore by controlling the latter they would control the first. Ever since the 1980’s changes in interest rates have been the main instrument for controlling the economy. Nobody today every mentions that the central plank of government economic policy is based on a theory for which evidence is lacking, simply because they cannot identify or correctly measure the key determinant, money supply.
Something very similar happened after the great financial crash of 2008/9. There were three deficits that could make recovery difficult the government or public sector debt, the private sector debt and the banking sector debt. The smallest was the government debt amounting in 2009 to about 60% of GDP and the largest was the banking sector deficit of 540% of GDP(as identified in a report by Paul Tucker, Deputy Governor of the Bank of England.) It is obvious that the debt that is in most urgent need of attention was that of the banking sector, yet the government of the day and succeeding ones chose to ignore it and focus instead on the government debt. The latter is the easiest to reduce as all the government had to do was cut its own spending, whereas the more serious bank debt was much harder to tackle. The government would have to take on the big banks and the City of London, very powerful opponents of whose power the government is in awe. Also if the government was serious about reducing bank debt it would negatively impact on the property market, as cutting the debt would be achieved by reducing the loans the banks could make in total. If there was less money available for house purchases, prices would fall. It is a truism of British politics that the easiest way to achieve electoral unpopularity is to preside over a fall in house prices. Consequently Britain remains with Japan one of the most indebted of the developed nations.
While these facts are known amongst the community of economists there is a conspiracy of silence in parliament about the true nature of Britain’s debt problems. There is no leading political figure that wants to be responsible for the painful economic adjustment that would result from putting the bankers house in order. Instead they focus on how they will reduce the least significant of the three debts and the noise of the debate on government debt crowds out any possible alternative debate on the real nature of the debt problem.
The economic debate as understood by politicians is what matters, as they determine economic policy. The fact that the economic debate is founded on on misinformation and lies is irrelevant. What matters is that the economic lie is the one that every one accepts. In consequence the economic debate is about the wrong debt and the government has pursued the unnecessary austerity programe that impoverishe an increasing number of people, while turning a blind eye to the excesses of the financial industry. Lies matter because they can be based on simple easily understandable untruths, whereas the truth about the problems of the economy is complex and hard to understand. To admit to truth would deny the politicians the opportunity to offer simple policy solutions that they could sell to the electorate. As the political debate of today is conducted in the simplistic language of the tabloid newspapers the truth about the real nature of Britain’s economic problems will remain concealed. Concealed that is until some major economic crisis forces the political and media classes to recognise the true nature of the problems facing the British economy.