Tag Archives: Says Law

Tearing it up by the roots – a new approach to economics

Michael Gove dismissed the profession of economists, as one of those unnecessary groups of professionals, who stopped the common sense will of the people from prevailing. Although Michael Gove knows little of economics and the value of his statement can be questioned, he is right to suggest that something is rotten within the economics profession.

Just as Karl Popper looks back to Parmenides (early 5 BCE) as the originator of the modern scientific discourse, I believe that the same philosopher can be used to demonstrate the failings of contemporary economics. Parmenides has a vision in which the Goddess reveals to him two separate worlds that of truth which is known only to the Gods, and the world of shadows and falsehoods known to man. Man can only glimpse but shadows of truth, he can never know. Certainty is only known to the Gods. What Popper understands from this is that scientific inquiry can never know certainty, truths known today will be demonstrated as false tomorrow. Scientific truths are conjectures which should be in a form that makes capable of refutation. It is this verification process that makes possible the advance of science as new and better truths replace those of today and yesterday. However he does suggest that these founding fathers are giants on whose shoulders we stand to advance. They make the initial discoveries that make possible the advance of science. Today Newton’s cosmology and theory of gravity are regarded at best partial truths. Yet without Newton’s discoveries Einstein and the advances of modern cosmology would be impossible.

What Karl Popper believes is that there can be no certainties only probabilities. The latter being an admission that we don’t know. Contemporary economics ‘does know’ it knows certain truths about the economy. There are two fundamental truths and they are those of the market economy and modern monetary theory. These are the two foundational principles that underpin all contemporary economics..

Market theory is often referred to as Neo-liberal economics. This theory asserts that the free market is a self regulating organisation, which if subject to minimal government interference will find its own level of equilibrium. Governments that interfere and over regulate the economy risk upsetting the balance of forces in the economy, that determine the best of all possible outcomes for all. It was Alfred Marshall (1840 – 1924) who demonstrated the truths of market economics with the supply and demand theories with which all students of economics are familiar today. Familiarly known the diagrams that demonstrate the ‘Marshallian Scissors’. Nearly all economic theory is a derivation of market economics.

Perhaps the most notorious is Says’ law of incomes. This states that it is self defeating to try to maintain wage levels during a recession, as this will merely increase unemployment through making workers to expensive to pay. Far better to let wages fall to a level at which it becomes profitable for firms to employ workers. These newly employed workers will spend the wages they receive, which will increase demand and kickstart the recovery. With the economy growing wages will return to their former high levels, as newly profitable firms bid against each other through paying higher wages to attract workers from the diminishing pool of unemployed labour. No government will ever admit to following Say’s law, but it is implicit truth, as they are always concerned to avoid the situation in which high wages make workers unaffordable to employers. When Tony Blair introduced the minimum wage he took great pains to ensure that it was not set at a too high a level, as that would make labour too expensive to employ.

A common sense truth which seems obvious to all. However there is very little economic evidence to demonstrate the truth of this ‘common sense’ theory.

The other great truth of orthodox economics is modern monetary theory (now associated with Milton Friedman). This quite simply states that the level of economic activity is determined by the quantity of money in the economy. Increasing the quantity of money in the economy increases the number of purchases people make, so increasing the level of economy activity. However if the quantity of money is increased too much, there is too much money chasing too few goods and so inflation occurs. All the government needs to do to control the level of economic activity is to either change interest rates or the supply of money (so called Quantitive Easing). Although this theory is associated with Milton Friedman he was merely putting the ideas of Irving Fisher (1867-1947) into a more modern format. This school of thinking in fact has a long history, as it’s origins can be traced back to Copernicus who first gave it form 1517.*

Unfortunately modern monetary theory has one flaw, if if the government is to control the supply of money, it must know what it is controlling. Unfortunately it does not. When the Treasury introduced this policy in the 1980’s, I think they came up with seven different definitions of what constituted money. In practice they adopted one definition, M4 as the most likely one. Despite this flaw in the theory, governments have since the 1980’s all been practitioners of modern monetary policy. Never in academic circles will you hear this criticism mentioned.

J.M.Keynes and the economics named after him is regarded as an aberration and no longer regarded as one the foundational truths of economics. The British Treasury the fount of all economic truth has long since dismissed his ideas as irrelevant.

What the economists ‘who know’ have in common, is that they possess what that they believe is a bag of tricks from which the appropriate tool can be chosen to fix any crisis. At present the favoured tool is a combination of reducing interest rates and increasing the supply of money through quantitive easing.

Karl Popper influenced me in my choice of names, he does as do I, belong in the school of ‘don’t knows’ or to put it more accurately we believe our respective subjects consist of a series of probable or possible truths which for the present have great utility. As Karl Popper writes that to state that something is a probability is to admit to doubt. Probably the best known advocate of this school is J.K.Galbraith.* As he had no grand theory linked to his name and was dismissive of such theories. Academic economists tended to regard him as not one of them. He was an agricultural economist, who caught the eye of Franklin Roosevelt and who drafted him in to help manage the wartime US economy. He was one of the authors of the post war report into the effectiveness on allied bombing on Germany. They as a group were surprised to discover how little impact it had on the German economy. A fact conveniently overlooked in the Vietnam war.

What discredited him in the eyes of other economists was his prioritising the human factor over any grand theory. While Hayek claimed that the mad speculation that led to the Wall Street crash of 1929 was due to a drying up of legitimate investment opportunities, Galbraith lays the blame squarely on the shoulders of the financiers. The bosses of Goldman Sachs and the other major banks were both reckless and irresponsible. They made huge profits from the foolish and reckless investments made on the Stock Exchange and had no incentive to discourage them. This is illustrated in the example of the Florida property developer who bought swamp land claiming to to be prime real estate. The authorities on the New York Stock Exchange saw no reason to prevent the sale of stock in this fraudulent enterprise. It was just too profitable. In Galbraith’s words the great crash was 1929 was due to the activities of a group of rogue financiers.

Not surprisingly it turned out that Goldman Sachs was involved in similar activities in the events leading up to the crash of 2008. They were fined millions of dollars for selling what they knew to be worthless bonds to their clients.

When I studied economics at university, I was disappointed to discover it avoided the big questions. The issue of distribution of wealth was redefined as the optimum output curve. Any point on that curve represented the best possible distribution of resources within a given community. This as an exercise in logical thinking was impeccable, but it had no relevance to world outside the seminar room. While this ‘economic scientism’ dominates the subject of economics it remains detached from the real world. When Russians during the ‘Moscow Spring’ came to study economics or more precisely free market economics; they expressed disappointment about how little it taught them about the real economy.

After a number of years teaching economics I came to realise that the teaching of economics was about developing the ‘economic imagination’. This was not so much learning the economic theory that relates to a particular scenario, but being creative within the parameters of economic thinking. A Socratic economics in which reasoning is used to disabuse the student of the ‘truths’ of orthodox economics. The conventions of orthodox economics often stand in the way of developing a real solution to the problem. Only the most unimaginative can think that changing interest rates, increasing or reducing money supply is the answer to everything. Any study of the post war management of the economy would surprise today’s readers.Realising a shortage of houses meant that this could lead to a rapid rise in house prices and inflation in the housing market, the government took action to prevent this happening. The annual in increase in house prices was subject to a tax. This of course meant house owners had a disincentive to the over valuation of houses and house prices remained low in this period. This made the majority of houses affordable unlike today.

Again J.K. Galbraith provides an illustration of this in his work in managing the US wartime economy. One of the problems of the wartime economy is inflation. With so much of the nations output requisitioned for the war effort, a shortage of goods in some parts of the economy would lead to a rapid rise in prices and inflation. Galbraith realised that it was not necessary to introduce a national system of price controls, but instead to control prices with the cooperation of the great corporations. Since they accounted for a majority of the nations output, if they could be persuaded to keep prices down there would be no price inflation. All the other medium and small businesses would follow suit, particularly if they were suppliers to the major corporations.

Economics suffers from one problem that is unique to it. What is true yesterday may not be true today. The economy is a dynamic institution that is constantly changing. Evidence about what is happening in the economy is from yesterday. There is no evidence, apart of the most impressionist kind about today and none about tomorrow. This is why J.S.Mill said there can be no science of of economics. Given this uncertainty governments prefer to use the old tried and tested methods, fearing that any policy innovation will make things worse rather than better. This Conservative mind set explains why governments never get to grips with the problems that plague the economy.

The consequences of adopting the ‘economics of don’t know

Universities would change, economics departments would have to teach students to think creatively. Old dead economists, the founding fathers of the subject would no longer dominate the curriculum. The subject would become more open ended, there would now be no arbitrary limits to subject knowledge. All the old certainties associated with this subject would go. Current academic economists would resist any change, as the knowledge they hold so dear would no longer be valued. University departments of economics would revert back to the liberal humanism of the past.

Resistance to this change would not just come from current academics, but also government. University education is now a commodity that is bought and sold. All the current means that are used to measure a universities output would cease to work. Creative and innovative thinking does not lead itself to the current system of box ticking. Governments would lose the main means through which they control what is taught in the universities.

The two greatest employers of economics graduates the investment banks and the Treasury don’t want graduates who think. They want them versed in the ways of the old economics, together the statistical skills acquired in the study of the old economics. This is the problem already known of, when Manchester students demanded a radical change in the economics syllabus, they had to contend with the fact that they would denying themselves lucrative employment in the world of banking.

Economics can be one of those subjects has to be endured and best soon forgotten on leaving university. What I am suggesting would lead to a revolution in the teaching of economics, it would now be a subject that valued creativity, rather than conformity amongst its students. If instead of discouraging students from continuing an interest in the subject, economics would be one of those stimulating subjects whose students would now retain a life time interest. Since so many MPs have studied PPE at university, those MPs would be better informed and rather than parliament collectively demonstrating an ignorance of the subject and debates on the economy and its management would be better informed and enlightening.

Politics would have to change, Chancellors such as Rishi Sunack and the Treasury itself would have to adopt evidence based economics. Rishi Sunak could no longer quote the truths of the founding fathers as justification for his policies. In constructing economic policies real thinking would be required, as real answers to problems would be required. I look forward to the day when any politician is laughed at when they turn to the old economic pieties to justify there ill thought out policies.

* J.K.Galbraith would probably be horrified to know that I consider him the doyen of the economists who don’t know. I include him because he is one of the few economists, unlike many economists does not know the answer before he starts the investigation. He possesses no ready made answers.

Is a Christian economics either desirable or possible?

A recent survey demonstrated that the majority of the UK population are now atheists. However there is another change which goes against the trend to a more secular society. Liberal theologians such as myself are seen increasingly as being in error and the new movement in theology is a return to what can only be termed pre-modern Christianity. A Christianity in which the Bible is seen as the last word, the ultimate expression of God’s will. A rejection of theologists such as Bultman who described the New Testament as a mythical expression of the essential Christian truths. This new movement in the protestant church is associated with the theologian Karl Barth. Within the church system  this return to Christian roots is mirrored in the growth of the pentecostal church movement, which is led by its members and dispenses with guidance of intellectual theologians. In fact I was taken aback when one Christian philosopher described Liberal theologians such as myself as being misled by demons.

Now this movement to return to the Christian roots is increasingly taking over the churches, if it becomes more successful it could result in a radical rethink of the approach to the all the sciences that deal with humanity. In England the Christian philosophers and theologians who advocate this approach believe that Christian philosophy should be at the centre of all thinking or as one philosopher said, ‘theology is about everything and philosophy is about one thing’.  Philosophers such as John Milbank believe that God’s creation of universe was not just a physical creation but  a creation of everything. One part of creation is the spiritual and all the truths about human existence and the nature of the universe are part of this spiritual creation. Truth is not found through rational enquiry but it recovered from the spiritual world created by God. The people best placed to discover these truths are the theologians, as those who seek a knowledge of God are best able to uncover God’s created truths. This philosophy is as John Milbank writes is a reversion to pre-modern Christianity, that is Christianity as it was before the renaissance.

John Milbank and his fellow radical orthodox Christians don’t want the abandonment of all the post renaissance disciplines such as economics, sociology and Cartesian philosophy, but rather a redrafting of them. The practices of these subjects should be informed by an understanding of God’s truths. This can be achieved in two ways, either economists, philosophers undergo an initial training in the truths of Christianity as discovered the theologians or Christian truths become part of the warp and woof of the subject. Universities in the 19th century were overwhelmingly Christian institutions and the economists of the period can be said to have been practising the first method of inclusion. The second would involve a radical redrafting of subjects such as economics if the practice of economics was to include Christian concepts and understandings.

Although the universities of Oxford and Cambridge were in the 19th century Anglican Christian institutions the practice of Christianity was limited to a knowledge and understanding of the ‘Thirty Nine Articles’ which were considered the essentials of the Anglican faith. If the student could recite them it was considered sufficient to warrant membership of the two universities. However if the radical orthodox Christians had control of the curriculum all students of economics would have go undergo a course of study in Christian doctrine. Economics would become a subsidiary of the department of theology. Once considered to be sufficiently imbued with Christian doctrine students would be allowed to study economics. Possibly if the radical orthodox christians had there way, the Philosophy, Politics and Economic degree (PPE) would become Theology, Politics and Economics (TPE).

However there is the warning from Aristotle when he writes at the beginning of ‘The Ethics’ that although he knows the meaning of the word good, that does not prevent him from doing bad actions. What he recommends is the instillation of virtue through habit, so good actions become habitual. In 2000 years of history Christianity has a very mixed record. There is for every compassionate and loving St. Francis, a St. Dominic, who use power and violence (in this example through the threat of and use of burning at the stake against heretics) to prevent error. George Bush’s war in Iraq was in part a Christian Crusade against the barbaric muslim regime of Saddam Hussein. In all probably compelling all economists to undergo a training in theology would at best have very mixed result, there would be a few St. Francis’s but many St.Dominic’s. Misunderstood and misguided Christian zealotry could cause as much distress as the misguided and malign doctrine of Neo-Liberalism.

A more fruitful approach would be to incorporate the key concepts of Christianity into economic practice. An economics which incorporated  Christian ethics would make it if not impossible, make it less likely that an economics such as Neo-Liberalism with its disregard for human life and dignity would ever become the dominant economic philosophy.  In the gospels Christ says that the supreme commandment is to ‘love the lord God’; a moral injunction which the theologian Caputo states is best demonstrated by loving your fellow man. What he advocates is agapé the disinterested love of our fellow men, or in the words of the Old Testament, ‘love your neighbour as yourself’. If agape was accepted as the  ‘summum bonum’ of economics, practices such as Says Law would be removed from the subject. What Says states is that in the time of a recession any legislation that seeks to prevent incomes being cut is self defeating as it only creates more unemployment as employers lay off expensive workers. The same goes for the actions of trade unions as who try to protect workers wages in a recession. What for Says is the correct remedy is to let wages fall until they become so low that the struggling businesses can now afford to take on the newly cheapened workers. These newly employed workers will spend their incomes and generate increased demand which will kickstart the economy into a recovery. Although no politician or economist would ever say that they are a follower of Says, they do put his ideas into practice. The response of all governments to the crisis of 2008/9 was to cut incomes. In Britain this was achieved by freezing the pay of all public sector workers and by transferring many workers from permanent employment to lower paid self employment. The starkest example of this cruel policy is the austerity policy forced on Greece which saw pay reduced to levels that reduced many workers to poverty.

What so many politicians forget is that the practice of economics should aim at maximising the welfare of the people. (There is a section in economics textbook entitled ‘welfare economics’ , a section conveniently ignored by most practising economists.) Today so many economic policies do the reverse, they aim to minimise the welfare of the many so as to maximise the welfare of the privileged few. Policies such as increasing government expenditure in the times of recession (to offset the fall in demand and incomes caused by the recession) would be prioritised over those which recommend the cutting of the coat to fit the cloth. The problem of austerity policies is that the suffering they cause the great majority is rarely justified. Only in exceptional circumstances should the harsh austerity policies of today be applied, in such circumstances occurred at the end of World War II, when the government needed to direct the nations income into rebuilding a war damaged economy.

What economists most need is an ethical code built into their subject. Economists as with all people will only act in the best interests of mankind, if constrained to by the rules. Without such constraints they will not be inhibited from selfish policy recommendations that benefit them and their sponsors. Far too many economists are employed by consultancies (funded by wealthy individuals) or work for financial organisations that want to see economic policies drafted to promote their own selfish interests. When for example the government increased income tax for the wealthiest to 50%, there was a howl of protest from the economists who work for these self interested organisations. They all claimed that the increase in tax would be a disincentive to enterprise. Only the writing of a strict set of ethical rules into the subject would prevent its abuse at the hands of self interested individuals. At present the very lax approach of economists to ethics leaves it open to abuse, disinterested economic analysis all to often means disregarding the normal ethical rules that govern human conduct.