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Tuesday, 15 November 2011

A crisis of economics?

A recent piece suggests that the current crisis of capitalism has exposed the need for big picture economics. Until economics revisits its roots, it will fail to come up with an alternative economic system to replace capitalism. There are three problems with the basic thesis as presented. First, many economists pretty much think from a systems perspective. It seems to me that what policy makers take on board is not always aligned with how economists think day to day. Second, the word "capitalism" does not help because what we have is not pure capitalism as narrowly understood. Finally, it is not immediately clear that the real revolution needed is in economics. A strong case can be made that the crisis is much about the crisis of "democracy" than it is about economics. The events taking place will leave their lasting impact not so much on economic thinking but on how individuals in the western world relate to their governments. With those caveats, see the essay below :

It's become commonplace to criticize the “Occupy” movement for failing to offer an alternative vision. But the thousands of activists in the streets of New York and London aren’t the only ones lacking perspective: economists, to whom we might expect to turn for such vision, have long since given up thinking in terms of economic systems — and we are all the worse for it.

This wasn’t always the case. Course lists from economics departments used to be filled with offerings in “comparative economic systems,” contrasting capitalism and socialism or comparing the French, Scandinavian and Anglo-Saxon models of capitalism.

Such courses arose in the context of the cold war, when the battle with the Soviet Union was about showing that our system was better than theirs. But with the demise of the Soviet Union, that motivation disappeared. Globalization, so it is claimed, has created a single system of capitalism driven by international competition (ignoring the very real differences between, say, China and the United States). We now have an economics profession that hardly ever discusses its fundamental subject, “capitalism.”

Many economists say that what matters are questions like whether markets are competitive or monopolistic, or how monetary policy works. Using broad, ill-defined notions like capitalism invites ideological grandstanding and distracts from the hard technical problems.

There is a lot in that argument. Economists do much better when they tackle small, well-defined problems. As John Maynard Keynes put it, economists should become more like dentists: modest people who look at a small part of the body but remove a lot of pain.

However, there are also downsides to approaching economics as a dentist would: above all, the loss of any vision about what the economic system should look like. Even Keynes himself was driven by a powerful vision of capitalism. He believed it was the only system that could create prosperity, but it was also inherently unstable and so in need of constant reform. This vision caught the imagination of a generation that had experienced the Great Depression and World War II and helped drive policy for nearly half a century. He was, as the economist Robert Heilbroner claimed, a “worldly philosopher,” alongside such economic visionaries as Adam Smith, John Stuart Mill and Karl Marx.

In the 20th century, the main challenge to Keynes’s vision came from economists like Friedrich Hayek and Milton Friedman, who envisioned an ideal economy involving isolated individuals bargaining with one another in free markets. Government, they contended, usually messes things up. Overtaking a Keynesianism that many found inadequate to the task of tackling the stagflation of the 1970s, this vision fueled neoliberal and free-market conservative agendas of governments around the world.

THAT vision has in turn been undermined by the current crisis. It took extensive government action to prevent another Great Depression, while the enormous rewards received by bankers at the heart of the meltdown have led many to ask whether unfettered capitalism produced an equitable distribution of wealth. We clearly need a new, alternative vision of capitalism. But thanks to decades of academic training in the “dentistry” approach to economics, today’s Keynes or Friedman is nowhere to be found.

Another downside to the “dentistry” approach to economics is that important pieces of human experience can easily fall from sight. The government does not cut an abstract entity called “government spending” but numerous spending programs, from veterans’ benefits and homeland security to Medicare and Medicaid. To refuse to discuss ideas such as types of capitalism deprives us of language with which to think about these problems. It makes it easier to stop thinking about what the economic system is for and in whose interests it is working.

Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.


  1. Thanks for a good article, we know the bubble is popping, what will the effect be on Zambia from your perspective?

  2. " It's become commonplace to criticize the “Occupy” movement for failing to offer an alternative vision. But the thousands of activists in the streets of New York and London aren’t the only ones lacking perspective: "

    It is absurd to claim that the Occupy Wall Street people 'lack perspective'. They have far better perspective of the economic disaster that is unfolding than any of the corporate shills who are desperately trying to ignore them.

    What happens is that these mainstream media shills (all multi-millionairs), want them to come up with a single 'list of demands' (like they are hostage takers), and a single answer or issue.

    The truth is that they call themselves the 99% (more like the 99.99%), because they are from all walks of life, and all have their own story to tell. The idea that a nation of 320 million people can have their opinions represented by two parties is absurd. And yet this is what they want from the OWS protesters - are you Republican or Democrats?

  3. " economists, to whom we might expect to turn for such vision, have long since given up thinking in terms of economic systems — and we are all the worse for it. "

    The problem I have with economics, is that they have never routed the Supply Side Economic theorists. Also, the likes of Ron Paul and his libertarian economics can pass without anyone pointing out the lack of historic precedent for these theories.

    Also, there is a tendency towards professional myopia and reductionism.


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