The ‘battle of the economists’-sound and fury signifying nothing

22 02 2010

It has been said that the politics of academia is the most vicious and bitter form of politics, because the stakes are so low. The phrase comes to mind when considering the exchange of views between different groups of economists this week. First a group of twenty wrote a letter to the Sunday Times arguing that fiscal tightening, or cuts in public spending as it really is, should start sooner rather than later. This was jumped on by the Tories as proof that Labour was threatening the long term credit worthiness of the UK. Then today two groups of economists, headed by lord Skidelsky and Lord Layard, had letters published in the Financial Times refuting the first group. Skidelsky and Layard argued that early fiscal tightening would lead to a plunge back into recession. This argument is interpreted as support for Labour.

The onset of the recession has left the economics profession effectively discredited. The numbers of economists who predicted the recession were so small that they are the stopped clock part of the economics profession. If you predict recession for long enough then you will eventually be right. Neither the free market economists or the neo Keynesians have any remaining intellectual credibility.

This intellectual paralysis has contributed to a situation in which serious global analysis of the causes of the recession has been inadequate. Most discussions have focused on the symptoms of the crisis, such as the credit bubble, rather than the causes. As a result the current position of most economists on recovery is to cross their fingers and hope for the best.

The current ‘controversy’ over fiscal tightening revolves in effect around whether the small cuts now proposed by the Tories for the next financial year, around £2 billion-a lot of money for you and me but a drop in the ocean for the UK economy, should go ahead or not. That this relatively tiny amount should be so controversial indicates how limited the debate about the UK economy really is. What is even worse is that the wider discussion of the future has been boiled down to how far and how fast public spending should be cut.

In reality all the participants in this discussion know that even if it was desitrable that large cuts in public spending should take place over the next year or two it is not a realistic option. It would require a huge effort of political will of which there is no evidence that it exists. Everybody understands that it ios only the massive supprt given to the economy through support for the banks and through pubblic spending which is keeping the UK economy afloat.

The main underlying worry in all of this is that there is no plan to get the UK economy back to growth. As the Financial Times commented on the spat between economists, there is no alternative to continued state support for the economy. It argued that major cuts now, which nobody is suggesting anyway, would lead to a further contraction of the economy,

It is not clear what forces could offset such a contraction. Easier monetary policy would be of limited use: domestic credit growth is not a route to sustainable recovery and exports are unreliable. At a time when most of the world wants to export its way out of trouble, who is going to buy all those British goods?

In other words the only option on the horizon is to wait for help from the world economy, which is essentially ‘unreliable’.

The dispute between economists is significant only because of its insignificance. The identification of  one side with Labour and the other with the Tories shows just how narrow the differences between the parties are on the central question of the economy.

A version of this article also appeared on Spiked

More effective leadership in politics would be a good thing, but leadership to what end? Shiller’s behavioural economics-wrong again

18 02 2010 the aftermath of the bursting of the largest bubble in history, in the property market as well as other markets, we see that a social-psychological phenomenon, over-confidence, was not managed by leaders, and its subsequent collapse represents the deepest cause of the financial crisis.

The essential banality of behavioural psychology when applied to politics or economics was revealed again today in Robert Shiller’s latest article on leadership in the United States. Shiller, the joint  author of Animal Spirits contrasts unfavourably  the leadership of Obama and Gordon Brown during the present recession with that of Franklin D Roosevelt during the Great Depression of the 1930s. His conclusion is

Leadership matters. But it can be effective only sometimes. And leadership in a crisis cannot undo all the damage of lack of leadership in the past.

so sometimes leadership works and sometimes it does not. Excellent work Sherlock! Shiller cannot even explain why on its own terms Roosevelt’s leadership was effective, merely pointing out that it appeared to help bring an end to the Depression. Such a narrow reading of the economics of the 1930s is itself absurd. The US economy was finally brought out of the Depression by World War Two and the tremendous boost to production and innovation that came with it.

There is now widespread acceptance that politics and the political process in the West are in acute crisis. (See this desperate analysis of UK politics for example). It is tempting at times like this to yearn for the smack of firm government. It is certainly true that seeing political leaders taking firm and decisive action evokes at least some respect, even if one disagrees with the particular approach, and is better than leaders who vacillate and seem constantly uncertain of even their short-term, let alone their long-term goals.

But Shiller and others over-emphasise the subjective element of leadership. It is interesting that the only other example he gives of effective leadership in a crisis is of Winston Churchill during World War Two. Churchill is significant because he combined strong personal leadership qualities with a well-defined cause, the survival of Britain in the face of a deadly enemy. Before the War  Churchill was a renegade who lacked significant influence. After the War he was a totem Prime Minister. It was the unique political environment of the War which gave content to his leadership skills. He engaged with the strong patriotic feelings still at that time present within large sections of the British people and inspired them to keep fighting.

President Obama is a man with obvious and admirable leadership qualities. His problem is that he is leading a nation which is in relative economic decline and he has no political framework available within which to address this problem. The story of the United States is of continuous progress and global domination. US politics is finding it impossible to deal with a world of relative decline. Shiller’s emphasis on confidence is very American. The story of the US is one in which confidence is the key to success.

There is something very attractive about this ‘can do’ approach to life and there is much about it which we who are immersed in the deep cynicism of British culture could emulate. British political leaders are dwarves compared with Obama, so the problem here is even more acute. However the mirror image of US style confidence is those other figures familiar from American fiction, the confidence trickster, the snake oil seller and the quack doctor. Confidence and optimism are all very well, but the main problem facing politics today is its emptiness and lack of vision. Shiller does us all no favours by focusing on the wrong problem and the wrong solution. The medicine of confidence he prescribes is the modern equivalent of snake oil.

The great social paradigms are dead, long live the next ones (whatever they are)

16 02 2010

Are we witnessing a paradigm change? I suspect not. Remember Kuhn’s assertion that a paradigm does not truly collapse until another is ready to take its place. China does provide an alternative, apparently successful, model, but it is difficult to see it succeeding in many other countries.The free market will accommodate its lessons and find a way to survive. The Chinese model will continue for some time too. I don’t see business’s Copernicus. Kuhn was probably right: lessons from the history of science are hard to apply elsewhere.

Michael Skapinker’s article, from which the above quote comes, asks whether the creation of paradigms, that is of unifying if transitional theories, which are vital to scientific development, is applicable to social and economic questions. His answer is probably not as these ‘these other areas are more fragmented’.

I would argue the opposite. The creation of  paradigms in politics and economics is vital to progress. Humans do not live by bread alone. We require an overarching view of the world within which to locate our own feeble individual efforts. This role has been played throughout human history by various religions. In more modern times it has taken the form of economo/political movements like the bourgeois individualism of nascent capitalism and the reaction against this in the form of  both romantic conservatism and the communism of Marx and Engels.

While it is true that these paradigms never became universally accepted in all sections of society at all times they nevertheless played a key role in creating a world view within which adherents could comfortably operate. Crucially they also  allowed those who believed in the paradigm to take action and make things happen which required very tough decisions and were often to the detriment of other human beings. The driving of peasants from the land in the various forms of land enclosure is one example of this. These were acts which caused enormous hardship to many, but as Marx recognised  

They conquered the field for capitalistic agriculture, made the soil part and parcel of capital, and created for the town industries the necessary supply of a “free” and outlawed proletariat

The point here is not whether these things are right or wrong, but that without the firm belief in capitalism and the market of those who perpetrated the enclosures they would not have happened.

Skapinker acknowledges that we are a bit short on political or economic paradigms today. The ‘free market’ of  Thatcher and Reagan appears discredited. Communism is extinct.Skapinker  dismisses China as a possibility, although there are those in the west,as we have noted here, who seem to aspire to a Chinese model of political concensus and more centralised state control.  How is it that we seem to have reached this paradigm free state?

The answer lies in understanding how paradigms are created. In historical terms they are the product of historical developments. The paradigm of bourgeois individualism was the product of the development of the free market and an assault on the privileges of the landed aristocracy. Social change became embodied in the person of the new middle classes. The paradigm of communism was the product of the development of the working class, free of the means of production and therefore with no stake in the existing paradigm.

Today there is no rising historical force which can embody a new paradigm. In that respect history appears to be exhausted. The paradox of this development is that in the absence of a paradigm with historical force it appears to be impossible even to imagine that one could exist. We are suffering from a failure of historical imagination about the possibilities of social change because human history has reached an impasse. That is why politics everywhere is in disarray and confusion. It is also why throwbacks like islamic fundamentalism or the religious right in the US can appeal to people who need some kind of world view to give their lives meaning.

Perhaps the only comfort here is that history, like nature, abhors a vacuum. Our individual life spans are short but seem to encompass eternity. In historical terms the period since the collapse of communism and the discrediting of its only apparent alternative is very brief. It would be a mistake to think that we have reached the end of paradigms. As with science, it is just when we think that we know everything that something new comes along to reveal a new and higher truth.

UK politics is broken beyond repair-no coalition can fix that

12 02 2010

A recent opinion poll attracted a lot of attention because 70% of those polled agreed that Britain had a ‘broken society’. The striking figure which received less coverage was that even more, 73%, agreed that ‘politics is broken’. If you add that to the recent survey which showed only 56% of people in the UK thought it worth voting we can see what sorry depths politics has sunk to.

This nadir is also demonstrated by the fact that far from politics being at the centre of a discussion of the upcoming general election, the issue which now appears to be the main one facing the country is whether a coalition government would be a good or a bad thing. It is a remarkable demonstration of the weakness of the Conservative Party that it does not appear to be able to take advantage of the deep unpopularity of Gordon Brown’s Labour Government and win a clear majority.

Martin Wolf, writing today, makes the point that a coalition government would be a good thing because;

 ..the UK’s government has been the author of a flood of ill-considered, media-driven initiatives. Almost nothing is properly thought out. This is the result of the domination of a handful of people over the machinery of power, unchecked by party, parliament, bureaucracy or any other tier of government. Coalition government would make this change in desirable ways.

This is a case of right diagnosis, wrong medicine. Anatole Kaletsky made similiar points recently by implying that what we need is more concensus politics, like the Chinese, if we are to recover our social and economic dynamism. The cheap and shallow politics that Wolf refers to is a product of the end of big aspirational politics, which used to be ideologically framed, and its replacement by a short-term managerial approach. This short-termist approach dominates every party. Putting the parties together in to a coalition would not change this.  Politics is not petty because of the existence of different parties. It is petty because the parties have nothing else to offer except these ‘media driven’ idiocies. It is petty because of the absence in any of their programmes of any vision for a better society.

It seems we have reached the bottom or close to the bottom of a cycle of general cynicism towards politics and the political process. The question is are we condemned to bump along the bottom for a long time or will there be any reaction? There is certainly no sign of any recovery at the moment. There are some attempts to inject some politics into the general election campaign and these should be supported. It is difficult to encourage participation in a general election which is so devoid of policies which can make a difference, but the effort still has to be made. Without a democratic revival we are condemned to drift, frustration and cynicism.

Our fight is not with the Chinese, but amongst ourselves

4 02 2010

 “Since the crisis, developing countries have lost interest in the old Washington consensus that promoted democracy and liberal economics. Wherever I go in the world, governments and business leaders talk about the new Beijing consensus — the Chinese route to prosperity and power. The West must come up with a new model of capitalism that’s consistent with our political values. Either we reinvent ourselves or we will lose.” Times

The recession may be over, and I stress the ‘may’, but the deep damage done to the confidence of western leaders remains. Anatole Kaletsky’s article in today’s Times, written as a review of the mood at Davos last week, reveals how deep the loss of confidence is. Let us review what forms the damage has taken.

Firstly, the recession has accelerated the economic balance towards China and the east. Secondly, it has destroyed the Reagan/Thatcher rhetorical commitment to free markets which underpinned most western economies. Thirdly it has revealed the ideological bankruptcy of western political parties. Kaletsky is right to point out that the failure of the meetings at Davos, and we could add of all of the global summits since the recession started, to address these issues is symptomatic of the crisis itself. There has been a studied refusal to properly debate the recession and its consequences. The western ruling elite has spent its time in the modern equivalent of a bar room brawl rather than addressing the main issues.

Kaletsky’s proposed solution is that western capitalism should reinvent itself. His suggested routes for doing this are themselves a symptom of the limited imagination that exists within the western elite. In fact, while appearing to want to challenge the Chinese model, Kaletsky’s solutions look suspiciously as if he wants to get as close to it as possible.

Do Western political systems need to be reformed to make them more conducive to compromise and rapid, consensual decision- making instead of the political paralysis that now threatens the US? Do we need an economy in which government plays a bigger role in finance, energy, environment and strategic infrastructure investment, but actually reduces public spending and taxes by backing away from some of its traditional, and ruinously expensive, responsibilities for health, pensions and education?

A political system which is based on consensus is what the Chinese Communist party enjoys. It is the antithesis of openly contested democracy. The ‘political paralysis’ which infects western governments is a product of the lack of any coherent political programme for change which can force its way on to the political agenda and persuade the majority in a democracy to support it. It is not more compromise that is needed, but more contestation.

It is not at all clear what western societies need to do in order to continue to make general progress. At present it seems as if the market is the only route. It may be, as Kaletsky suggests, that the state needs to play a more central role in developing the economy. But if this is the case there is even more need for a vigorous democracy to exist which can challenge and guide the state. At the very least we need an open public debate about the role of the state. It is not the form of politics which needs to be changed, but the content. Giving the state more powers without strengthening democratic control over it takes us closer again to the Chinese model.

Even Kaletsky’s final summation of the ‘choice’ facing us is wrongly framed. What we are trying to win against the Chinese is not continued global dominance by the west over the east. If it were only that why we would care? Capitalism is firmly entrenched in China and there is no threat to the market. If the stakes were only about which capitalist country comes out on top then most of us probably would not care very much. What is at stake is the future of democracy.

The experiment in democratic politics, which began with the Greeks and was taken up much later mainly in the west, is now weaker and feebler than at any time in the past sixty years. We do have a fight on our hands, but it is not with the Chinese. It is with our own narrow perceptions of what is possible. We suffer from a failure of political imagination and a climate of low expectations which infect every area of life. Any challenge to the status quo has to begin by taking on the pessimistic, risk obsessed cultures of the west.

The Tories shrink before our eyes

3 02 2010

The(Tory) MP was unable to identify many points of difference between the Tory plan and Labour’s proposals to rebalance the economy and put the finances back on to a stable footing. But he stressed the contrast with the government’s economic record – a point the Tories will drive home as they seek to blame Gordon Brown for the recession and the painful corrective measures it has made necessary. Financial Times

Here we are a few months from a general election and it is increasingly obvious that on the biggest issue facing the UK, the future of the economy, the main opposition party has nothing different to offer from New Labour. The Tories are saying in essence that they would manage the economy better than New Labour, but the policies would be the same.

The Tories tried to differentiate themselves last year by saying that they were the ‘austerity’ party. Even at the time I pointed out that this would be both unpopular and also that big spending cuts would be very difficult to implement. Now that Cameron is backing away from the austerity message the Tories are revealed as having nothing to say that could not come from the mouths of Brown or Mandelson.

Why is this a problem? There are two reasons. Firstly, the UK economy is at a turning point. Business as usual cannot be the solution. The financial sector is unlikely to recover its position as the locomotive of the economy. Indeed, as populism continues to rule government’s attitude towards bankers and banking and debts remain unpaid, there may be more bad news to come from the financial sector. Short termism still rules economic policies. There is an absence of both strategic thinking about the long-term development of the UK economy and also the kind of entrepreneurial attitude which is required to lead the UK out of the hole it is in.

Sir John Rose, the CEO of Rolls-Royce, has written today about the potential strengths of the UK economy. There is much in his article to agree with. Yet Rose misses out the key element of  the lack of political leadership that is required to ensure the kind of transformation he is asking for. Which brings us on to the second problem.

In a recent study of British Social Attitudes the percentage of people in the UK who saw voting as a duty had fallen from 64% in 2000 to 56% in 2009. There has been a continuous disengagement with politics and the political process for some years. The recent scandal over MPs’ expenses was both a symptom of disillusionment with politics and a reinforcement of it.  If political parties cannot differentiate themselves on the question of the economy, which is central to everybody’s lives, then there is even less reason to vote.

Finally this seems to sum up the bankers bonus issue as succinctly as anything else I have read on it.


Innovation and inspiration-part 2

2 02 2010

During today’s economic downturn, innovation will be more important than ever. The sooner far-sighted strategies are developed and implemented by government, business and other agencies, the more a better world will be within humanity’s reach. It is not innovation that creates inequality, but the social choices of institutions. We distinguish innovation from fiscal, regulatory, legal and cap-and-trade responses to today’s challenges. Unlike these technocratic measures, innovation has the potential, at least, to increase wealth and opportunity for everyone: it is not a zero-sum game. Big Potatoes: The London Manifesto for Innovation


This blog has long argued that the UK requires a radical change for the better in its approach to innovation. I am delighted to recommend a new report, Big Potatoes: the London Manifesto for Innovation,which you can register for here, which proposes a 14 point programme for innovation.