Someone familiar with Russian totalitarianism once asked how George Orwell understood it so well without ever having experienced it. It was pointed out that Orwell had been to Eton. Paul Krugman asks how could the guardians of economic orthodoxy all suddenly come out in favour not just of fiscal austerity, which was wrong, but also monetary tightening.
It took bad thinking and bad policy by many players to get us into the state we’re in; rarely in the course of human events have so many worked so hard to do so much damage. But if I had to identify the players who really let us down the most, I think I’d point to European institutions that lent totally spurious intellectual credibility to the Pain Caucus. Specifically:
- The OECD, which a year ago demanded both fiscal austerity and a sharp rise in interest rates, because, well, because. Recently the OECD surveyed Britain, concluded that inflation is likely to decline, unemployment to rise, and that the UK should therefore … continue with fiscal austerity and raise rates. As a correspondent wrote, “What planet are they living on? What planet am I living on?”
- The ECB, which bought totally into the doctrine of expansionary austerity, despite overwhelming evidence that it was false, and proceeded to raise rates in the face of a deeply depressed economy — possibly the straw that breaks the euro’s back.
- The BIS, which called for tighter monetary policy just three months ago, to fight a nonexistent inflationary threat. Did I mention that inflation expectations, as measured by the difference between yields on ordinary and index bonds, have been plunging like a stone?
I haven’t developed a full theory of the sociology going on here. But these organisations should be doing some agonised soul-searching, asking how they got it so wrong while posing as high priests of economic expertise.
I don’t have a fully developed one either, but whenever I see this kind of groupthink, especially in economics, I think of years 8-10 at school. You know that time when the opinion of peer group is virtually irresistible. I recall there were codes about how high one wore one’s belt, and the length of your long pants. Too high or too short was death. Now it would have been possible to wear your pants so long or your belt so low as to lapse into parody, but that was pretty easy to judge. So short of that there was a kind of asymmetry. You could be tolerated (at least for your decisions on these things) or decidedly uncool — not really worthy of the normal considerations due to a human being.
And as one might imagine for a species that evolved on the African savannah where the most important pronouns were “us” and “them” we’re very attuned to who’s in and who’s out. Indeed research has recently been reported that we instinctively discriminate against those wearing different coloured wristbands compared with those wearing the same.
In economics there’s the same kind of asymmetry — and it’s around all those things such as fiscal responsibility and no pain, no gain. Now it’s not as if those issues shouldn’t get their due. Moreover it’s also true that there are some powerful forces pushing against them. Easing is more popular than tightening and that matters in a democracy.
And in normal times these kinds of notions are important. So there’s a role in the eco-system for tough-minded, no-pain-no-gainedness. But where one needs emergency expansion, as one did in Australia in 2007, or one is in or close to being in a liquidity trap as is much of the developed world, this asymmetry is deadly. It’s horrible to watch the grip on those who are supposed to be trained to be as rational as possible in these situations.
“Moreover it’s also true that there are some powerful forces pushing against them. Easing is more popular than tightening and that matters in a democracy.”
In theory yes but given a right leaning media, owned by those who tend to think they will benefit from low tax low spend economics and given the co-option of both major parties in most two party democracies (UK, USA, Australia) to one economic pseudo-orthodoxy that favours tightening and given the semi-democracies we live in (ie first past the post in U.K., hardly anyone voting in U.S. and non proportional representation) it actually is quite rare that public opinion on economics is translated into policy settings that reflect it (aside from some pork barreling around election time). Thus the stupid geese who praised the settings that got us into this mess seem to be able to pontificate on how to fix it without everyone just keeling over with laughter/nausea. So the world sails on into a recession setting up policies to make it worse.
It’s all too horrible to contemplate. The ignorant are comparatively blissful, in that they can sit back and hope things get better.
The intellignet know that this is the result of systemic problems in our politics and our academia (economics principally)
The grand failure of capitalism is on show, the inability of capitalism to recognise that there are vast areas of the economy/ecology where market forces can never be let loose, the fact that economics is incapable, as a study, or either relevant analysis or problem solving. Economics is now co-opting fields of research which are more psychology based, which is good, but lets face it, the old study of economics is now laregely a discredited field of endeavour.
There never was, and never has been, rational man (homo economicus)
Psychology, heuristics, these branches of real human behaviour will hopefull assign economics to the dustbin of history.
But we need a new political model, and there is nothing in sight.
I wish you well in your endeavours Mr Gruen. You seem to be free of the mindless orthodoxy that you point out and I trust you can remain so. The analogy of school years from 8-10 is unfortunately apt.
Ah yes, the intellignet! Obviously I’m not a member of that class. Oops!
More spelling errors follow that blunder. Wonderful, I could write for Crikey.
I hate that crikey forums don’t have an edit function.