Are things changing in the economics profession?
Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)
Originally published in Spanish at vozpopuli (en Español)
Translated and edited by BRAVE NEW EUROPE
There is a deep crisis of vision in modern economic thinking in the dominant orthodox macroeconomics. In recent decades these economists have proposed a series of economic recipes, or business recommendations, based on a set of “indisputable truths”, when in reality they represented nothing more than previous methodological judgements of an ideological nature. For years I have been explaining the falsity of the vast majority of their initial hypotheses. If the recommendations remained mere reflections contained in academic articles, well, that would be fine. The problem is that politicians, bankers, businessmen transfer these ideas, these recommendations, because they fit in very well, in economic policy measures, or in business decision making. So, yes, Houston, we have a problem.
Now many of those responsible for this process intend to abandon the ship unseen, as if nothing had ever happened. A typical example is a tweet from the beginning of this month from the former chief economist of the IMF, Olivier Blanchard, who in May 2008 explained to us the wonderful state of the global macroeconomy, its virtuous cycle. He wrote in this recent tweet, without any qualms, “Weighing my words carefully: we may be on the verge of a fiscal paradigm shift. Proof of concept: the great agreement between Summers, Furman, Bernanke, Rogoff and myself…” Let the champagne corks fly! As William Mitchell recently detailed, “In a desperate attempt to remain relevant when the paradigm that they have been pushing for decades, which has devastated economies and people’s lives, is now being exposed as a failure, they are jumping ship and putting themselves at the forefront of the new era”.
The crisis of vision in modern economic thinking
In May 2012, I published a blog whose title paraphrased that of a book published in the mid-1990s by the economist and historian of economic thought Robert Heilbroner and his pupil William Milberg, “The Crisis of Vision of Modern Economic Thought“. Even then, the authors anticipated the intellectual void and fallacies behind the elegant mathematical models of orthodox macroeconomics, which led to the Great Recession. Already in 1996 Heilbroner and Milberg claimed that a devastating crisis, wider and deeper than ever, was affecting modern economic theory. The crisis in question was a consequence of the absence of a vision, of a set of those shared political and social concepts on which an economy ultimately depends. The decline of the economic perspective has been followed by various trends whose common denominator was an impeccable elegance in setting out the terms, accompanied by an absolute ineffectiveness in their practical application.
Among the economists who anticipated the Great Recession well in advance, in addition to Wynne Godley, undoubtedly one of the most elegant macro-economists the profession has ever produced, memorable for his Seven Unsustainable Processes, were Australian post-Keynesian economists Steve Keen and William Mitchell, among others. Steve Keen in The WHO warns of outbreak of virulent new ‘Economic Reality’ virus, published in the Review of Keynesian Economics, mercilessly destroyed the foundations and falsehoods of the dominant economy, that which still governs the economic policies of half the world. He used a fine irony: “A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.” The WHO now deeply regrets its early complacency, since almost immediately after the Blanchard outbreak in 2016, an even more virulent strain of the virus appeared: the ‘RR’ or ‘Romer Reality’ variant, in reference to the Yale University professor who definitively disavowed the entire theory under which he had been brought up. We are referring to Paul Romer. And this strain of the virus is indeed resistant and very worrying”.
The evidence against orthodox macroeconomics is accumulating
Yes, the 2018 Nobel Prize winner in economics, Paul Romer, published in September 2016 an indispensable article for every student of economics, The Trouble with Macroeconomics. (you can continue to see Romer’s updated reflections on this website). The summary of the article could not be more devastating: “Over the past three decades, the methods and findings of macroeconomics have deteriorated to the point that much of the work in this area can no longer be described as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation of large Keynesian models, and it is worse because it is much more opaque. The major concern is that macroeconomic pseudoscience is undermining the standards of science across the economy. If so, all policy domains that touch the economy could lose the accumulation of useful knowledge that characterises true science, the greatest human invention”. Demolisher Romer. As we have pointed out before, the problem is that these theories, idealised by macroeconomists, are applied by bankers, industrialists, technocrats, and politicians. Mainstream macroeconomics has proved to be useless and dangerous for the management of the real economy, constituting a purely ideological position capable of ignoring and denying the causes of the Great Recession.
Let me finish with three academic articles just out of the oven, and which continue to dismantle the foundations of macroeconomic pseudoscience. The first, “The Economic Consequences of Major Tax Cuts for the Rich“, a working paper from the International Inequality Institute at the London School of Economics, where the authors conclude “We find that major tax reforms that reduce taxes on the rich lead to greater income inequality… By contrast, such reforms have no significant effect on economic growth and unemployment. Without comment, all the nonsense put forward to cut taxes for the richest, does not fit the reality and the data.
The second article, recently published, is a European Central Bank working paper, “Losers amongst the losers: the welfare effects of the Great Recession across cohorts“, whose author concludes that “young people bear disproportionate burdens during the recession in the short term, but also face a diminishing long-term outlook”. The article refers to some of the main fictions that have been propagated to induce governments to use fiscal deficits only to smooth the economic cycle, namely the alleged burden that the excesses of the current generation (the public deficit) create for their children and grandchildren (who, according to the children’s tale of orthodoxy, have to pay the debt incurred by such excesses). The third and last, “Does Austerity Cause Polarization?” deals with the political consequences of austerity: the authors conclude that austerity is a major determinant of political destabilisation in democratic industrialised countries.
On the basis of these reflections, allow me to pose a final question: Do those of you in Europe and here in our own Spanish Ministry of Economy understand that we are heading for a crisis of solvency of families and companies, where Minsky’s “Big Bank” will have to intervene, together with the Treasury and other government bodies, to clean up the financial mess and guide the restructuring of the balance sheet (or, more often, the rescue) of families and domestic companies, financial and non-financial? I’m afraid not yet!
May 2021 be a better year than the annus horribilis that is about to end.