Uncertainty is news for economists, and the Great Uncertainty is the biggest news of all

The financial crisis in an age of uncertainty.

In this, the second in a series of linked posts on what we have termed the Great Uncertainty, we turn our attention to the nature of the current financial crisis. We explore the implications, in particular, for how we think (or should think) about the economic dynamics of both crisis and recovery in the uncertain circumstances in which we now find ourselves.

What, in brief, is this financial crisis? It is a largely Western crisis brought about by neoliberal excess and lack of proper political control. It has prompted a widespread politics of austerity and now renders the resumption of economic growth a severe conundrum for the US, Japan and nearly all major European economies, including Britain. For the rest of the world the financial crisis has undoubtedly been challenging, chiefly because of its impact on Western demand and levels of business activity. But it has manifestly not stopped growth in China, India, Brazil and many other parts of Asia, Latin America and indeed Africa.

All of this is obviously well enough known by now. But we maintain that it is still not well enough understood. We want here to make three points about how we should go about making up for the paucity of our current understanding of the financial crisis precisely by relating it to the condition of the Great Uncertainty in which we find ourselves.

The first point – made very much in the spirit of SPERI and the kind of analysis it has sought to provide since its launch just over a year ago – is that such dynamics are always profoundly political. We need an analysis of economic processes that acknowledges this – a political economy as distinct from an apolitical economy. There is no economics without politics, just as there is certainly no modern politics without economics (in the sense that any contemporary politics has economic conditions of existence).

This is why it is such a shame that the disciplinary division of labour between professional economics and political science has produced a cavernous gap where once there was a pre-disciplinary political economy (of Adam Smith, David Ricardo and Karl Marx). Disciplinary parochialism, and the disciplinary professionalisation with which it is so often associated, prepares us poorly for the analysis of the politics in our economics and the economics in our politics.

But, if we are right and the economic has always been political, just as the political has tended to be economic (in the sense that any contemporary politics has economic conditions of existence), then why is this any more important today in times of acknowledged crisis? The answer lies in uncertainty – something else for which the disciplinary fault-lines between economics and political science does not prepare us well.

The point, our second point, is a very simple one. Uncertainty is news for economics. This is certainly the case for modern mainstream professionalised neoclassical economic theory, which is the basis of the economics in and through which we have been governed for far too long. By contrast, uncertainty is not news at all for political economists. Indeed, it is, in a sense, the founding premise of any genuinely political economy.

For to acknowledge that economic dynamics are necessarily and profoundly political is to acknowledge that there are no politically unmediated logics of economic compulsion – that economics is not a source of logics (as distinct from rhetorics) of no alternative. ‘There is no alternative’ is never the description of an economic reality: it is a (typically mendacious) strategy of political legitimation.

But why is this important and why it is important today? This is our third point. It is about modern economic theory, the crisis and (un)certainty. Modern economic theory is formal theory, constructed from a series of abstract premises about the rationality, self-interest and narcissism of homo economicus – economic ‘man’ (sic). It paints a picture of the world and builds models of it on the basis of such assumptions.

However, these assumptions are not chosen for their accuracy or their credibility, but precisely because they make possible the kind of abstract formal algebraic model building which is modern economic theory’s raison d’être. Modern economics is about making economic systems amenable to this kind of modelling – and that entails a commitment to analytical assumptions which are, at best, crassly distorting simplifications and at worst demonstrably false.

In fact, it is precisely this that makes mainstream economics so attractive to policy-makers. It both claims to be and ‘looks’ very scientific. It is neat and reproducible and its models lead typically to clear policy inferences. It does what policy-makers want and it has the added attraction of doing so in a way that is largely immune to critique from those not fluent in the private language in which it is conducted. In short, it ‘depoliticises’ and ‘technicises’ economics – and that is precisely what makes it attractive (and hence relevant) to political elites.

But this comes at a massive price – as we are now all too well aware. For, crucially for us (for all of us), the assumptions which make mainstream economics so attractive to political elites are equilibrium assumptions. Modern economics, in other words, offers us a spurious science of equilibrium – a science of certainty in an age of uncertainty. Its models informed the thinking and the conduct of those who inflated the bubble whose bursting precipitated the crisis. As such, it is deeply and profoundly implicated in the crisis. This is their crisis.

The conclusion we reach is that we cannot allow the economics of certainty to govern again the world of Great Uncertainty in which we live. Acknowledging uncertainty in a moment of great uncertainty should be the starting-point for all economic thought. That, we contend, entails a political economy, the kind of political economy that SPERI espouses and seeks to promote.

This is the first in a five-post series on the "Great Uncertainty".

Professors Colin Hay and Tony Payne are Directors of the Sheffield Political Economy Research Institute at the University of Sheffield.

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.