Economics After the Crisis: Objectives and Means
MIT Press, 128pp, £17.95
The global financial crisis that began in 2007 dealt a severe blow to several of the world’s major economies. At first, it seemed that it would also have a transformative effect on the discipline of economics. The conventional wisdom on topics from asset pricing to monetary policy seemed to have been badly discredited. Economists were pilloried. Even the Queen had a dig, asking the assembled aristocracy of UK economics in 2009 why none of them had seen it coming. But then the crisis subsided. The conventional wisdom that the best way out of a slump is loose money, fiscal austerity and supply-side reform mysteriously rematerialised. Like the Bourbons after their restoration in 1814, economists seemed to have learned nothing and forgotten nothing.
Fortunately, in Adair Turner, the UK has a public intellectual who is persistent enough not to be bamboozled by this bizarre sleight of hand. When he delivered the Lionel Robbins lectures at the London School of Economics in October 2010, Britain’s most versatile economic policymaker did not waste the occasion on ephemera. Instead, he used the three lectures to pose fundamental questions about our economic situation and about economics itself. They have now been published in book form.
In his first lecture, Turner asks whether the conventional emphasis on maximising GDP growth makes sense. He notes that the existence of a direct link between per capita income and welfare has become a shibboleth on both left and right. He concludes, however, that the empirical evidence for such a connection is limited. Consequently, “increasing GDP per capita beyond the levels achieved in rich developed countries . . . is not a useful definition of the overriding objective of economic activity”.
Turner’s second lecture is a re-evaluation of the argument that the extension and deregulation of markets, and especially financial markets, are always desirable. He identifies two alternative schools of thought: the currently dominant, neoclassical one that advocates the growth of financial markets because it constitutes “market completion” and would therefore lead to more efficient resource allocation; and the Keynes/Minsky school, which argues that financial markets are a source of intrinsic instability in the economy. The crisis has left Turner underwhelmed by the theories and methods of the neoclassical school. As a highly experienced regulator, he understands both the theoretical attractions of easily tractable models and their shortcomings in practice. His conclusion is blunt:
[I]t is better to live in the real world of complexities imperfectly understood than to construct for ourselves an intellectually elegant set of assumptions that don’t accord with real-world phenomena.
Turner’s rejection of the implicit objective and the main means prescribed by the pre-crisis orthodoxy and his arguments for what should replace them are important enough in themselves. But it is his third lecture, in which he argues that we need “to reconstruct the way in which economics is taught and practiced”, that elevates this book from important to essential reading for anyone who cares about the subject.
He argues, with John Maynard Keynes, that “economics is a moral and not a natural science”. This means that the economist will have to be “mathematician, historian, statesman and philosopher in some degree”. Critics, including many economics teachers, will reply that such a demand is all very well for the polymathic Lord Turner but represents unreasonable expectations for the average undergraduate. Turner would respond that the recurrent financial crises of the past two decades show that sticking with the status quo is no longer defensible.
If one accepts Turner’s argument that there is a need for a major intellectual revolution in economics, there remains the question of what will bring it about. In his introduction, Turner despairs that the shock of the global financial crisis seems not to have been sufficient. He contrasts this disappointing outcome with the discipline’s change of direction after the Great Depression of the early 1930s.
Unfortunately, the situation is worse than he makes out. Even the Depression did not change economics. The 1930s threw up plenty of new approaches in economics, most of them long forgotten today. The one that did survive to change the discipline – Keynes’s “general theory” – won the day only because the Second World War forced experimentation with its ideas of state control over investment. The disturbing truth is that to change economics, it took both the inspired efforts of a great thinker-cum-policymaker such as Keynes and the force of circumstances even more terrible than the Great Depression.
With this book, Turner has proved that Britain still produces thinkers who combine ideas with practical experience. As for the force of circumstances, we can only hope that the rigid approach of pre-crisis economics drifts into obscurity as gently as the house of Bourbon did in 1830. World war is a ludicrously high price to have to pay to recover economic common sense.
Felix Martin is a macroeconomist. His book “Money: the Unauthorised Biography” will be published by the Bodley Head in 2013