Crash test dummies: a call for bold economic reform

When it comes to solutions to our post-crisis problems, Martin Wolf argues, the first step is to jettison the straitjacket of mainstream economics – and this he proceeds to do.

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The Shifts and the Shocks 
Martin Wolf
Allen Lane, 496pp, £25

Mainstream economics is in crisis. That might seem a melodramatic statement, one that has been made every year for the past half-century. But this time it is true. I say this not because of some personal vendetta, but on grounds with which any self-­respecting economist would find it hard to argue. The consumers have had enough: young people no longer want to study it.

For some time now, they have been voting with their feet. For more than two decades, the number of economics departments in the UK has been declining; and this year, for the first time in living memory, introductory economics was overtaken by introductory computer science as the single most popular course at Harvard University.

More recently, the students have become more vocal. Vigorous movements have sprung up demanding reform of the mainstream curriculum – from the Post-Crash Economics Society in Manchester and the Cambridge Society for Economic Pluralism to the Glasgow University Real World Economics Society and the international Rethinking Economics. These groups say that economics as it is taught in universities does not respect classical academic values of pluralism and intellectual freedom – and so, it has become a self-referential catechism rather than an engine for understanding the economic world.

Does it really matter to the rest of us if students don’t like the way that economics is taught these days? The Shifts and the Shocks, a sparkling book by one of the movements’ more unlikely supporters, shows unequivocally that it does.

Martin Wolf is a figure unique in modern economics. The chief economics correspondent of the Financial Times, he is the Undisputed Heavyweight Economic Commentary Champion of the World, whose regular columns for nearly 30 years have translated worldwide developments in the field into language that the public – and even policymakers – can understand.

Wolf is no armchair theorist or op-ed blowhard: he is a reporter of the old school whose beat is the global decision-making circuit. As the Waugh of Scoop might have said: he has loitered of old at many a World Economic Forum, and forced an entry into many a stricken ministry of finance.

He is also more than a journalist. He has achieved that rarest of feats – to have earned an eminent place among the very policy-makers and academics on whom he reports. When in 2010 the UK government appointed the Independent Commission on Banking to propose reforms to the sector, it turned to the warden of All Souls, Oxford, a former head of Barclays Bank . . . and Martin Wolf.

So, it is no surprise that his new book provides an exceptionally comprehensive, lucid and engaging account of both the main changes that the world economy underwent in the 1990s and 2000s (the “shifts”) and the crisis itself (the “shocks”).

Much has been written about the crisis. No other book, however, presents so clear an explanation of the extraordinary interaction of global macroeconomic and national financial factors behind it: how decisions taken in Beijing by the Central Committee of the Chinese Communist Party could lead inadvertently to a boom in mortgage lending in Arizona and the collapse of eight of America’s largest financial institutions.

Yet it is not – or not just – for this masterful overview of events that you should read this book. It is for its answer to the most fundamental question posed by the crisis: not how, but why, did it happen? More than anything else, Wolf argues, it was mainstream economics itself that was to blame. The drawing up of national budgets, the setting of central bank interest rates, the pricing of shares, bonds and options, all became ever more sophisticated in the decades leading up to the crash. But all were based on a flawed understanding of how the economy works. Remarkable as it may seem now, it was an understanding that assumed away all the things at the core of the crisis: money, banks, finance. By mistaking this fantasy-world for reality, we earned ourselves the ultimate lesson in the power of ideas: “The crisis happened partly because the economic mainstream rendered that outcome ostensibly so unlikely in theory that they ended up making it far more likely in practice.”

When it comes to solutions to our post-crisis problems, Wolf argues, the first step is to jettison the straitjacket of mainstream economics – and this he proceeds to do. The result is a guide to a raft of bold reforms: from experimentation with narrow banking within nations to the introduction of a shared currency for use between them.

The defining demand of the new student economics reform movements is for pluralism. For them, the crisis did more than just expose the flaws in mainstream theory. It showed how dangerous the fixation on a single method of doing economics to the exclusion of all others is. Early on in The Shifts and the Shocks, Wolf sums up why the students are right in a typically succinct epigram: “Naive economics helps cause unstable economies.” His book is a consummate demonstration of how powerful an alternative approach to the subject, rooted in an intimate familiarity with real-world data and unashamedly catholic in its choice of theoretical frameworks, can be.

No one could accuse it of being naive – and if it achieves the wide audience it deserves, it might even make the world economy more stable. 

Felix Martin is the author of “Money: the Unauthorised Biography” (Vintage, £9.99)

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 22 October 2014 issue of the New Statesman, Why Britain and Germany aren't natural enemies