The malaise created by economists

Terrific article in the AFR this morning by Robert Samuelson (no relation to Paul) which demolishes the snake oil economists of both the Keynesian and the monetarist schools. 

It leverages off an OECD report into why its forecasts of growth have undershot so comprehensively over recent years.  He points out that the OECD is not alone in being incapable of accurate forecasts.

The OECD ascribes its failure to reasons like:

  • globalisation: US contagion spreading to other economies.
  •  fragile banks: “Countries with undercapitalised banks fared especially poorly, presumably because the banks lent less.”
  • economic regulation: impeding adjustment in some economies.

There is something in all of these especially the last but the key reasons are that the contagion was one of bad economic ideas almost universally being accepted by the economics profession and readily adopted by the political establishment.  When experts tell politicians that the way out of the morass is to spend more money than they have, or create more credit for businesses and consumers they are offering a painless road to recovery. 

Perhaps something is being learned because the OECD economists are not adopting the Krugman/Yellen line and blaming ‘austerity’ for the problems.  And nor should they in view of the massive budget deficits in place since 2008 and the credit created interest rates of virtually zero. 

He adds,

The great recession and financial crisis changed behaviour in fundamental ways that economists have yet to incorporate fully into their models or theories. The widespread faith that modern societies were sheltered from deep and sustained economic setbacks has been shattered.

He blames economists for both the recession and the boom that preceded it.  The models they use recognise only an incidental place for the supply side.  The models assume that, as night follows day, an upsurge in demand from whatever source will result in a multiplier response where investors will increase capacity and the wagon trade will again roll forward. 

Instead, what was always recognised pre-Keynes (and pre-Friedman, his monetarist tweedle dee), is that increased income  requires savings and investment or its equivalent in improved production methods.  There is little role for these notions in the modern teaching of economics which injects a perverse effect from the subject as it is taught in most universities and schools. 

And it seems that the Keynesian and monetarist economists fail to realise that the key factor driving first the West, and then Japan and the Taiwans, Singapores and Koreas, and now China was high savings levels that were canalised for the most part entrepreneurially into market responsive uses and not directed (Soviet style) into government winner picked venues.

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5 Responses to The malaise created by economists

  1. JohnA

    “…and the waggon trade will again roll forward.”

    A nice typo that demonstrates the hatred of the Regressives (thanks to whoever coined that one) for the car industry.


  2. Squirrel

    “When experts tell politicians that the way out of the morass is to spend more money than they have, or create more credit for businesses and consumers they are offering a painless road to recovery. ”

    Yes – feeding an addiction may, for a time, assist in managing the symptoms of the addiction, but will not cure it.

  3. .

    Now my disciples,

    Y = f(K, L, l, A, t…)

    Anything which contradicts this is bullshit.

  4. Jim Rose

    alan, see Hetzel, Robert L. The Great Recession: Market Failure or Policy Failure? Cambridge: Cambridge University Press, 2012 for a monetarist counter-punch.

    Hetzel places the blame for the Great Recession firmly on tight monetary policy in 2008, not the bursting of the housing bubble and the financial crisis in September 2008.

    Hetzel argues that “A moderate recession became a major recession in summer 2008 when the FOMC ceased lowering the funds rate while the economy deteriorated” because of a concern that the persistence of high headline inflation (a result of increased energy prices) “would raise expected inflation above its implicit 2% target” (p204).”

    See for a good review by hugh rockoff

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