We always need sceptical economists

Paul Sweeney: There is a growing consensus that the collapse in the world economy is due largely to the failure of the liberalisation, privatisation, de-regulation and tax cutting polices. Yet many economists are in shock. Conservative economists’ intellectual belief in the self-correcting workings of the free market has exposed the inadequacy of their theoretical foundations. Life – the real economy – has badly let them down.

This week, the British Government, after three big bail outs of the profitable East Coast Railway, had to renationalise it; the operator walked away because the profit was not big enough. The cost of off-balance sheet PPPs has had to be realised, while plans for additional ones – such as the mooted privatisation of the Royal Mail – have had to be cancelled.

The lack of scepticism among many economists, their incredible confidence in their own beliefs - as if they were scientifically based - has always puzzled. It may be due to the lack of knowledge of economic history and the history of economic thought, and/or to the narrow focus on econometrics. This latter adds to the illusion of scientific rigour but is not a substitute for intelligent, rigorous analysis of real world economics.

There is also the narrowness of real economic debate in Ireland’s universities and in the media. The neo-classical training of economists appears to engender a deep conservatism, a lack of intellectual curiosity and a fascination with technical detail, which ignores the fundamental, policy-relevant issues.

So where are the sceptical economists? I immediately think of four popular economists, three in the US, Paul Krugman, Jamie Galbraith and Joe Stiglitz and Will Hutton in the UK. All have been battling for a new Keynesian economics for some time. They favour a stimulus package amongst other actions, while conservatives want to cut public expenditure.

Last night on Newsnight Stiglitz described the current economic system as “Casino Capitalism.” He said that the weak response by the state on both sides of the Atlantic to the banking crisis was due in large part to the power of financial capital. Even a popular government like Obama’s has not done enough on tackling the power of the banks, he claimed. This is strong comment. We seldom get such strong critical comment in Ireland, though Morgan Kelly of UCD has not minced his words.

While the left has never believed in the self-correcting market, it is important that it is also sceptical of the operation of the state on economic and social matters too. PPARS, useless voting machines, nursing home scandals, poisoning women with bad blood, facilitating the physical and sexual abuse of children for decades, and overflowing sewage works are just some of the more costly state failures. And the money, billions of our tax euros, is not the only cost of these failures by our public service and the politicians who make the main decisions.

But in financial terms, all state failures pale in comparison to the costs of the disastrous economic polices pursued in Ireland between 1998 and 2005/6. The strongly pro-cyclical, tax-cutting policies in a domestic boom, along with adherence to the efficient markets theory by many in our own Department of Finance and the Financial Regulator, allowed the banks to compound our economic collapse; the vast costs of these mistakes are impossible to estimate.

Had key powerful economic state officials been more sceptical of the markets, we might have had some internal opposition to PD McCreevy’s tax cutting policies, and we might have had better bank regulation. The result would have been a more manageable economic downturn. The state was supposed to protect us from the worst excesses of the market. The state let us down, so badly, that the cost may run for decades.

While this failure was largely due to the “intellectual capture” of the cream of the state’s economic establishment by the free market fundamentalists, the reasons are of little comfort to ordinary people. But we must try and learn the political and economic lessons of why this occurred.

How did an economic ideology become so dominant that it captured the minds of so many? McCreevy, the PDs and many in the media sold the pup. But why did so many generally conservative public servants and others buy it?

While progressives can take heart that much must now change, unless we come up with much more coherent strategies Ireland and Europe are likely to end up many cul-de-sacs in the road to building a new economic system that works. This has to include a new paradigm of utilising the best of the public and private sectors.

The excoriation of the public sector by the defeated, retreating storm troopers of new-liberalism has served to distract from the consequences of the abject failure of their market fundamentalism. Yet these attacks have taken us up the first alleyway, away from addressing real economic issues.

The emergence of popular debate on economics in a number of Irish blogs is most welcome. However, the print media, especially the Irish Times, which took comment from academic economists for a time, is again reverting to promoting the utterances of the PR economists from the stockbrokers and finance capital as “fact”. There is no scepticism there – a few facts and self-confident, Big Opinions, rooted in “economic science”! The late Paul Tansey is sorely missed for fairness, accuracy, and most of all, for his perception, which was rooted in a degree of healthy scepticism.