The Renminbi and the Rise of China in Global Trade and Finance


April 10, 2017

The Renminbi and the Rise of China in Global Trade and Finance

by Paola Subacchi, Chatham House

http://www.eastasiaforum.org

“…any suggestion that the renminbi may one day rival the dollar and seriously threaten the greenback’s dominance within the international monetary system remains wishful thinking. The renminbi is moving in the right direction, but much more needs to be done to make it into a pillar of this multi-currency system.”–Paola Subacchi

At times of big turmoil, currencies take the hit, but economic transformation can also create currency winners. Nowhere is this more apparent than when we compare the prospects of British sterling and China’s renminbi.

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Between February 2016 — when the referendum on the UK’s membership of the European Union (EU) was announced — and the end of January 2017, the sterling fell by 14 per cent against the US dollar. Then, at the beginning of October, when the UK government appeared to signal a preference for a clear break with the EU — a ‘hard Brexit’ — the sterling dropped again by 6 per cent.

As the British government is serving notice on the membership of the EU, it is not yet clear what the future relationship will look like. Will Britain remain a member of Europe’s single market? Or will it embrace a totally independent trade policy to maintain control at its borders?

Currencies not only reflect geopolitical dynamics, but also patterns of trade and debt. A weak currency is not much help for an economy that imports more than it exports. The UK has a significant deficit in its current account — roughly, it consumes more than it produces — at almost 6 per cent of GDP. Of course, a weak currency would lower the prices of exports, but only if these goods are produced with limited inputs from imports.

In a world of global supply chains this is questionable. Even assuming that a weak sterling would help shift the UK model of growth from domestic demand to exports, this adjustment will take time and is unlikely to cushion the adverse impact of Brexit on real GDP growth in the next few years.

The ‘hard Brexit’ option, by reducing market openness, will affect investors’ confidence, have an adverse impact on capital inflows and undermine growth. If the UK becomes less attractive as an investment destination, and stricter immigration policies cause the labour force to shrink, then Britain may find it difficult to attract the quantity of foreign capital and labour necessary to sustain a domestic demand-driven economy.

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The sterling remains in the IMF’s Special Drawing Rights (SDR) basket of international reserve currencies. To some extent the sterling has been a proxy of British global influence: on the way down, but still ‘punching above its weight’. But the sterling’s protracted weakness coupled with the inclusion of the Chinese renminbi in the SDR basket — in effect from the beginning of October 2017 — may result in downgrading the pound when the composition of the basket is reassessed in 2020.

If currencies are an expression of national sovereignty, they also epitomise the limits of such sovereignty in an open economy. Exchange rate dynamics tend to reflect divergences between domestic politics and global markets. Thinking that domestic policy making can be insulated from the rest of the world, so that no coordination or cooperation is needed, is deeply fallacious. The sterling’s troubles are a reminder that foreign investors have an indirect say — and interest — in how a country is managed.

The inclusion of the renminbi among the currencies that compose the SDRs — the US dollar, the euro, the yen and the sterling — is a ‘milestone’ for China, as International Monetary Fund Managing Director Christine Lagarde said when she presented the IMF executive board’s decision on 30 November 2016.

The renminbi’s inclusion recognises the work that China’s monetary authorities have done in the last five years to push the renminbi’s transformation into an international currency — a currency that can be used to invoice and settle international trade and that is traded in international capital markets. The outcome of this process has been remarkable: approximately 25 per cent of China’s trade is now settled in renminbi — it was less than 1 per cent in 2009.

In addition, the inclusion somehow addresses the contradiction that China has faced for years: being the world’s second largest economy and the largest exporter without a currency that reflects that role. For years the dollar has been the currency used in China’s trade and investments, and this is still largely the case. This has suited China well throughout its transformation from a poor and isolated nation into an industrial powerhouse that is well integrated in regional and international supply chains.

But China’s dollar dependence no longer reflects Beijing’s ambitions for playing a more engaging and assertive role in international economic and financial affairs and governance. If ‘great nations have great currencies’, to paraphrase Nobel laureate Robert Mundell, then it is understandable that the Chinese leadership would push to turn the renminbi into a ‘great currency’.

Finally, and even more critically, being part of the SDR basket implicitly recognises the role that the renminbi, going forward, can play in the international monetary system. The hype that has surrounded the IMF decision — the SDR made headlines beyond the financial press, perhaps for the first time since its creation in 1969 — should not obscure the fact that the development of the renminbi is not a linear process, even if it is heavily policy-driven, and there is no guarantee that progress will continue at the same remarkable pace. The renminbi remains a currency with limited international circulation because of obstacles that are still in place to constrain capital flows into and from China’s domestic market.

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This is not the case for trade transactions, where the renminbi has been fully convertible since 2001 when China joined the World Trade Organisation. But what is the incentive for foreign businesses to hold renminbi if liquidity is constrained and therefore so are investment opportunities?

To make the renminbi into an international currency that foreigners want to hold as a store of value the Chinese leadership needs to continue the pace of reforms. Top of the list is the exchange rate and the abandonment of the system where the central bank intervenes every time the value of the renminbi moves outside a pre-determined range. Until foreign investors believe that the renminbi is liquid and trustworthy, any suggestion that the renminbi may one day rival the dollar and seriously threaten the greenback’s dominance within the international monetary system remains wishful thinking. The renminbi is moving in the right direction, but much more needs to be done to make it into a pillar of this multi-currency system.

Paola Subacchi is Director of Economic Research at Chatham House, London, and the author of The People’s Money: How China Is Building a Global Currency (Columbia University Press, 2017).

 

The Anatomy of Populist Economics


February 27, 2017

The Anatomy of Populist Economics

by Economist Brigitte Granville*

http://www.project-syndicate.org

Today’s populist movements are all following a similar economic prescription, and governments in Hungary, Poland, and the US are giving the world an early dose of what the future may hold. Will voters swallow the medicine, or will they soon start seeking a second opinion

For at least the past year, populism has been wreaking havoc on Western democracies. Populist forces – parties, leaders, and ideas – underpinned the “Leave” campaign’s victory in the United Kingdom’s Brexit referendum and Donald Trump’s election as President of the United States. Now, populism lurks ominously in the background of the Netherlands’ general election in March and the French presidential election in April and May.

But, despite populism’s seeming ubiquity, it is a hard concept to pin down. Populists are often intolerant of outsiders and those who are different; and yet Geert Wilders, the far-right Dutch populist leader, is a firm believer in gay rights. In the US, Trump’s presidential campaign was described as an anti-elite movement; and yet his administration is already practically a subsidiary of Goldman Sachs.

While today’s populist resurgence comes from the nationalist right, some of the leading populist exponents in recent decades – such as Venezuela’s late president, Hugo Chávez – were firmly on the left. What they share is a zero-sum view of the world, which necessitates the creation of scapegoats who can be blamed for all problems. Moreover, because populist leaders claim to embody the uniform will of a mythical “people,” they consider democracy to be a means to power, rather than a desirable end in itself.

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But populists have more in common than an obsession with cultural boundaries and political borders. They also share a recipe for economic governance, one that Project Syndicate commentators have been tracking since long before today’s brand of populism began dominating the world’s headlines. Guided by their insights, we can begin to understand the origins of today’s populist resurgence, and what is in store for Western countries where its avatars come to power.

Diagnosing the Problem

Given populism’s many faces, is it really possible to identify a root cause? For Warwick University’s Robert Skidelsky, it is no coincidence that the two major political upheavals of 2016 – the Brexiteers’ success in last June’s referendum and Trump’s election victory – occurred in “the two countries that most fervently embraced neoliberal economics.” The US and the UK’s economic model over the past few decades, Skidelsky observes, has allowed for “obscenely lavish rewards for a few, high levels of unemployment and underemployment, and curtailment of the state’s role in welfare provision.” And this widening inequality, he writes, “strips away the democratic veil that hides from the majority of citizens the true workings of power.”

But Gavekal Dragonomics Chief Economist Anatole Kaletsky sees another dynamic at work, and offers “several reasons to question the link between populist politics and economic distress.” For starters, he points out that “most populist voters are neither poor nor unemployed; they are not victims of globalization, immigration, and free trade.” Having analyzed Brexit exit polls and voter-survey responses, Kaletsky concludes that “cultural and ethnic attitudes, not direct economic motivations, are the real distinguishing features of anti-globalization voting.”

At first blush, these arguments may seem incompatible; but their disagreement is really only between ultimate and proximate causes. For Skidelsky, “It is when the rewards of economic progress accrue mainly to the already wealthy that the disjunction between minority and majority cultural values becomes seriously destabilizing.” Likewise, for Kaletsky, “The main relevance of economics is that the 2008 financial crisis created conditions for a political backlash by older, more conservative voters, who have been losing the cultural battles over race, gender, and social identity.”

Harvard political philosopher Michael Sandel warns against focusing exclusively on “the bigotry in populist protest” or viewing it “only in economic terms.” The fundamental issue, he argues, is “that the upheavals of 2016 stemmed from the establishment’s inability to address – or even adequately recognize – genuine grievances.” And, because these grievances “are about social esteem, not only about wages and jobs,” they are difficult to disentangle “from the intolerant aspects of populist protest” – namely, anti-immigrant sentiments.

Nobel laureate economist Edmund Phelps also links populist voters’ anger to their loss of dignity in the larger political economy. As the share of US employment in manufacturing has steadily declined, blue-collar workers, Phelps notes. “have lost the opportunity to do meaningful work, and to feel a sense of agency.” In other words, “losing their ‘good jobs’” meant losing “the central source of meaning in their lives.” And while many of the lost manufacturing jobs were replaced with new jobs in new sectors, as Oxford University historian Margaret MacMillan cautions, nuanced economic arguments “cannot counter the unhappiness of people who feel marginalized, undervalued, and scorned.”

A Democratic Disease

Princeton University’s Jan-Werner Mueller, who published a highly regarded book about populism last year, has identified such “feelings of dispossession and disenfranchisement” as “fertile ground” in which populist politicians can sow seeds of resentment. And, in an earlier commentary that long predated the current news cycle, Mueller explained that, “Populism cannot be understood at the level of policies; rather, it is a particular way of imagining politics.” Above all, he observes, the populist imagination is inherently divisive: “It pits the innocent, always hard-working people against both a corrupt elite (who do not really work, other than to further their own interests) and those on the very bottom of society (who also do not work and live off others).”

In its more virulent forms, populism can be thought of as being akin to an autoimmune disease, whereby democracy gives rise to forces that attack it. Andrés Velasco, a former finance minister of Chile, laments that the nature of representative democracy can create an impression that politicians are “distant and untrustworthy.” The “rhetoric of modern democracy,” he writes, “emphasizes closeness to voters and their concerns.” But elected representatives cannot spend all of their time interacting with constituents when they have a duty to govern. When this dissonance between rhetoric and reality becomes “too glaring,” Velasco notes, “political leaders’ credibility suffers.”

This loss of trust leads disaffected citizens to put a premium on perceived authenticity. So, “although populist policies reduce overall economic welfare,” Velasco notes, “rational voters choose them because they are the price of distinguishing between different types of politicians.” In fact, such a willingness to suffer further economic pain in order to avenge elite betrayals and strike back at scapegoats may be a defining element of today’s populist resurgence.

Populist leaders in Hungary and Poland, who are currently advancing their own brand of “illiberal democracy,” seem to have staked their governments’ future on this presumption. As Central European University’s Maciej Kisilowski points out, it may not even matter that “the high economic costs of illiberal democracy are already apparent.” These countries’ electorates, Kisilowski surmises, “may regard economic stagnation as an acceptable price to pay for what they want most: a more familiar world where the state guarantees the dominant in-group’s sense of belonging and dignity, at the expense of ‘others.’”

Sławomir Sierakowski of the Institute for Advanced Study in Warsaw provides further support for this point. When Jarosław Kaczyński’s Law and Justice Party (PiS) returned to power in Poland a year ago, many assumed that it would quickly fail. Instead, it has succeeded, because Kaczyński mastered the politics of “two issues near and dear to voters: social transfers and immigration,” Sierakowski explains. “As long as he controls these two bastions of voter sentiment, he is safe.” Of course, given the PiS government’s politicization of the courts, the civil service, and the press, the same cannot be said for Poland’s democratic institutions.

A Populist Placebo

But how long can populist governments sustain generous transfers in the absence of strong economic growth? The answer will depend on how long their supporters remain convinced that they can have their cake and eat it – which is precisely what former Brexit leader and current British Foreign Minister Boris Johnson promised to Leave voters. Indeed, as Columbia University’s Jeffrey Sachs observed just after the Brexit vote, “Working-class ‘Leave’ voters reasoned that most or all of the income losses would in any event be borne by the rich, and especially the despised bankers of the City of London.”

Given the UK economy’s unexpected resilience last year, the populists probably feel vindicated. But, though most economists misjudged “the immediate impact that the United Kingdom’s [vote] would have on its economy,” writes Chatham House’s Paola Subacchi, “a gloomy long-term prognosis is probably correct,” given British leaders’ desire for a complete break from the European Union’s single market and customs union.

Such delayed effects can create an alibi for unsustainable policies, which, according to Velasco, is precisely “how economic populism works.” For example, the approach that Trump seems likely to take – tax cuts, growth-stimulating measures, and protectionism, with little thought given to inflation or public debt – is untenable, and will ultimately fail. But, as Velasco puts it, “‘Ultimately’ can be a very long time.” And that can give populist governments more staying power than many observers assume. “Populist policies are called that because they are popular,” he notes. “And they are popular because they work – at least for a while.”

In the meantime, populist leaders can pursue policies favored not only by their base, but also by many of their opponents. In the whirlwind of his first days in office, for example, Trump fulfilled his campaign promise to abandon the 12-country Trans-Pacific Partnership (TPP). This, Princeton University’s Ashoka Mody believes, was actually a welcome move, given that “international trade agreements, propped up by powerful interests, have become increasingly intrusive.” Similarly, before Trump’s election, Harvard University economist Dani Rodrik called for a rebalancing “between national autonomy and globalization.” In Rodrik’s view, it should go without saying that “the requirements of liberal democracy” must come before “those of international trade and investment.”

Trump’s promise of corporate tax reform has also wide appeal beyond his electoral base. For Harvard’s Martin Feldstein, who chaired President Ronald Reagan’s Council of Economic Advisers, current legislative proposals to overhaul the US’s outdated tax system could “have a highly favorable impact on business investment, raising productivity and overall economic growth.” Assuming that Trump, working with congressional Republicans, can strike the right policy balance, he will have bought himself some time with the business community.

Princeton University economic historian Harold James makes a related point, arguing that “the economics of US populism will not necessarily fail, at least not immediately,” owing to the US’s “uniquely resilient” position in the global economy. “Because [the US] has historically been the global safe haven in times of economic uncertainty,” James notes, “it may be less affected than other countries by political unpredictability.”

A Turn for the Worse

But even if Trump can extend his honeymoon, James does not discount the possibility that “today’s contagious populism will create the conditions for its own destruction.” One way that could happen, argues Benjamin Cohen of the University of California, Santa Barbara, is if the US loses its “exorbitant privilege” as the issuer of the dominant international reserve currency. If Trump “pursues his protectionist promise to put ‘America first,’” Cohen writes, “investors and central banks could gradually be impelled to find alternative reserves for their spare billions.”

Trump’s version of economic populism could also face a reckoning if it results in a new boom-bust cycle – one that could end in a period of stagflation around the 2018 US congressional elections. Just before the election, Feldstein warned that “overpriced assets are fostering an increasingly risky environment.” Given that the US economy is already at full employment, with an inflation rate near 2%, Trump’s planned fiscal stimulus could push it into overdrive, and force the Federal Reserve to raise the federal funds rate.

Such a scenario would certainly worsen the plight of Trump’s constituency of white working-class voters in America’s former manufacturing heartland. But so, too, would his trade proposals, which could easily precipitate trade wars with China, Mexico, and other trading partners. Trump has told displaced blue-collar workers to blame trade deals and competition from imports for the loss of their jobs. But, “with productivity gains exceeding demand growth” worldwide, Nobel laureate economist Joseph Stiglitz points out, America “would have faced deindustrialization even without freer trade.”

Given this, Trump’s prescription of trade protectionism, Stiglitz says, will only “make all Americans poorer.” One reason, explains former World Bank Chief Economist Anne Krueger, is that imports create and sustain jobs, too. The irony of Trump’s proposed import tariffs is that they threaten American exporters. Many export-industry jobs, Krueger points out, exist because inexpensive imports enable American manufactures to compete domestically and abroad; and “exporting to the US gives foreigners more income with which to buy imports from the US and other countries.”

Simon Johnson of MIT also fears such a lose-lose scenario. If Trump starts taxing imports, Johnson argues, “the cost per job will be high: all imports will become more expensive, and this increase in the price level will filter through to the cost of everything Americans buy.”

Botching the Operation

Other Project Syndicate commentators have pinpointed a deeper flaw in populist economics, apart from any specific policy proposal: recklessness. Populists often overplay their hand by flouting legal, economic, or political conventions, or by exerting inappropriate influence in markets to try to funnel benefits to their supporters. In fact, according to a classic study of economic populism in Latin America by Sebastián Edwards of UCLA and the late Rüdiger Dornbusch of MIT, it is standard populist practice to show “no concern for the existence of fiscal and foreign exchange constraints” in the pursuit of faster growth and redistribution.

New York University’s Nouriel Roubini suspects that Trump may be similarly tempted to interfere inappropriately in currency markets. As his stimulus measures push up the value of the dollar, Roubini says, “Trump could unilaterally intervene to weaken the dollar, or impose capital controls to limit dollar-strengthening capital inflows.” But if Trump is too reckless with his “damage-control methods,” already-wary markets will succumb to “full-blown panic.”

Mody, for his part, sees serious risks in Trump’s interference in corporations’ practices and business decisions. By bullying companies over Twitter to keep jobs based in the US (or to punish them for dropping his daughter Ivanka’s clothing line), Trump has already begun to undermine “the norms and institutions that govern markets.” And in Phelps’s view, Trump’s Twitter interventions, combined with his deregulation agenda, risk entrenching corporatism at the expense of the innovation and competition necessary to sustain economic dynamism and income growth.

The Search for a Cure

With populist movements leaving political establishments reeling, could a positive counter-populist economic policy agenda soon emerge? The Nobel laureate economist Michael Spence sees an opportunity in disaffected voters’ rejection of an insufficiently inclusive economic-growth model. “With previous presumptions, biases, and taboos having been erased,” he writes, “it may be possible to create something better.” Likewise, for Stiglitz, Trumpism’s silver lining is that its opponents are experiencing “a new sense of solidarity over core values such as tolerance and equality, sustained by awareness of the bigotry and misogyny, whether hidden or open, that Trump and his team embody.”

An implicit argument running through many Project Syndicate commentaries is that the only prophylactic against economist populism is more aggressive redistribution. As Rodrik puts it, populism – and poor governance generally – emerges when elites prove unwilling to “make adjustments to ensure that everyone does indeed benefit” from the existing economic model.

Behind recent, large-scale rejections of the “system” is a widely shared sense among certain groups of voters that the “establishment” has subordinated citizens’ interests to cosmopolitan goals such as globalization, immigration, and cultural diversity. Most commentators agree that economic shocks such as the Great Recession or the eurozone sovereign-debt crisis are neither necessary nor sufficient to explain the rise of populism. Rather, populism is more a response to prolonged economic malaise, deteriorating living standards, declining trust in established institutions, and a common perception that incumbent leaders have feathered their nests at the people’s expense.

These are complex economic and political problems for which populism offers fancifully simple solutions. Efforts by the media to move the populist mind have proved counter-productive, and will likely continue to do so.Those opposed to the populist cure will have to come up with an equally powerful alternative, or look on helplessly as economic uncertainty and despair overwhelm the patient.

Economists in Denial


February 27, 2017

Economists in Denial

By Lord Skidelsky*

https://www.project-syndicate.org/columnist/robert-skidelsky

*Robert (Lord) Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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View from above of the Bank of England. The central bank of the UK manages the sterling currency and regulates financial transactions. Banker to Central Banks.

Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.

Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.

It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.

Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. The reason is that most people are creatures of habit. Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand.

Central banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.

This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on recurring patterns of behavior will fail when something genuinely new happens.

Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of quantifiable risk fail when faced with radical uncertainty.

The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.

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Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” Likewise, many Brits are now more confident about the future.

This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat.

The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior.

Keynes’s economics was about the logic of choice under uncertainty. He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past.

There have been a few scattered attempts to meet the challenge. In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.” Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices.

The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.” Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.”

But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. Haldane, too, seems to put his faith in larger data sets.

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A Towering Figure in Economics–Lord Keynes

Keynes, for his part, didn’t think this way at all. He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. To offer meaningful descriptions of the world, economists, he often said, must be well educated.

 

Unveiling Donald J. Trump – the Revolt against the Establishment


February 25, 2017

The HUFFINGTON POST.

 

Unveiling Donald J. Trump – the Revolt against the Establishment

Joergen Oerstroem Moeller, Visiting Senior Fellow, ISEAS-Yusof Ishak Institute, Singapore

http://www.huffingtonpost.com/entry/unveiling-trump-the-revolt-against-the-establishment_us_58accad3e4b0598627a55e1a

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Why are people turning their backs on the ‘Western’ model? The Reason: Donald J Trump making America Great Again

Why are people turning their back on the ‘Western’ model? How could it happen and even more so in such a short time span? While most of us associate the recent string of events to failed regimes or fictional story plots, it now haunts the U.S. – playing out like a reality show except the consequences are real and cannot be tuned out by a press on the remote control – however tempting that might be[1].

The elite has cut the link to the people, who retaliate by turning against the elite. A revolt!

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Conceptually industrialization was anchored in enlightenment, science, rationality, and logic. Ethically a higher degree of decency followed. The nexus was check and balances, which not only framed economic prosperity, rising equality and fairness, but also opened the door for the majority of people to influence political decision making.

Now, negative side-effects start to overrule the positive side of the model. Polls show that a majority of people in industrialized countries feel that their children will NOT live in a better world. Consensus and coalition building – the mainstay of the check and balances system – is no longer the plinth of our world order – world view, weltanschaung. Political correctness emphasizing tolerance and respect and crafted to block a repetition of 1914 to 1945 is now rejected yes ridiculed and cast aside. It is legitimate, in some places even laudable to vilify other people and advocate discrimination on the basis of ethnicity and religion.

Subjectivity has replaced objectivity blurring the difference between truth and non-truth. Between facts and made up figures. Today any viewpoint is legitimate. ‘My point of view is as good as yours!’ No insistence on evidence.

Industrialization.

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Adam Smith’s ‘The Wealth of Nations’ gave birth to economic theory explaining capital formation conducive to growth. The market – economic thinking and behavior – precipitated change and dynamics after centuries of near stagnation. Concomitantly economic policy started to guide the political system (liberal representative democracy) in its endeavors to control the economy and distribute wealth between capitalists and non-capitalists.

It was not a global model, but build around the notion of rich (insiders) and poor (outsiders). Countries could be ‘relegated’ (as was the case for Argentina one hundred years ago), but not promoted. Sometimes around 1975 the outsiders challenged the insiders. Promotion, incompatible with the model, started. The result quickly became competition for jobs, welfare, and resources on a global scale. The industrial age edifice began to crack.

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Philosopher  of the Enlightenment– John Locke

http://www.sparknotes.com/history/european/enlightenment/terms.html

Capitalism is a marvelous growth machine especially combined with globalization, but aberrations, distortions and negative side-effects must be kept under control. The challenge from the socialist/communist model did precisely that. When that challenge disappeared in 1991, the self-imposed barriers for egoistic behavior melted away. The dominating perspective became short-term profit defined by pure market economy disregarding potential or real negative societal side-effects – what an economist would label external diseconomies on a societal level/scale.

Globalization introduced economies of scale which:

– Generated enormous profits for multinational companies.

– Opened the door for minimizing tax by shuffling revenue and profits around among countries.

– Suppressed the wage share of Gross Domestic Product (GDP) in rich countries destabilizing and impoverishing their middle class.

– Dislocated manufacturing in rich countries; small-scale plants in local communities disappeared and people felt abandoned, desperate, and without hope.

The upside – enormously important – was that hundreds of millions of people in poor countries were lifted out of poverty.

The political problem gradually suffusing the agenda was that the negative side-effects were mainly, almost exclusively felt in rich and industrialized countries with the upside blessing Emerging Markets and Developing Economies (EMDE). Suddenly the dichotomy between ‘haves’ and ‘have nots’ changed dramatically – a complete reversal of roles.

Technology introduced the skills factor to determine distribution of income. Three groups of “workers” emerged. Those having the skills in demand asked for and got a premium. A thin layer. Those doing repetitive functions, the middle class, were squeezed. Those in lower paid service jobs were forced to accept lower wages under pressure from the middle class above them in the social strata now competing for their jobs and immigrants in social strata below them. In the U.S. wage differentials and inequality was falling 1920 to 1940, stable until the 1970s where after inequality started to explode – almost exactly at the time when Information and Communication Technology (ICT) plus globalization began to put its mark on the economy.

Social losers tried to be heard by voting for the opposition, but the opposition fared no better than the government because there was no answer. In reality government and opposition was the same side of two coins!

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University of Manchester Economics students aim to tear up free-market syllabus

And who are the losers? They are broadly speaking people unable or unwilling to cope with change – not necessarily unemployed or poor. In Europe and the U.S. many of them are found among the middle class being eradicated, disappearing as the stabilizing factor. Year 2000 US, Europe, and Japan accounted for 2/3 of global middle class. prognosis tells that year 2020 it will be about half and year 2050 about 15%. The privileged status built up over the industrial as skilled workers – the hero of industrialization and its main beneficiary – was suddenly taken away from them; other social groups or ethnicities fare better. Since 2007 close to ten million new jobs have been created in the U.S., but whites have lost one million jobs. This discloses the losers as white Anglo-Saxon protestant males powerful during the industrial age fighting almost literally to maintain their privileges.

They constitute a large segment of the population, but they are not the ‘people’. Did the British people vote for Brexit? No. Figuring in the turn out 38% of the electorate did. We read that the American people elected Donald Trump. Wrong. Hillary Clinton got almost 3 million more votes. Figuring in the turn out approx. 26% of the Americans voted for Trump. The depressing interpretation is that a large and growing share of the population does not find it worthwhile to operate inside the system. The system is not theirs! They vote against the system or stay away. The silver lining is that if the system – the establishment – can get the act together and deliver, those people may return. The game is not lost.

The future.

It is fascinating to reflect on how things will turn out, but foolhardy to put forward a picture of the world order to come. Mankind might cut the link to nature and live in a totally artificial environment – mankind may choose the opposite and opt for a return to stronger human relations while respecting the cycle of nature, as our ancestors actually did – or be so confused and bemused under the onslaught of globalization and technology that we end up with some kind of superstition like in the middle ages.

What we can do is to search for some fundamental trends controlling the future development; intercept them to build a system/model strong enough to keep the ship steady until the fog has cleared and a better view of where we are going beckons.

If civilization is a work in progress, we should mobilize discipline and self-discipline to rally people to a common purpose aiming at:

– Societies as a whole instead of egoistic behavior.

– Long term thinking/behavior instead of short-term effects.

– Sustainability instead of throw away consumption.

– A new kind of self-esteem among human beings with people feeling they are a spoke in the wheel contributing to society and receiving something in return.

– Mutual respects leaders – people instead of mutual disrespect and distrust.

The future main thread is common and shared values gradually crowding out economics as the main motivating force. The objective is a new social contract. The vehicle is communication via social networks. The playing field for communication becomes level instead of top/down or down/top or passive only (radio/TV). The social networks should belong to the people and used by the people. Neither commercialized nor allow concentration of knowledge opening for abuse of power.

Political system.

Power distance separates politicians’ values from voters’ values. In many countries, barely 2/3 of the electorate turns up signaling indifference. Membership of political parties tells the same story.

A lower power distance can be sought through roll back of centralization and concentration to lower power distance. Turn local communities into yes LOCAL and small communities; reject increasing returns borrowed from economics for public services. Look for solutions to combine social networks with human contacts. The service provider – welfare, education, and health – must be close to people to cater for their basic needs and not perceived as business.

There are innumerable challenges and opportunities embedded in social networks. In principle, they ‘should rally people to a common purpose’. In reality the opposite happens: Segmentation of public opinion through vociferous and importunate persons/groups hijacking the agenda. Social networks become divisive, disruptive, and increase power distance. Human contacts so vital a glue for unity and coherence fade away.

Segmentation/fragmentation comes into play as people communicate more, but with like-minded people. Those who contact us have analogous opinions. We search, maybe unconsciously, for opinions & views similar to our own ones. A closed-circuit network appears with people reinforcing one another in already held opinions eschewing contradictory information. It is no wonder that extremists’ views have established themselves and got a grip on the political agenda simultaneously with the explosion of social networks.

Using social networks anybody can try to set the agenda. If the message resonates with the public the cascade effect guarantees success irrespective of facts, objectivity, and merit. The ‘newcomers’ are proactive, offensive, snippy, aggressive, using rude/disparaging vocabulary, and dispense with objectivity, facts, and the truth. The establishment appears as reactive, defensive, even boring with politically correct vocabulary which does not strike a chord with the public – and do care about objectivity, facts, and the truth. Studies show that many, maybe most people decide in the split of a second based on instinct, intuition, own experiences and background. We live in a world dominated by a pressure of impression: Catch attention every day and use simple language. The attention span is short so select your audience and appear to be like them. Our ‘self’ is the template for judging others. This opens the door for tailor-made interference in people’s decision making. Recently Alexander Nix, CEO of Cambridge Analytica was quoted saying ‘we have a massive database of 4-5,000 data points on every adult in America’. Allegedly the company helped Trump to win.

The establishment can also use this model! And doesn’t because it has severed the links to the people.

Economic model.

Economics has always loved the idea of general equilibrium, but for the economic system only. Now a kind of societal equilibrium could be the objective.

Short term profits from a purely economic point of view distort the social fabric. Many people look – in vain – for stability and security – human security, economic security, and social security. After disruptive and explosive change over the preceding half century – a burst of activity rarely seen in history – there is a growing preference for calm down, digest, and find out how to use technology and globalization – instead of letting these two big forces, disruptive at that, steer where we go.

Relative prices reflect market perspectives rewarding short-term profit regardless of potentially negative societal effects (inequality, unfairness, and low social mobility), pollution, and depletion of resources. Incorporating societal effects other than economics the scoreboard in its entirety may not be profitable for economic operators – business. So it is not done.

Therefore, they should be changed to reflect these societal aspects. Making it expensive to use resources, punish pollution, and put a price on activities beneficial for society for example care for the elderly and couching children. The immediate objection is that such policies interfere in the market mechanism – the reply is: Yes, that is also the purpose. The market mechanism may have served us well, but can it continue to do so under different conditions? Can the market handle ‘less’ in a socially acceptable way? Doubtful.

Relative factor prices favor technology and robotics. Economically that makes sense. But not for those people losing their jobs. We cannot and should not stop technology and robotics, but provide jobs in labor intensive areas – among other things societal purposes – by remunerating such work.

The theory of the firm dating back to the 1930s explains why it is profitable – short term market economy profitability – to organize production within the firm (concentration and standardization/ uniformization) rather than relying on a multitude of contracts (de-concentration and diversification). Transaction costs become lower. Main advantage is to have the workforce inside the company – figuratively under one roof.

Information and Communication Technology (ICT) has shot that theory down. Now transaction costs outside the firm is cheaper than inside the firm mainly because of savings in overhead costs. Part time work and one person companies are going up – in some cases selling the product to firms instead of doing it inside the firm. It’s odd to read every month about employment and unemployment not taking into account how many people have left companies to do the same work outside companies.

The paradox is that the number of people employed by firms in rich countries goes down while at the same time concentration of finance and knowledge goes up not only shaking the established relationship between workforce and the company, but cutting the bond between firm and workforce, which was the core of the industrial age social contract. They are no longer indispensable for each other.

Conclusion.

The golden days of economic growth and distribution of wealth will not return. The creeping dehumanization and denaturalization is being questioned – is this really what we want? The shift to non-economic values cannot be integrated in the existing political system and economic model.

The challenge now is to keep societies together under burden sharing and adapt to stability and human security. Groups as an alternative framework for organization of societies enter the picture. The risk is that values and social networking break societies into a small number of groups with limited inter-group mobility – are you with us or against us? A kind of social immobility. The group serves as service provider – you cannot live outside the group. ISIL is an illustration of this as was the communist party. You belong to us forever.

The key is a social contract embodying

– The shift in preferences from economics as the dominant element to reflect societal values.

– A reinstatement of confidence and trust between politicians and voters.

– Building a bridge over the rising gap between interests of firms (owners and management) and interests of the workforce.

– Make the service provider visible in daily life, close to the people and increasingly delivering stability, security and peace at mind.

Joergen Oerstroem Moeller is Visiting Senior Fellow, ISEAS Yusof Ishak Institute, Singapore and Adjunct Professor Singapore Management University & Copenhagen Business School. Honorary Alumni, University of Copenhagen.

[1] ‘The Veil of Circumstance’ [ISEAS PUBLISHING, November 2016] offers a deeper analysis of the transformation our societies is undergoing.

(2). ISEAS –Yusof Ishak Institute. PERSPECTIVE. ISSUE: 2017 No. 11 ISSN 335 667

SINGAPORE 21. FEBRUARY 2017.

 “Trump and Brexit:  Some Lessons for Southeast Asia” by Joergen Oerstroem Moeller @ https://www.iseas.edu.sg/images/pdf/ISEAS_Perspective_2017_11.pdf.

Executive Summary

  • Donald Trump’s victory and Brexit illustrate that a considerable share of the population in the U.S. and Britain feel left behind, side-lined and neglected by recent globalising trends.
  • Despite their revolt, the establishment and the existing political systems have a chance to stage a comeback, especially if President Trump fails to live up to expectations of those who voted for him.
  • A surge in migration over the last 15 years in the US and Britain has also put the question of identity on the agenda. Although most countries can assimilate migrants over the longer term, a huge inflow of migrants in a short time span tends to generate serious negative opposition.
  • Rising unemployment in small towns in these countries has reinforced the identity problem, and initiated emigration to cities, undermining what were once stable societies and dilapidating their towns.

    Southeast Asian countries have lessons to learn from this development and should be aware of the risks involved as urbanisation in the region continues unabated.

End of summary.

 

 

Donald Trump–The Reluctant Multilateralist (?)


February 21, 2017

Donald Trump–The Reluctant Multilateralist (?)

by Barry Eichengreen

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Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors:The Great Depression, the Great Recession, and the Uses – and Misuses – of History.–www.project-syndicate.org

FLORENCE – Donald Trump did not assume the US presidency as a committed multilateralist. On that, partisans of all political persuasions can agree. Among his most controversial campaign statements were some suggesting that NATO was obsolete, a position that bodes ill for his attitude to other multilateral organizations and alliances.

Last week, however, Trump stepped back, reassuring an audience at US Central Command in Tampa, Florida (the headquarters for US forces that operate in the Middle East). “We strongly support NATO,” he declared, explaining that his “issue” with the Alliance was one of full and proper financial contributions from all members, not fundamental security arrangements.

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This more nuanced view presumably reflects a new appreciation, whether born of security briefings or the sobering fact of actually occupying the Oval Office, that the world is a dangerous place. Even a president committed to putting “America first” now seems to recognize that a framework through which countries can pursue shared goals is not a bad thing.

The question now is whether what is true for NATO is also true for the International Monetary Fund, the World Bank, the World Trade Organization, and the Basel Committee on Banking Supervision. Trump’s record on the campaign trail and Twitter is not heartening. Back in 2012, he tweeted criticism of the World Bank for “tying poverty to ‘climate change’” (his quotation marks). “And we wonder why international organizations are ineffective,” he complained.

Likewise, last July, he mooted the possibility that the United States might withdraw from the WTO if it constrained his ability to impose tariffs. And he vowed repeatedly during the presidential campaign to withdraw from the Paris climate agreement. But the evolution of Trump’s position on NATO suggests that he may yet see merit to working through these organizations as he comes to recognize that the world economy, too, is a dangerous place.

Following the election, Trump acknowledged having an open mind on the Paris climate agreement. His position seemed less to deny the existence of global warming than to insist that policies mitigating climate change not impose an unreasonable burden on American companies.

The way to limit the competitive burden on US producers is, of course, by ensuring that other countries also require their companies to take steps to mitigate climate change, thereby keeping the playing field level. And this is precisely what the Paris agreement is about.

The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.–Barry Eichengreen

The same can be said of the Basel Committee’s standards for capital adequacy. Holding more capital is not costless for US banks, as advisers like Gary Cohn, formerly of Goldman Sachs and now the head of Trump’s National Economic Council, presumably tell the president morning, noon, and night. Leveling the playing field in this area means requiring foreign banks also to hold more capital, which is precisely the point of the Basel process.

Trump may similarly come to appreciate the advantages of working through the IMF when a crisis erupts in Venezuela, or in Mexico as a result of his own policies. In 1995, the US Treasury extended financial assistance to Mexico through the Exchange Stabilization Fund. In 2008, the Federal Reserve provided Brazil with a $30 billion swap line to help it navigate the global financial crisis. But imagine the outrage with which Trump’s supporters would greet a “taxpayer bailout” of a foreign country or Mexican officials’ anger over having to secure assistance from the same Trump administration responsible for their country’s ills. Both sides would surely prefer working through the IMF.

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Jim Yong Kim–From Brown University to The World Bank

Trump can’t be pleased that the Obama administration rushed to push through the reappointment of its chosen World Bank president, Jim Yong Kim. But he clearly recognizes the benefits of development aid. While he has said that the US should “stop sending foreign aid to countries that hate us,” he has also observed that failure to help poor countries can foment instability.

This would appear to be an area where Trump will favor bilateral action, which would enable him to assuage his conservative critics by insisting that no US funds go toward family planning, while taking credit for any and all assistance. At the same time, minimizing the role of the US in the World Bank would create a vacuum to be filled by China, Trump’s bête noire, both in that institution and through the activities of the Chinese-led Asian Infrastructure Investment Bank.

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The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.

One thing he can do unilaterally is slap duties on imports, potentially in violation of WTO rules. We’ll soon find out whether those rules will deter him.

https://www.project-syndicate.org/commentary/trump-nato-reluctant-mulitlateralist-by-barry-eichengreen-2017-02

Book: The Econocracy Review


February 12, 2017

The Econocracy Reviewhow three students caused a global crisis in economics

by Aditya Chakraborthy

https://www.theguardian.com/books/2017/feb/09/the-econocracy-review-joe-earle-cahal-moran-zach-ward-perkins

Unhappy at how economics is out of touch with reality and defined by an elite, Joe Earle, Cahal Moran and Zach Ward-Perkins sum up their explosive call for change

By making their discipline all-pervasive, and pretending it is the physics of social science, economists have turned much of our democracy into a no-go zone for the public. This is the authors’ ultimate charge: “We live in a nation divided between a minority who feel they own the language of economics and a majority who don’t.”–Aditya Chakraborthy
Riot police clash with demonstrators outside parliament in Athens, October 2011, as anger breaks out over new austerity measures

Riot police clash with demonstrators outside Parliament in Athens, October 2011, as anger breaks out over new austerity measures Photograph: Angelos Tzortzinis/AFP/Getty Images

In the autumn of 2011, as the world’s financial system lurched from crash to crisis, the authors of this book began, as undergraduates, to study economics. While their lectures took place at the University of Manchester the eurozone was in flames. The students’ first term would last longer than the Greek government. Banks across the west were still on life support. And David Cameron was imposing on Britons year on year of swingeing spending cuts.

Yet the bushfires those teenagers saw raging each night on the news got barely a mention in the seminars they sat through, they say: the biggest economic catastrophe of our times “wasn’t mentioned in our lectures and what we were learning didn’t seem to have any relevance to understanding it”, they write in The Econocracy. “We were memorising and regurgitating abstract economic models for multiple-choice exams.

Part of this book describes what happened next: how the economic crisis turned into a crisis of economics. It deserves a good account, since the activities of these Manchester students rank among the most startling protest movements of the decade.

After a year of being force-fed irrelevancies, say the students, they formed the Post-Crash Economics Society, with a sympathetic lecturer giving them evening classes on the events and perspectives they weren’t being taught. They lobbied teachers for new modules, and when that didn’t work, they mobilised hundreds of undergraduates to express their disappointment in the influential National Student Survey. The economics department ended up with the lowest score of any at the university: the professors had been told by their pupils that they could do better.

The protests spread to other economics faculties – in Glasgow, Istanbul, Kolkata. Working at speed, students around the world published a joint letter to their professors calling for nothing less than a reformation of their discipline.

Economics has been challenged by would-be reformers before, but never on this scale. What made the difference was the crash of 2008. Students could now argue that their lecturers hadn’t called the biggest economic event of their lifetimes – so their commandments weren’t worth the stone they were carved on. They could also point to the way in which the economic model in the real world was broken and ask why the models they were using had barely changed.

The protests found an attentive audience among fellow undergraduates – the sort who in previous years would have kept their heads down and waited for the “milk round” to deliver an accountancy traineeship, but were now facing the prospect of hiring freezes, moving back home and paying off their giant student debt with poor wages.

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I covered this uprising from the outset, and later served as an unpaid trustee for the network now called Rethinking Economics. To me, it has two key features in common with other social movements that sprang up in the aftermath of the banking crash. Like the Occupy protests, it was ultimately about democracy: who gets to have a say, and who gets silenced. It also shared with the student fees protests of 2010 deep discomfort at the state of modern British universities. What are supposed to be forums for speculative thought more often resemble costly finishing schools for the sons of Chinese communist party cadres and the daughters of wealthy Russians.

Much of the post-crash dissent has disintegrated into trace elements. A line can be drawn from Occupy to Bernie Sanders and Black Lives Matter; some of those undergraduates who were kettled by the police in 2010 are now signed-up Corbynistas. But the economics movement remains remarkably intact. Rethinking Economics has grown to 43 student campaigns across 15 countries, from America to China. Some of its alumni went into the civil service, where they have established an Exploring Economics network to push for alternative approaches to economics in policy making. There are evening classes, and then there is this book, which formalises and expands the case first made five years ago.

Joe Earle, foreground, with the Post-Crash Economics Society at Manchester University.

Joe Earle, centre, with the Post-Crash Economics Society at Manchester University. Photograph: Jon Super

The Econocracy makes three big arguments. First, economics has shoved its way into all aspects of our public life. Flick through any newspaper and you’ll find it is not enough for mental illness to cause suffering, or for people to enjoy paintings: both must have a specific cost or benefit to GDP. It is as if Gradgrind had set up a boutique consultancy, offering mandatory but spurious quantification for any passing cause.

Second, the economics being pushed is narrow and of recent invention. It sees the economy “as a distinct system that follows a particular, often mechanical logic” and believes this “can be managed using a scientific criteria”. It would not be recognised by Keynes or Marx or Adam Smith.

 

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In the 1930s, economists began describing the economy as a unitary entity. For decades, Treasury officials produced forecasts in English. That changed only in 1961, when they moved to formal equations and reams of numbers. By the end of the 1970s, 99 organisations were generating projections for the UK economy. Forecasting had become a numerical alchemy: turning base human assumptions and frailty into the marketable gold of rigorous-seeming science.

By making their discipline all-pervasive, and pretending it is the physics of social science, economists have turned much of our democracy into a no-go zone for the public. This is the authors’ ultimate charge: “We live in a nation divided between a minority who feel they own the language of economics and a majority who don’t.”

This status quo works well for the powerful and wealthy and it will be fiercely defended. As Ed Miliband and Jeremy Corbyn have found, suggest policies that challenge the narrow orthodoxy and you will be branded an economic illiterate – even if they add up. Academics who follow different schools of economic thought are often exiled from the big faculties and journals.

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The most devastating evidence in this book concerns what goes into making an economist. The authors analysed 174 economics modules for seven Russell Group universities, making this the most comprehensive curriculum review I know of. Focusing on the exams that undergraduates were asked to prepare for, they found a heavy reliance on multiple choice. The vast bulk of the questions asked students either to describe a model or theory, or to show how economic events could be explained by them. Rarely were they asked to assess the models themselves. In essence, they were being tested on whether they had memorised the catechism and could recite it under invigilation.

Critical thinking is not necessary to win a top economics degree. Of the core economics papers, only 8% of marks awarded asked for any critical evaluation or independent judgment. At one university, the authors write, 97% of all compulsory modules “entailed no form of critical or independent thinking whatsoever”.

Remember that these students shell out £9,000 a year for what is an elevated form of rote learning. Remember, too, that some of these graduates will go on to work in the City, handle multimillion pound budgets at FTSE businesses, head Whitehall departments, and set policy for the rest of us. Yet, as the authors write: “The people who are entrusted to run our economy are in almost no way taught to think about it critically.”

They aren’t the only ones worried. Soon after Earle and co started at university, the Bank of England held a day-long conference titled Are Economics Graduates Fit for Purpose?. Interviewing Andy Haldane, chief economist at the Bank of England, in 2014, I asked: what was the answer? There was an audible gulp, and a pause that lasted most of a minute. Finally, an answer limped out: “Not yet.”

The Manchester undergraduates were told by an academic that alternative approaches were as much use as a tobacco-smoke enema. Which is to say, he was as likely to take Friedrich Hayek or Joseph Schumpeter seriously as he was to blow smoke up someone’s ass.

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The students’ entrepreneurialism is evident in this book. Packed with original research, it comes with pages of endorsements, evidently harvested by the students themselves, from Vince Cable to Noam Chomsky. Yet the text is rarely angry. Its tone is of a strained politeness, as if the authors were talking politics with a putative father-in-law.

More thoughtful academics have accepted the need for change – but strictly on their own terms, within the limits only they decide. That professional defensiveness has done them no favours. When Michael Gove compared economists to the scientists who worked for Nazi Germany and declared the “people of this country have had enough of experts”, he was shamelessly courting a certain type of Brexiter. But that he felt able to say it at all says a lot about how low the standing of economists has sunk.

The high priests of economics still hold power, but they no longer have legitimacy. In proving so resistant to serious reform, they have sent the message to a sceptical public that they are unreformable. Which makes The Econocracy a case study for the question we should all be asking since the crash: how, after all that, have the elites – in Westminster, in the City, in economics – stayed in charge?

The Econocracy is published by Manchester University.