Monday, October 25, 2010

A Professor Writes an Excellent Study of What Went Wrong Before 2008

Zombie Economics: how dead ideas still walk among us, by John Quiggin, Professor of Economics, University of Queensland, Princeton University Press, 2010 (27 October) (ISBN 978-0-691-14582-2).

For those who lived through the bulk of the years with which this most challenging book engages the reader, you could feel like the man who sees his whole life as an economist flash past just before he drowns. Oh, the memory of those hot debates in staff common rooms of yesteryear! This time John Quiggin’s excellent account of those years flashes by in a parade of the debates about ‘Keynesian Multipliers’, the ‘Great Moderation’, ‘Efficient Markets Hypothesis’, ‘Dynamic Stochastic General Equilibrium’, ‘Trickle-down Economics’ and ‘Privatisation’.

One thing for sure, Professor Quiggin makes no attempt to moderate his hostility to most of the Zombies he sees shuffling around the corridors of academe, and worse, whispering in the ears of those who inhabit the corridors of power. It is without doubt the best account I have read for long enough. It describes, in suitably effortless lay-persons’ language, high macro-economic theory and practice that dominated the post-war decades in the capitalist economies.

This is no treatise in mathematics, though the history of the 60-years of what is known as macro-economics, is replete with plain-language accounts of the maths, econometrics, and number-crunching that changed our profession completely. Professor Quiggin takes you through it with unerring panache, and for those readers inclined to read the original journals and books, there are clear guides to the appropriate scholarly literature at the end of each chapter (you could usefully build a course around these guides for your students and for those of your older staff needing to get-up-to speed).

Quiggin despatches the false certainties of the period from the 1980s to 2008, with his surgical precision, not sparing anything or anybody who qualified for what he calls ‘Zombie economics’ and its close-cousin, Voodoo politics. One of these ideas that I have always found unlikely, was the idea that ‘prices generated by financial markets represent the best possible estimate of the value of any investment’, at least until the moment when they clearly don’t, but by then the improbable idea had done more than enough damage.

Indeed, the very idea of general equilibrium, claimed as mathematically ‘proven’ to exist by Arrow and Debrue (1954) though not practised on any known world. General Equilibrium has long been anathema to me since Samuelson attributed the ‘proof’ of it to be related to what Adam Smith was alleged to have meant by the metaphor of ‘an invisible hand’. This is contrary to the evidence of his use of it in Wealth Of Nations, of which I have commented many times on Lost Legacy. So this alone made me wonder about ‘Dynamic Stochastic General Equilibrium’ and what resulted from applying it in real-world economies.

On ‘Trickle-down economics’ Quiggin really goes to town, but perhaps overstates his case a little. Of course, using data from the USA, Britain, Australia, I am not surprised that the evidence for any sign of a ‘trickle down effect’ is found wanting, but would mention the fact (of which few would disagree) o that the living standards of the poor, relative to the super-rich, in the main capitalist countries, when compared to the living standards of the bulk of the majority poor in the poor countries, are incomparably better than those trapped in the worlds really poor countries.

The fact that the super-rich and the middle-rich in the richer capitalist mixed economies are so far ahead must still have something to do with the fact that the same economies that made the super-rich so rich, also had something to do with the relatively much better living standards of their poorer minorities. I notice no mass migration, legal or otherwise, from USA, Britain, and Australia, of the poor in the big capitalist moving towards the poorer countries. The traffic is all in the other direction. Poor people are not stupid.

On ‘privatisation’, Quiggin makes another strong case against selling off state-run monopolies and it is worth studying by all sides of the argument. It is also worth noting that government treasuries prefer to sell state-monopolies to get a higher price when they are sold as private monopolies. And that’s the rub.

Private monopolies, which by definition do not compete, do not do as well as they would otherwise from the points of view of their customers. This was the experience in Britain at the time of the great transfer of state monopolies into private monopolies – BT, gas and electricity are UK examples. Getting a telephone connected could take weeks, until telecoms were opened to competition, likewise with the old public utilities. Even France Telecom has improved dramatically since Orange took it over operationally and other competitors moved in. In Australia, the old state monopolies of civil aviation, once swept way, led to incomparably better timetables and customer friendly services, as I found on a recent return visit to Sydney and Melbourne. The benefits of competition in service and customer treatment may not show in the statistics; I doubt if any government will try to draw them back into state.

However, Professor Quiggin has written a racy account of the crisis in the world economy and the related crisis in economics. He writes:

An economy can settle for long periods in a low-output, high- unemployment state and may not meet the neoclassical definition of equilibrium but does match the original concept, borrowed from physics, of a state in which the system tends to remain and to which it tends to return … we need a theory that encompasses crises and rapid jumps between one kind of equilibrium and another ... Between these two levels, we need to consider the fact that the economy is not a simple machine for aggregating consumer preferences and allocating resources accordingly. The economy is embedded in a complex social structure, and there is a continuous interaction between the economic system and society as a whole. Phenomena like ‘trust’ and ‘confidence are primarily social, but they affect, and are affected by, the performance of the economic system” (p. 124).

This is one of many other passages in which I completely agreed with Quiggin, not least for the verity of his pronouncements, but also for its echo of Adam Smith’s approach to analysis in Moral Sentiments and Wealth Of Nations, from which classical and neoclassical theorists ran away as fast as they could. The classicals slowly slid via Ricardo towards Marx, and the neo-classicals slowly – then speedily – raced towards mathematical abstractions, woefully bereft of contact with the real world.

It’s not that Zombie ideas just ‘walk among us’; their pronouncements are of a world without human beings (aka Homo economicus and her brood), and if they merely are replaced by more refined abstractions, better equations, and more sophisticated maths, we have good reasons to fear the future.

I strongly recommend Professor Quiggin’s Zombie Economics to all economists, whatever their hue and whatever their past roles in the debate’s, which he examines so critically.



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