Major Issues where Mainstream Economists Failed

Part 2

Paul Sweeney20/07/2023

In the last blog, I examined six of twelve major economic issues that mainstream economists failed to see coming or adopted incorrect responses to, and I now examine the other six issues.

6.        Housing

It is widely recognised that the financial collapse in 2008 was substantially due to the repackaging and positive re-branding of the housing debts of poor Americans. These packages were sold on as "good" investments for some years. Then somebody copped on that poor people could not repay their now substantial mortgages. In Ireland and other European countries around one 10th of all housing had been provided by the state for low income people for decades. When this social democratic practice (which was at the heart of Fianna Fail's success as the "natural party of government") was abandoned in the 1970s, following Thatcher's ideas, public-housing was sold off here too.  Everyone was told to get on the property ladder by getting a mortgage. Thus all housing became a financialised, market commodity to be traded for big bucks by finance types. Then came the crash in 2008.

The end of public provision of housing meant that now housing market in Ireland is now a grossly distorted market, but with massive state intervention. Most of the huge state subsidies are making things worse instead of better. This is because the neo-liberal ideas which led to the financial Crash are still fairly dominant in the heads of many mainstream economists and politicians.

Irish housing is a market but it is not a "free market" but a highly subsidised and distorted market and the outcomes are unintendedly perverted.

 7.         Inequality

Until about a decade ago, most economists did not think much about inequality. They had reason to believe that it would sort itself out through the market. This was because as the American economy developed in the decades after World War II, inequality did decline. Inequality was reduced because working people were well paid, thanks to strong unionisation and broad economic and social progress in the US and most of Europe.

 

However, from the 1970s onwards, inequality grew rapidly in the US and elsewhere in the world, with the adoption neoliberal ideas. IMF, OECD World Banks all ignored inequality too. However, in recent years, these bodies all actively seek "inclusiveness" in most policies. Similarly, in Ireland some mainstream economists are studying inequality and contributing to its resolution too.

 8.         Technology is not neutral.

The mainstream tend to accept technology as neutral. Technology has played a major role in increasing inequality and in the decline in labour's share of national income as I show in this paper. In a new book, "Power and Progress: the thousand year struggle over technology and prosperity," Daron Acemoglu and Simon Johnson show that technological innovation does not necessarily produce real progress for ordinary people. Dani Rodrik, commenting on the book, argued that "the nature and direction of technological change responds to societal arrangements" that is, to those who have power.  They, the owners of technology, win.

 9.         Globalisation

Similarly, globalisation is not neutral. While the process greatly reduced global inequality by raising incomes in developing countries, much of it was thanks to the offshoring of manufacturing jobs from Europe and America. Like technology, it was not neutral. Many people lost their jobs, particularly high paid, unionised jobs in manufacturing and little was done to ameliorate this. This adverse impact was not recognised within mainstream economics for a long time.  Latterly,  Dani Rodrik, Milankovic, and others and the World Bank, IMF and even ECB now recognise many of its benefits were captured by those at the top. I have critically supported globalisation, arguing that it should have been radically reformed to ensure more equitable distribution for decades.

10.       Climate Change

Mainstream economists did not ignore climate change in my view. However, the neoclassical belief in the workings of the markets did delay the wake-up call on this existential threat to humanity. The mainstream have what can best described as a naive belief in the independence of firms in the market and in its ability to solve problems. Regrettably climate change is an existential threat to humanity and very strong intervention at all levels, especially by states and firms, is required urgently. The mainstream hesitate, often bowing to the dominance of firms and markets. This means action is slower than if more radical heterodox views were taken seriously. Thus the political economy of neoclassical economics colours their judgements around the role of key actors, of corporations, of firms (see section 5 in earlier blog) which are major players in the cause of climate change and hopefully, in its solution. Economics has a key role in challenging the relentless strive for shareholder value, for short-term profit by corporations, particularly those dependence on fossil fuel.

11.       GDP and Growth

President Higgins was particularly critical of the focus of orthodox economics on growth, particularly as measured by GDP in his speech for TASC. There are various measures of national income. The most common is gross domestic product or GDP. This does not work for Ireland so we use GNI*. Most economists have been aware that the measurement of national income is difficult, leaving out women's work in the home, the repair of climate destruction and war et cetera, for many years. Yet GDP, GNP, and GNI* are still reasonable ways of measuring the increases in income in a country and to help compare countries themselves against previous years and against one another in the broadest form of economic development. In fact, the term economic development is a superior term to economic growth with progressives preferring to use the term. Development may include some growth. A rising annual National Income however measured, does mean that there is more money to pay for public services assuming rising taxation. When there's a recession and national income falls, it is difficult for governments to fund programs, hence cuts in public services etc. 

Finally there has been a very welcome move to green growth / development, and many Irish economists are working in this area. Michael D Higgins was quite sophisticated in his criticism of the emphasis on growth, but may have been misinterpreted.

Even the US national security adviser, Jake Sullivan recently insisted that the focus on GDP growth rates isn't good enough – it must be sustainable and equitable. Furthermore, Ursula von der Leyen, the President of the EU Commission said that "economic growth is not an end in itself. That growth must not destroy its own foundations. That growth must serve people and future generations."

 

12.       GDP and Economic Growth

President Higgins was particularly critical of the focus of orthodox economics on growth, particularly as measured by GDP in his speech for TASC. There are various measures of national income. The most common is gross domestic product or GDP. This does not work for Ireland so we use GNI*. Most economists have been aware that the measurement of national income is difficult, leaving out women's work in the home, the repair of climate destruction and war et cetera, for many years. Yet GDP, GNP, and GNI* are still reasonable ways of measuring the increases in income in a country; to help compare countries themselves against previous years; and against one another in the broadest form of economic development. In fact, the term economic development is a better term to use than economic growth with most progressives preferring to use the term. Development may include some growth. A rising annual National Income however measured, does mean that there is more money to pay for public services assuming rising taxation. When there's a recession and national income falls, it is difficult for governments to fund programs, hence cuts in public services etc.  That is the value of some growth.

Finally there has been a very welcome move to green growth or development, and many Irish economists are working in this area. Michael D Higgins was quite sophisticated in his criticism of the emphasis on growth, but may have been misinterpreted.

Even the US national security adviser, Jake Sullivan recently insisted that GDP growth rates on seek isn't good enough – it must be sustainable and equitable. Furthermore, Ursula von der Leyen, the President of the EU Commission said that "economic growth is not an end in itself. That growth must not destroy its own foundations. That growth must serve people and future generations."

Conclusion

This a personal and partisan view of the failings of mainstream economics. I may have left out a few other failures and I did not focus on the successes of the mainstream in helping create the high income and the happy liberal country that Ireland has become. We Irish also have much greater freedom for our citizens who were so oppressed by Church and state until recent decades - a freedom enabled by economic progress.

The President was correct to call for more heterodox economic thinking. It is welcome that the mainstream is now addressing inequality and climate change. It was excellent that in the face of reality during the Covid crisis, in contrast to their response to the 2008 Crash with harsh austerity, that governments and mainstream economists responded with the adoption of strong Keynesian "borrow and spend" economic policies to both the Covid and Energy Crises, tossing out the EU's austerity-ridden Fiscal Rules or SGP. This worked very well.

However, it is not just the intellectual grip of Milton Friedman's neo-liberal ideas of the superiority of the market; of the primacy of the shareholder value-governance of firms; of the small state; of privatising everything; of the supposed superiority of the private sector over the public; but also many dated neo-classical ideas in the modern state where the public sector makes up half of national income. Neo-liberal ideas are probably irreformable being so ideological. But neo-classical economics can adapt to reality but must do so faster. It must abandon subservience to the status quo or it will fail. There have been many books about the collapse of modern capitalism in recent years. Heterodox economic ideas must now be both accepted and adopted, becoming the mainstream instead of neo-classical, so that the pressing issue of climate change and the other major issues can be addressed.

 

 

 

 

 

 

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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