Mike Danson argues that we need to remember who failed to warn us of approaching financial meltdown and challenge the assumptions of conventional economics
Not normally quoted on these pages but last November the Queen asked why so few economists had foreseen the credit crunch, the apparent cause or superficial symptom of the present recession and economic crisis. This has led to muted responses from the profession, either trying to explain away the failing of the ‘science’ to see this coming or to identify or apologise for why they had been so wrong. As well as many not showing any contrition, most have not suggested that a more fundamental problem exists at the heart of how economists have understood the world. This neo-classical approach believes that the natural order is that we are all out for own desires and ends; maximising our own profits or bonuses regardless of the impacts on the rest of society. According to their faith, this is good for all apart from the feckless or undeserving. To prove this belief, they represent how the world operates as a mathematical model and all the restrictive and unjustified assumptions which underpin the very essentials of this approach are forgotten when advice is given to governments, corporations and peoples.
Counter to this, some of the critics from within the economics discipline who have entered the debate have offered an alternative view which puts more emphasis on the limitations of the market, the need for the state to intervene to control this beast, and the importance of meeting basic human needs as well as the needs for profit of a few. A number of the latter might be more familiar to the readers of the SLR, adopting as they do a more traditional Scottish political economy approach to analysing and influencing the ways of the economy. As a contribution to the debate, this paper therefore uses what lies at the core of their respective arguments to examine the roles of the public and private sectors in the economy and society, reminding us that we in Scotland can harness forces for greater and common good as well as for private satisfaction and still be good economists.
The defenders of neo-classical economics have argued, therefore, that ‘some of the best mathematical minds’ were involved in risk management – so promising to benefit all by growing the national cake ever bigger – but that ‘they frequently lost sight of the bigger picture’. So they believed that ‘Economics’ was basically sound but too many at the heart of the subject, who had become very powerful in advising Governments and the major players, had made some unfortunate errors of judgement. They mistakenly had concluded that risks had been safely dispersed and ‘virtually removed’ through an array of novel financial instruments while politicians of all types were charmed by the market. The ‘failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole’ was the excuse for the current crisis.
They are not suggesting that the problem was so fundamental as to undermine the whole charade. So all that follows from the neo-classical approach, they argue, can be left untouched; and indeed now more than ever we should be bolstering the market and the freedoms it both generates and protects. But, from across the economics spectrum others have rattled these walls of complacency and abstraction to complain ‘that economists have become largely transformed into a branch of applied mathematics, with little contact with the real world’. We do not need to delve more deeply into the world of economists here but this apparently narrow criticism over how the ‘preference for mathematical technique over real-world substance [has] diverted many economists from looking at the whole picture’ reveals some important differences on public goods and private wealth.
An alternative letter to the Queen further makes the point that while her original apologists for the failures of neo-classical economics (Professors Besley and Hennessy) “complain that economists have become overly ‘charmed by the market’, they mention neither the highly questionable belief in universal ‘rationality’ nor the ‘efficient markets hypothesis’, which are both widely taught and promoted by mainstream economists”. These critics then “call for a broader training of economists, involving allied disciplines such as psychology and economic history, as well as mathematics”.
A generation ago many of us relied on the state for housing, health, education, security at all stages of our lives, stability in families and communities. As well as not being perfect, but then none of us ever claimed it was a completed project, this reliance we were told from 1977 onwards was generating a dependency culture where our enterprise and entrepreneurship were being stifled so that the national cake was not growing quickly enough; and so hundreds of thousands of jobs had to disappear across Scotland, homes were sold off to sitting tenants and housing associations, our companies and mutuals were privatised, essential services were deregulated, our investment in our futures was organised through PFI/PPP schemes and a new country was to be born. But alongside all the papers and arguments made in Scottish Left Review against each and all of these, we know that the state had to remain or re-enter many areas of life as the market failed again and again to provide even the basics for many in society. Here we have been generally more circumspect about the benefits of many of these changes but in England New Labour’s extension of the Conservative neo-classical model has pushed ever deeper into the public sector, burdening the population with the demands of private markets, motives and returns in health, education and other areas of the welfare state. Looking to the wealth of the promised land of the US, we have been led down a privatised future while ignoring the incredible depths of poverty that necessarily exist amid that plenty. The poor are not only always with us in that system but must be in order to keep the minimum wage low, deskill the workforce and so create the opportunities for profit.
From our northern European neighbours we can see an alternative vision of greater equity and efficiency, backed by the confirmed highest average living standards in the world founded on state intervention and high taxes. The role of the public sector in the Nordic countries has been fundamental to their individual and collective prosperity, contrasting with the US and UK model of believing that the crumbs of a bigger cake will naturally fall to the poor – and we know that trickle down strategies simply do not work.
Our own earlier research on the proposed transfer of municipal housing stock in Glasgow and other places in Scotland, identified many of the issues that have come so strongly home in the current crisis, as has the work on Schools PFI proposals. To make these fantasies appear to make sense, incredible leaps of faith had to be made with inconceivable rates of improvements to homes, schools, hospitals, army training, etc. embedded in the statistical detail. When we and others managed to gain access to such ‘economic analyses’, the damning truth was all too apparent. The very companies and organisations which created these stories and statistics were, of course, involved in the feeding trough frenzy of bonuses and fees. And so with such assumptions as every pound spent on a privatised Glasgow council house raising its value by £1.25, that every pound spent on a pupil in a Renfrewshire school being an investment under private control but a cost under the traditional council management, they were generating the pre-conditions for the crises of today and tomorrow. The evidence has been there for all readers of this and other critical journals to see and this was presented at a time when the business cycle was supposed to be confined to the wheelie bin of history.
Not only did we tell you so, but the very bases of the wider current recession were to be found in that approach to economics. The fundamental presumptions that the private sector could deliver these huge productivity gains – with no attempt to understand how this would be achieved (it had to be through vilification of the workforce, wage cuts, anti-union practices, in-work poverty, deskilling, and under-utilisation of highly qualified migrant workers), and that public risk would be reduced through capital market machinations (proved all too ridiculous over the last eighteen months) were not questioned by the orthodoxy.
The immediate impacts of these crucial assumptions were also rarely challenged in the mainstream. Reducing costs by driving down the terms and conditions of the lowest paid and transferring these savings to offshore accounts, bonuses and pensions for the super rich would inevitably shrink the UK and Scottish economies: taking money out of the corner shop and the neighbourhood with their high multiplier factors in favour of luxury yachts, Formula 1 cars and other inflated imports did not make us a richer society, however measured. As always, bread and circuses and divisive policies are relied upon to obscure that the emperor’s new clothes are still not there.
Then when the economic and financial system entered its inevitable recession, we fully expected that, after the initial anger had been managed, the poor would suffer the most, the regressive tax system would be reinforced, strategies for social inclusion would be downgraded, bankers and the City would be protected, and regulation would be as relaxed as it had been during the formation and realisation of the crisis. As we all know, the private sector came cap in hand scrounging to the public authorities for billions and billions of pounds of our money to bail them out. Where is the wealth creation there, who created it and who benefits?
So if we pick up the left journals of the 80s or return to the writings of Galbraith, Keynes, Marx or Smith – all political economists and none of whom would have been welcomed by the mathematical modellers who control the discipline today – an overwhelming sense of déjà vue and despair may descend.
But we live in Scotland and with a rich history of political debate and a devolved Parliament, we can dare to argue for alternatives. We can start to learn from our Nordic neighbours on what would be required to follow their route to a better future, with some honesty necessary from across the political spectrum on the tax and spend implications (see for some speculations on this1). Closer to home, I would argue that the example of community based initiatives in everything from housing, regeneration, social and cultural activities, have been transformed by land buy-outs under the Land Reform legislation, demonstrating that mathematical economic models cannot pre-determine the impact of changes in ownership. Increasing population, sustainable and sustained economic development, improved housing, renewable energy generation, reforestation, are all evidence of the failure of simplistic economics to understand the importance of social ownership and control.
With clear links across the health, education, housing, social welfare, enterprise and employment agenda, these initiatives confirm that the public sector – essentially in cooperation with the agencies of communities, volunteers and workers – offers a better, sustainable and more secure future than what is offered by the sterile, short term, free market philosophy beloved by the establishment.