mainly macro: Revolutions in Economic Policy

mainly macro: Revolutions in Economic Policy


The Commission on
Economic Justice hosted by the Institute for Public Policy Research
(IPPR) has just published a substantial and comprehensive report
on the UK economy called ‘Time for Change’. I hope to write about
aspects of that report later, but its basic premise is that we need a
revolution in economic policy making, akin to the revolutions enacted
by the post-war Attlee government and Mrs. Thatcher. The thinking
behind the idea of economic policy revolutions is outlined by Alfie
Stirling and Laurie Laybourne-Langton in a paper
in The Political Quarterly.

The authors adapt
the ideas of Thomas Kuhn’s The Structure of Scientific Revolutions
to economic policy. I do not want to get hung up on the legitimacy or
details of this. The basic idea that some periods involve profound
changes in economic policy is not really contentious. Also the idea
that the ‘failing paradigm’ will first try to adapt itself before
being replaced by the revolutionary idea is straightforward. You only
need to look at the state of current politics in the UK and US to
take seriously the idea that what could be called the neoliberal era
– the set of policies and world view associated with Thatcher and
Reagan – is coming to an end.

There is a lot in
the paper that I agree with, at least until the conclusions. [1] But
I think my main critical comment would be that the paper focuses too
much on macroeconomics, and as a result goes a little astray. It is
if, having borrowed Kuhn’s idea and applied it to economic policy,
the authors feel obliged to keep going back to an actual academic
discipline, macroeconomic theory, rather than staying with economic
policy as a whole. Let me set out first how I see the macroeconomic
transformation that took place around the time of Thatcher and
Reagan.

A key mistake that
many people make is to say that conventional Keynesian macroeconomic
theory was unable to explain stagflation, and that policymakers
adopted monetarism or new classical ideas as a result. The basis for
understanding stagflation and reducing inflation was known since at
least
Friedman’s famous address in 1968 giving his account of the
expectations augmented Phillips curve. This Phillips curve was not
used to guide monetary or fiscal policy before the end of the 1970s
because most policy makers and some economists were reluctant to
raise unemployment as a way of reducing inflation. [2]

In the UK this use
of demand management to control inflation (or its counterpart, which
was to abandon attempts at direct control like incomes policies)
coincided with the election of Thatcher, but in the US it was
initiated by Paul Volcker under Jimmy Carter. In both the UK and US
it was associated with attempts to control monetary aggregates, but
this lasted only a few years. You could argue that abandoning incomes
policies was neoliberal, but to me it looks like the inevitable
result of double digit inflation.

There was a
revolution in macroeconomic theory, but I have argued elsewhere
that it does not fit into the Kuhnian framework. The New Classical
Counter Revolution (NCCR) did not come up with an alternative
analysis of inflation: instead their concerns were more
methodological. It is true that that many who promoted the NCCR also
favoured neoliberalism, and you could relate reductionism to
individualism (and hence neoliberalism), but I think the appeal of
the NCCR owed much more to a collection of good ideas that the then
mainstream resisted, like rational expectations.
Inflation targeting
by central banks involves an attempt to manage the economy in much
the same way as Keynesian fiscal activism had done before. The
central bank is a part of the state. Central bank independence didn’t
come to the UK until 1997, and existed in the US well before Reagan.
What I call
the Consensus Assignment (monetary to demand management, fiscal to
debt control) was dealt a fatal blow by the GFC, but the popularity
of this assignment owes little to neoliberalism. Attempts to link
inflation targeting to neoliberalism, which are frequent, are in my
view a mistake.

Trying to fit
macroeconomics into an account of the rise of neoliberalism is
therefore problematic, and more importantly it detracts from the real
economic policy revolution that neoliberalism represented, which was
a change in the attitude of policymakers to state intervention of
almost any kind. Out went government partnership with industry
(described as ‘picking winners’), together with a regional and
industrial policy serious enough to counteract the effects of
globalisation and technical change. There was a corresponding shift
from the collective (including attacking trade unions) to the
individual, together with the idea that ‘wealth creators’ (aka
high earners) had to be incentivised by cutting ‘punitive’
taxation. Public money became ‘taxpayers money’ and so on.

All this was a
successful neoliberal revolution, where by success I mean it took
hold for decades. It, together with subsequent overreach,
has caused serious problems and is therefore ripe for review. But
ironically the attempt at a truly neoliberal macro policy – hands-off
monetary targeting with no demand management – failed within a few
years of being tried.

[1] I should say why
I think the conclusions do not follow from the rest of the paper.
There are some simple mistakes, such as “the failure of these same
models to predict accurately the effects of the UK vote to leave the
EU threatens to renew the crisis of confidence in economic theory.”
But there is also an implicit very misleading equation pair:
neoliberal policy=mainstream economics, revolution=heterodoxy.

First, the two
previous revolutions in macro theory came from within the mainstream,
not from outside. Second, neither austerity or Brexit have anything
to do with mainstream economics. More generally, mainstream economics
is as much a critique of neoliberalism as a support. As a result, a
revolution in economic policy making could quite easily originate
from within mainstream economics (see here,
for example).

[2] Today, that view
has been revived by members of the MMT school, who call using the
Phillips curve to control inflation amoral.



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