How the Keynesian-consensus turned into Keynesian-Dissensus in great recession

Henry Farrell and John Quiggin in this interesting paper look at this change of economic thought in this crisis.

They say that just on the breakout of the crisis economists and policymakers agreed near universally on the need for fiscal stimulus and adopt Keynesian policies. However, as crisis eased a bit we saw a great divergence with some economies choosing to adopt fiscal austerity and anti-Keynesian policies. What led to this sudden shift given the fact that economic conditions were still very bad.

The duo say the reason is shift of economic thought. On the eve of the crisis the Keynesian economists came to centre and pushed for stimulus. The anti-Keynesians either kept quiet or some even became more supportive of stimulus (like Martin Feldstein). As crisis eased, the anti-Keynesians again rose mainly German economists and ECB who strongly argued for the need to fiscal austerity.

In this article, we have made two major claims. First – that we can understand the creation of consensus (or dissensus) within an expert community as a process of contagion across that community. Second – that the appearance of consensus or dissensus within this community will determine whether ideas are, or not, politically influential.

The evidence seems to bear these arguments out. In 2008-2009, it was important that a relatively small number of `star’ economists, mostly based in the US, made vigorous arguments for Keynesianism. It was also important that some key fi gures who previously had not been favorably disposed to Keynesianism changed their minds. This helped propagate the idea of Keynesian stimulus to economists who otherwise would likely have been inoculated against it. Some of these economists – such as members of the Council of Economic Experts – played a key role in changing the eld of debate within Germany and other European countries. Even if the actual consensus among economists was rather less solid than it appeared to outside observers, the appearance of an emerging consensus was what mattered.

In 2010 in contrast, it mattered that there was a greater degree of disunity among economists in the US and within the IMF than there had been in the previous period. It also mattered that a new group of elite economists – those associated with the European Central Bank – had entered the fray. The debate was not nearly as one sided as it had been in the rst instance. The contagion of the previous period in part reversed its course.

They say this is hugely important case study. It shows how policy gets affected and framed. They introduce this nice idea of network topology. In this the node introduces an idea which then becomes ultra-powerful:

The appearance of consensus among experts is highly important in determining how their ideas aff ect policy actors. However, this appearance is a product of network topology and social pressures as much as, and in many cases more than, the kinds of processes of disinterested inquiry valued by scholars of epistemic communities. There are always likely to be doubters – the important question is whether these doubters’ opinions are widely propagated in a publicly visible manner, or instead die on the vine. Where there is no apparent consensus, we may expect the e ffects of expert ideas on policy actors to be limited at best. They still may have a role in argument – but policy actors will have far greater freedom to pick and choose sides of the argument that they nd convenient for their own purposes.

This has implications for how we think about the role of ideas in international relations. Most obviously, it suggests that the intricate micromechanisms through which ideas spread may sometimes be less important than gross social structures. Whether expert economists were deeply convinced, half-convinced, or not convinced at all by Keynesian ideas, did not matter as much as the external perception, in large part generated by patterns of propagation, that there had been a sea-change in the discipline.

Hence, the paper helps in two ways:

First, it helps us understand where consensus comes from, and the circumstances under which it is unlikely to arise.

Second, our arguments provide some insights into the broader issues concerning global  financial orders addressed in this special issue. They do not tell us whether the model laid out in the introduction, of a cycle between diff erent models of economic order, punctuated by brief patterns of instability, is correct.

It is just as possible that we are entering into a new global financial system which will be less driven by consensus than by continuing and ultimately irresolvable tensions between diff erent and antithetical ways of ordering the economy, and consequent confusion and trench warfare. Such a world would pose extraordinary challenges to scholars of international political economy, who naturally prefer simplicity and elegance to bewildering complexity. But that is no reason to think that it could not come into being. 

Hmm…The second learning is clearly dangerous.

Read the whole thing with nice coverage of events…

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One Response to “How the Keynesian-consensus turned into Keynesian-Dissensus in great recession”

  1. Did rise in inequality lead to increased opposition to Keynesian stimulus? « Mostly Economics Says:

    […] clearly based on pure economic interest. Not as big a story, but a possibility.  Henry Farrell argued in a paper saying there was some acceptance to Keynes in the first  phase of the crisis and then […]

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