Another critique of mainstream economics. This one came last year but is highly relevant given Europe’s woes today.
A virulent strain of austerity capitalism takes over Europe, leaving shattered lives in its shadow, researchers Servaas Storm and C.W.M. Naastepad, Senior Lecturers in Economics at Delft University of Technology in The Netherlands, consider how things got so bad, what role economists and misguided policy-makers have played, and which models and ideas are needed to change course. In the following interview, they discuss how most are getting the story about Europe wrong. They explain how their research shows that when countries try to compete with each other by lowering wages and slashing the social safety net, the costs are high both economically and socially, and why co-operative and regulated capitalism is a far better path.
What do they say in the interview?
Lynn Parramore: What do we need to know about economists and their relationship to power?
Servaas Storm: In a brief moment after financial crisis, mainstream economists did some soul-searching and rethinking. But once the economy stabilized (somewhat) thanks to large-scale government support, most went back to “normal,” rebuilding their professional status as neutral technocratic advisors and portraying macroeconomists as mere engineers solving practical problems. This is a chutzpah. Macroeconomics starts off from vision, moral values, perspectives and ideology, which color any analysis and need to be disclosed and debated. This was clear in the old days to economists as diverse as Joseph Schumpeter and Gunnar Myrdal, but not now anymore.
One example of “vision” is the unshaken belief of mainstream economics in the self-regulating and self-stabilizing powers of (financial) markets, which even Alan Greenspan admitted to be flawed.
It is exactly this “vision,” or ideology as Greenspan called it, which allowed the financial system to derail and blow-up our economies. But most economists refuse to debate their vision. They want to look scientific and neutral. Their refusal may also be directly linked to the fact that quite a few have undisclosed ties with financial-sector firms. But there is a far bigger reason, as explained by John Kenneth Galbraith long ago. By claiming that their economics has no content of power and politics but is neutral, mainstream economists have become “useful” as the influential and invaluable allies of the powers that be, who help to convince the public that the status quo, in Panglossian fashion, is the best of all possible worlds. They help de-democratize economic policy, which is quintessentially political and should be the subject of intense and informed democratic debate.
Huge lessons for India and emerging markets who think their policymakers as demigod engineers who will come and get the machine kicking. Economy is way too complex for any engineer to handle. Let us not be trapped into this thinking all the time.
This de-democratizing of economic policy has been playing out in the European economy, which you’ve compared to The Hunger Games. You note that we’re watching capitalism turn into something where a parasitic few prosper at the expense of the rest, who must increasingly fight to get their most basic needs met. How did things get this bad?
SS: Crisis-struck Eurozone countries are told that they got into trouble because of wastefulness and a lack of price or cost competitiveness. The powers that be preach austerity: Cut your government expenditures (however essential these are). Deregulate — especially the labor markets in order to reduce wages and labor costs. Go sell more exports to recover, since your debt-strapped citizens at home don’t have enough money to spend to keep the economy going. Do all this even if it means that wages (and living standards) get slashed by around 25-30 percent or more.
As a result of this “one-size-fits-all” policy prescription, all Eurozone member states (especially in Southern Europe) have been busy cutting down government spending, reducing wages, and breaking down social security and labor protection provisions. The predictable, dramatic, outcome has been that the crisis deepened to a near-collapse.
This frenzied race to see who can reduce labor costs the most looks like the contest forced upon twelve young people in The Hunger Games, a dystopian novel (and a movie) about how a fictional dictatorship is using “Bread and Circuses” to distract and appease its oppressed and disenfranchised population. The analogy between Europe’s crisis and The Hunger Games is that it’s competitive in the extreme. The contestants are the Eurozone members—each one trying to bootstrap its economy out of the throes of the most severe crisis in living memory. The audience judging each country’s performance is not made up of reality TV watchers but of financial (bond) markets and credit rating agencies, whose supposedly rational views can make or break any economy.
The name of the game is boosting cost-competitiveness and exports—and its rules are carved into stone in March 2011 in a ‘Euro Plus Competitiveness Pact,’ a plan imposed by Germany and the ECB that forced the other countries to play.
Actually somewhere down the line much of economic thinking has become really muddled. These issues of society and morality mattered greatly to earlier economists. But they called themselves as liberals and thought government will just create more problems. These guys also came up during times when they saw how their governments were just rapacious colonisers looting everything. Thus they believed people and markets work best.
Later on this became neoliberal agenda where though we are told the idea is to let markets work but all this agenda is written by you guessed it – govt and its institutions. Worst is it has completely ignored the human and morality values from discussions. Only money and profits matter. Over a period, financial markets or finocracy joined in taking the agenda even further.
Neoliberal agenda is neither new nor liberal and just the opposite actually. Nothing is funnier than seeing govt appointed central bankers telling us that we believe markets work the best. Really?
All the original liberals would have disapproved any of these policies in the name of liberalism.