onsdag 2 april 2008

Eleven years of New Labour economics - should anyone be blamed?

We shall soon be celebrating eleven years of New Labour. There was a long honeymoon period as the government was seen as a huge improvement on the sleazy old Conservatives. And being on the upwards side of the economic cycle, it looked as if Labour's policies were doing a good job, a success which Labour was not slow to claim as its own. And so, without any checks put in place to deal with it, the cycle moved on to its path of boom-to-bust, the point we have now reached, pretty much on schedule.

Is the government to blame? Had there been a Conservative or Liberal Democrat government in power, things would have turned out much the same. Moreover, any measures to prevent the boom-and-bust would have had to be put in place by 2003.

When Labour was elected, Gordon Brown became Chancellor of the Exchequer, and followed policies framed by his advisor, Ed Balls. Those policies, and the assumptions underlying them, were set out by Ed Balls in an article published in the Observer around 1995. But it was evident then that he had little real understanding of the forces that drove the economy. So should Balls be blamed?

I suggest not. He was an an academic high-flyer, educated at the independent Nottingham High School and Keble College, Oxford where he studied PPE, and later as a Kennedy Scholar at Harvard University. While at Oxford, Balls joined all the main political societies so that he could "hear all the speeches at all the political clubs." His career began as economic leader writer at the Financial Times (1990–94) followed by appointment as an economic adviser to the then shadow chancellor Gordon Brown (1994–97). In 1995, in a speech written for Gordon Brown to give to an economics conference, he managed to insert the jargon phrase "post neoclassical endogenous growth theory"Wikipedia entry

Thus, the British government has had the benefit of the best that academia has to offer in the way of contemporary understanding of economics. If, despite this, things can go so badly wrong, surely the blame must lie with those who shape the thinking in the academic world? Or is that unfair?

Of course there are many parallel streams of economic thought, but this surely is part of the problem? In the physical sciences, by contrast, whilst there is contention at the frontiers of knowledge, there is a hinterland of agreed principles and theory. It was a actually an economics professor, Wynne Godley, at Cambridge University, who, writing in the Financial Times some time in the 1980s, described economics as a subject in a state of great confusion, with no settled and accepted body of theory. Not having been through the system myself, I observe critically from the outside and it seems to me that not only that some of the fundamental concepts in modern economic theory are nonsensical and not in accord with what can be readily observed in practice, but that important insights from the economists of earlier times, notably the French Physiocrats, David Ricardo and Henry George, are dismissed as interesting historical notions of no importance now. This is strange because they systematise what every shopkeeper, every street busker, every Big Issue seller even, understands instinctively. In other words, economics as studied in the academic world has become so abstracted as to be useless as a means of guiding governments wishing to achieve their objectives, whatever those may be.

And so if there is any blame to be laid, it must be on complacent academics whose studies have got out of touch with the real world away from the dreaming spires. Or is this an unduly harsh judgement on people who one must assume are doing the best by their lights?

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