Slaves of defunct economists
Excellent review by Henry Farrell in The Washington Monthly:
Austerity: The History of a Dangerous Idea
by Mark Blyth
Oxford University Press, 304 pp.
Oordn January 25, the British statistics office announced that the United Kingdom’s economy had shrunk by 0.3 percent in the last quarter of 2012. After enduring two recessions in the last four years, Britain is now well on its way into a third. The pain has been compounded by a succession of austerity budgets, in which Britain’s Conservative-led government has tried to hack away at spending. Repeated rounds of cuts have battered the British economy. However, Britain’s chief economic policymaker, Chancellor of the Exchequer George Osborne, wants still more pain. He is pushing the government to identify £10 billion more in cuts this year.
This makes no economic sense. Olivier Blanchard, chief economist at the International Monetary Fund, has pleaded for Britain to start focusing on growth rather than fiscal virtue, claiming that “we’ve never been passionate about austerity.” It doesn’t make any political sense, either. Voters like vague proposals for “reducing government waste” in the abstract, but hate cuts to programs that they care about. Why do so many members of the political elite disagree with Blanchard in their visceral passion for austerity? Why do they keep on pushing for pain when it threatens economic ruin and hurts their election chances?
Mark Blyth’s new book, Austerity: The History of a Dangerous Idea, gives us some important clues. Many books have been published in the last few years explaining why some economic ideas (the efficient markets hypothesis; the Black-Scholes option pricing model) are dangerous. Blyth, professor of international political economy at Brown University (and a friend of mine), explains why a blind fixation on austerity is one of these terrible ideas. However, his book does two additional things that other books in this genre do not. First, it asks why bad economic ideas, like austerity, have such powerful consequences. Economists themselves do not think that ideas are powerful, and their models usually assume that people are motivated by straightforward self-interest rather than complicated notions. Second, it asks why these ideas keep on coming back. Every time governments have experimented with austerity, it has led to disaster, and yet a couple of decades later, their successors try again, with equally dismal consequences.
Blyth cares about bad ideas because they have profound consequences. We do not live in the tidy, ordered universe depicted by economists’ models. Instead, our world is crazy and chaotic. We try to control this world through imposing our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work for a while. For a couple of decades, it looked as though markets really were efficient, in the way that economists claimed they were. As long as everyone believed in the underlying idea of underlying markets, and believed that everyone else believed in this idea too, they could sustain the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating another short-lived island of stability.
This means that ideas are fundamentally important. The world does not come with an instruction sheet, but ideas can make it seem as if it does. They tell you which things to care about, and which to ignore; which policies to implement, and which to ridicule. This was true before the economic crisis. Everyone from the center left to the center right believed that weakly regulated markets worked as advertised, right up to the moment when they didn’t. It is equally true in the aftermath, as boosters of neoliberalism have moved with remarkable alacrity from one set of bad ideas to another. . .