Economics for the Many: Labour’s challenge to the orthodoxy part 1

In my last post I referred to a new book, Economics for the Many, a collection of essays edited by Labour's Shadow Chancellor John McDonnell. I am very interested in any new thinking coming from the left because I spy the possibility of a coalition between liberals and socialists - whether inside Labour or between Labour and another party or parties - since the right  seem to have run out of ideas and started allying themselves with toxic nostalgists. So I bought the book. My first idea was to read it all and produce a single review article. No doubt I would have come up with something along the lines of this rather dismissive review by the FT's Chris Giles. But the interest is likely to come from some of the details rather than the general thrust, so my plan is write a series of articles as I read it, a few chapters at a time. This is the first.

Introduction - John McDonnell

In my last post I was somewhat dismissive of Mr McDonnell as a Leninist more interested in candyfloss policies than promoting serious policy debate. Be that as it may, Mr McDonnell is keen to portray a picture of a ferment of new thinking on the left, which will produce a radical new orthodoxy, much as Margaret Thatcher ushered in 40 years ago. This collection of essays is part of the evidence, and his introduction sets out an overview..

As such it doesn't tell us very much. Some of the familiar left wing narrative pops up. Those two abstract nouns, neoliberalism and austerity, play star roles as the villains. The first as a process of alienation of economic management from human values, the second being ideologically motivated cuts that have left tragic consequences. These let to the “social murder” of Grenfell Tower, for example.

But is it candyfloss? Is it designed to give the impression of intellectual movement just to provide cover for a power grab? I have two concerns. Are they coherent? And in particular, do they point to a radical decentralisation of power, or in fact the a Chinese style centralisation, guided by a political commissariat? And secondly, are they actually workable? Do they form a credible basis for reforms in our economic management?

1.    Democratising Economics in a Post-truth World – Antonia Jennings

This isn’t a promising start. The basic thesis is sound enough. There is widespread ignorance about economics, and bafflement at the way it is talked about. I think it is a bit worse than Antonia Jennings, a member of the political think tank/charity ecosystem, suggests. Many of that minority who think they have a strong grasp of the subject actually don’t. This allows politicians to build up myths not based on sound economics. The austerity policies of the 2010 government is, of course, used as the primary example. The Brexit campaign of 2016 is used as another.

Her solutions, though, don’t measure up to the task. She suggests a number of nice ideas: improve education at schools and universities, bring more women into the profession, change the way economics is presented. But these feel hopelessly inadequate.

The first problem is that economics rests on a number of insights that are profoundly counter-intuitive. One is that an economy as a whole has to be managed quite differently from a household budget – the idea of living within your means works out in a very different way. Another is the idea of comparative advantage – which means that trade should benefit everybody. Alas these ideas are not only counter-intuitive, they have layers of understanding, which even trained economists argue over. Many, for example, have not got beyond the basic idea of "trade is good" to understand how a changing world might affect the benefits of trade. This will take much more than a bit extra schooling and more user-friendly language to fix, surely?

The second is the sheer political imperative to frame an easily digestible narrative. Austerity illustrates this. There is a perfectly economically literate case to be made for this policy – many economically literate politicians and civil servants, amongst others, supported it. The government did not attempt to make that case in public because the level of political debate did not permit it. The counter-narrative from the left that austerity was unnecessary and therefore an ideological attack on public servants and poor people is just as illiterate, and framed from the same political necessity. In fact there is a very challenging debate to be had on the subject with well-made arguments on both sides. What is rather depressing about the whole episode is that so few people are or were interested in having that argument out. It is too politically important for that.

Political polarisation is no doubt a strong factor here. It is much more effective to shout down and demonise your opponent than start a reasoned debate. Labour is part of the problem, or, more generously, a victim. What is the answer? I am tempted to say that it is greater political pluralism based on electoral reform – though that has brought its own problems elsewhere in the world.

So yes to reforming the economics discipline. But expectations on the political impact of this need to be moderated. The problem is more deep-seated.

In fact I suspect this chapter is more about maintaining that sense of outrage at neoliberalism and austerity, with the suggestion that both are founded on economic ignorance. A rather bitter piece of candyfloss.

2.    Labour’s Fiscal Credibility Rule in Context – Simon Wren-Lewis

Simon Wren-Lewis is an academic macroeconomist, who has advised the Labour leadership on its economic policies. He writes lucidly and is perhaps an example of what Ms Jennings is looking for in clearer economic discourse. His topic is the Fiscal Credibility Rule (FCR), an operating principle for tax and spending policy that was adopted by the Labour leadership before the 2017 general election to show that it could be trusted with the government finances.

He starts with an elegant description of macroeconomic policy before the crash. He then moves into criticism of the 2010 coalition government’s austerity policy, which he says strangled economic growth. This story is central to Labour’s narrative, and you cannot expect a balanced discussion of this in a book like this, published on the party’s behalf. Mr Wren-Lewis, anyway, has taken sides, in an example of something that Ms Jennings might have commented on but didn’t: academic economists take sides in policy debates rather than trying to tease out the disputed issues and resolve them. I’m not sure how much this tendency is due to the politically charged nature of the discipline, and how much this goes on generally in academia. It is tempting to rise to the challenge, but this is the wrong place to do it. His is a perfectly respectable academic argument that I happen to disagree with. But it matters more in understanding the past than in working out what to do in the future.

The feature of the FCR that Mr Wren-Lewis thinks is most innovative is the idea that when interest rates are near zero, the government should use fiscal policy to help restore aggregate demand back to the point when interest rates start to rise again. The article then takes a rather puzzling turn. He talks about Modern Monetary Theory (MMT – SW-L shows a real weakness for TLAs). This is an idea that has growing currency on the left, which suggests that the regulation of demand should principally carried out by fiscal policy, and not the manipulation of interest rates by a central bank. If that is the case then the FCR is a bit of a miserable compromise. He leaves it unclear as what he really thinks.

Another interesting point is thrown in as an aside: Labour’s fiscal rule does not include borrowing for investment. This would be a radical departure for the British Treasury, who like to manage government borrowing as a whole, whether it is driven by investment or not. Many academic economists, such as Joe Stiglitz, a Nobel Laureate often quoted by writers on the left, think that this is critical. If you read their critique of the 2010 coalition government closely, you will see that they don’t particularly criticise the aspects of austerity that made Labour supporters most angry – benefit cuts and reductions to the government payroll – but focus on the slashing of investment. An interesting debate is glossed over here: if fiscal policy is to be the main instrument for managing the business cycle, what balance should be taken by capital spending, and what by revenue deficits? I can see arguments on both sides, but it isn’t talked about enough.

For what it is worth, I agree with the central premise of MMT (which Mr Wren-Lewis points out is old-fashioned Keynesianism) – which is that fiscal policy should take up a full role in managing the business cycle, relegating central banks to support. But that invites a whole series of difficult questions, of which the role of capital spending is just one. A more important one is how do you tell when the economy is overheating, and so fiscal policy should be tightened? Mr Wren-Lewis simply suggests inflation – but in the modern economy inflation is no longer a reliable signal: dangerous imbalances in the financial system can build up instead. And there is an even bigger question: MMT in its simplest form implies a massive concentration of political power at the centre. For Leninists that is a good thing; liberals worry that this simply leads to incompetence and corruption.

But Labour aren’t going there yet. The FCR is actually rather a modest proposal, and sensible enough as far as it goes. But there is a much bigger debate to be had about how to manage the macroeconomy.

 

So a rather disappointing start, but many of the more interesting chapters were always going to be later on.

 

 

 

5 thoughts on “Economics for the Many: Labour’s challenge to the orthodoxy part 1”

  1. the central premise of MMT (which Mr Wren-Lewis points out is old-fashioned Keynesianism)

    SW-L probably isn’t right about this. New ideas are often countered by various spurious arguments. They are usually ignored to start with, then they are ridiculed, then they are disparaged by saying there’s nothing new about them etc.

    MMT has it roots, to some extent in Keynesianism, but there are important differences too. Keynes believed in the importance of fixing exchange rates. MMT emphasises that they should float. Keynes wanted trade to be kept closely balanced. MMT says there is no need and that it’s the big net exporters who end up with a worse deal. Incidentally, I possibly more in agreement with Keynes than MMT on this but I do understand the MMT argument.

    The ideas of all economists have to be understood in the context of their time. Gold was an important part of the monetary system in Keynes’ time. MMT recognises that’s all history now and has been for over 40 years.

  2. “MMT in its simplest form implies a massive concentration of political power at the centre.”

    No it doesn’t. Not necessarily. MMT is either right or it isn’t. If it is right then those who want to shrink the size of the state might want to take a look at it.

    They would soon realise that a policy of austerity to reduce the govt’s budget deficit is probably the worst way of going about it. All this does is depress demand and deflates the economy, creating the conditions where more people are more dependent on social programs than they would otherwise be.

    MMT is more properly a way of understanding how the economy works. If you like, a prism through which to view the economy. If the neoliberals/ordoliberals had wanted to set up a common currency in the EU that was going to bring the entire EU project into disrepute, lead to the rise of far right across the continent, and the create conditions in the UK that would lead to Brexit then any competent MMTer could have advised them exactly how to go about it!

    1. As I understand it MMT values national sovereignty, with the concentration of fiscal policy and the central bank under close political control. This gives the government immense power to regulate the economy, but who regulates them to ensure that they don’t bend things to make fiscal policy looser than it should be, and so build up inflation or a financial bubble or sovereign debt crisis? (though MMters don’t advocate borrowing in foreign currency, so that last a bit unfair). Precedents around the world are not encouraging (italy and Portugal before the Euro…to say nothing of Venezuela, etc), which is why ideas to constrain executive power, through fixed exchange rates and, at the extreme, the Euro, are so persistent. Now if there are ideas for institutional arrangements that can stop the abuse, that might help me – but it seems to undermine the whole point of it. The Euro is best understood as a deliberate curb on executive power to prevent its abuse. It went to far with is fiscal controls, but countries that did not go down the Euro route (Sweden, Poland, Hungary) have at least a big problem a problem with the far right as those that did. and not all those that did have a problem with the far right (Spain, Portugal, Ireland…). As I see it MMT advocates think such restraints on executive power are a criminal act that stops states from managing the economy efficiently.

  3. What’s the problem with National Sovereignty? The only difference between you and I on this point is that you have more faith in an emerging pan-European entity. Whereas I’m much more sceptical about the practicalities of ever making it work properly and democratically.

    MMTers know how to make it work economically. You need a EU government with considerable powers of spending and taxation, a central bank (the ECB) under its control and a common set of European laws. An ever closer union! A United States of Europe.

    I wouldn’t claim MMTers have a monopoly of wisdom about this. Milton Friedman said pretty much the same in 1997.

    https://www.project-syndicate.org/commentary/the-euro–monetary-unity-to-political-disunity

    Either the EU will get there or the forces, under the present arrangement, will gradually increase until it breaks apart. Or, maybe a new GFC will create the conditions for that to happen.

    MMT simply recognises that the model of the nation state, ie one government, one currency, one taxation and spending system is the one that we see is the norm on a world scale. Yes, they can be well run and also they can be badly run. I’m not sure if there’s any way to prevent the latter. I know I’m not being very original in saying that democracy is the least worst of all systems but that’s the way it is.

    The EU wouldn’t be in such a mess if it had been more democratic. Most people were reasonably happy with the old EEC. For all its faults it worked reasonably well and that’s what we need to get back to.

    1. I am glad to see that my understanding of MMT is reasonably sound. At the heart of it is an old debate about whether political power should be distributed or not – checks and balances. This clearly gets in the way of doing the right thing a lot of the time, but, so the theory goes, it also prevents the worst abuses. National sovereignty as an idea works up to a point, but I still think it needs to be restrained, and that will be better in the long run. That’s a hard sell to British people, as we are nearly the only country not to have been overrun by somebody else in the last 200 years and our separation of powers has worked quite well in practice, if not in theory

      The old EEC got stuck in a rut, and the Single Market gave it a very strong economic boost. I wouldn’t say that more or less democracy was the problem, but that its concept of democracy was flawed. The European Parliament is never going to fill a democratic deficit. Actually I think the old parliament with people drawn from national parliaments was a better idea. But the point is that the sovereign governments should be given more heft within its institutions – which indeed is what has happened in practice over the last few years. But I can’t pretend that it’s working as it should!

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