Heterodox economics is thin political fare

Last week the Social Liberal Forum hosted a three part series of blogs by”heterodox” economist Simon Radford, “Shouldn’t we listen to those who predicted the crash?”. In it he excoriated orthodox economics, and urged British Liberal Democrats to engage with heterodox economics. His advice is fine as far as it goes, but Lib Dems will find heterodox economics promises much and delivers little.

Now let me make my position clear. I think that orthodox economics has gone seriously awry, and I don’t want to defend it. Also I think that economics has become so central to the political debate that all those interested in politics should engage with it if they can – and they certainly shouldn’t accept orthodox economics as gospel. So to that extent I agree with Mr Radford.

But reading his series was like listening to a shaggy dog story. I eagerly awaited the punch line, the new liberal vision he seemed to suggest at the start, but it never came. The series ended before he had managed to say anything about the practical policy implications of following heterodox economics. I shouldn’t have been surprised. “Heterodox” simply means “not orthodox”, and it doesn’t imply any kind of coherence (which “orthodox” does). What we get was quite an interesting narrative, including a historical one on the development of orthodox economics after 1945. It explains that orthodox economics is seriously wrong – and was in large part to blame for the economic crash of 2008/2009. But we get no clear ideas as to what might be put in its place. This is quite a familiar pattern, I’m afraid. Criticising orthodox economics is like shooting rats in a barrel; so many of its core concepts are clearly nonsense; and it’s old news too. And yet the orthodoxy continues for a reason – it is at least coherent, and offers a discourse for the making of predictions and taking of decisions. It will persist for as long nobody presents a serious alternative way of thinking. This is a point made very well by the one heterodox economist I have any real time for, George Cooper. He at least puts some energy into shaping alternative ways of looking at things. There is no suggestion of that from Mr Radford.

There is a further problem that his readers might not pick up on. In it he seems to suggest, without quite saying it, that orthodox economics is behind current austerity policies, so popular in developed world economies apart from Japan. And yet the most trenchant critics of austerity are as orthodox as they come: economists such as Paul Krugman, Joe Stiglitz or Danny Blanchflower. Indeed when viewing the debate about the economics of austerity in places like the FT, I am struck by the number of orthodox economists taking a critical stance, and the dearth of them defending austerity. Instead austerity is defended by politicians and people like Niall Ferguson, who is a historian rather than an economist. Austerity is not built by a group of theoretical economists forcing the world to conform to their theories. It is largely the result of pragmatic politicians and central bankers struggling to cope with the realities of the world they are faced with. Germans may be fond of their “ordoliberalism“, with its worship of rules, but this not orthodox economics.

And this draws out an interesting point. It is that Keynesians increasingly dominate orthodox economics, and yet they are being marginalised politically. Before the crash there was a stand-off between neoclassical economists (often called “fresh water” because they tend to come from US Mid West universities) and the neo-Keynesians (“salt water”, since their US bases are on the eastern and western seaboards). Neoclassicists tended to oppose all kinds of state intervention; the neo-Keynesians offered clear theories for state intervention through fiscal and monetary policy. The crash has seriously diminished the standing of the neoclassicists. This wasn’t because their policies led to the crash – they argue quite coherently that it was various forms of state intervention that were the root cause. It was because they had absolutely nothing to say when the crash happened. They had a general attitude that the recession should be allowed to plumb its depths without any intervention. Nowhere was this considered to be practical or acceptable. Neoclassicists might support the idea of austerity, but of such a severe form that it would have no serious audience beyond US Republican primary voters. Neoclassicists haven’t helped themselves by predicting that the loose monetary policies followed by central banks would lead to massive inflation – when in fact inflation has barely budged. Neoclassical economics seems to have no connection with reality. Neo-Keynesians like Mr Krugman, meanwhile, simply say that the crash left their version of orthodoxy intact, bar a few tweaks. Indeed they confidently claim the post-crash world as vindication. To them heterodox economics is an unnecessary distraction.

And it’s hard not to sympathise with that view. Mr Radford suggests following websites such as naked capitalism or Steve Keen. The former seems to be a rage of negativity based mainly on US liberal domestic concerns; and the latter doesn’t seem to say anything that hasn’t been said better by the FT’s highly orthodox Martin Wolf. Confession – these opinions are based on a quick scan of these sites and reading Mr Keen’s explanation of the current China crisis. I may be doing both an injustice – but they don’t make a good first impression.

And here’s the strange thing. I have read almost no clear critique of the neo-Keynesian orthodoxy used to criticise austerity policies. And yet if their prescriptions are so obvious, why haven’t they been followed? It is clear to me that policymakers are basing their judgements on practical and political problems, not on economic theory – problems that their neo-Keynesian critics refuse to address seriously, so bound up are they in the theory of it all. I think this is a sign that neo-Keynesianism is past its sell-by date. That it no longer reflects the actual realities lurking behind the aggregated statistics that are the lifeblood of orthodox economics.

So we now find that the political left increasingly depends on orthodox economics for its politcal critique, and yet governments and central bankers are blundering along a different path, lacking a clear theoretical framework. Unfortunately, instead of searching for an updated theoretical framework that might offer public policymakers more guidance, heterodox economists seem content to rage against authority. Perhaps it is because the development of a genuinely new economics leads to questions that not even heterodox economists are comfortable with, such as the usefulness of aggregated economic statistics, and such central concepts as economic growth. But those searching for the policies of the future have to address these profound issues.