Prospect Magazine: Back to school: top economists on what their subject needs to learn next: Learn to prevent—we’re out of cure:
The crisis and its aftermath showed that the North Atlantic economies could not maintain full employment by following the Keynesian road. The idea that when the private sector sits down the public sector should stand up—that consistent durable prosperity can be achieved by having government step in as a spender of last resort—proved unsustainable. It also showed that full employment could not be maintained by following the monetarist road: the idea that successful regulation could keep finance on a sound footing, or at least a steady enough footing for central banks to manage, also proved unsustainable.
Ultimately prosperity is unlikely to be maintained without competent democratic government, and that has proven shaky since the slump. The big question is: what institutional—and perhaps political—changes are necessary to avoid another wild swing? In all likelihood we’ve only a decade to build better institutions of economic management. And we have not yet begun...
What other people say:
Larry Summers: Get to grips with vicious cycles: The central lesson of 21st century economic experience is that modern economies are not self-equilibrating systems. Indeed, modern economies are often dominated by positive feedback effects that destabilise. Margin calls, bank runs, portfolio insurance, option hedging all cause more selling of assets as their values go down. When selling causes lower prices, which cause more selling, the market mechanism is in trouble. We now understand how it can give way to long-term economic problems such as secular stagnation, where excessive saving drags down demand and economic growth slows.
The challenge is to prevent vicious cycles from developing and to contain them when they start. This will mean more, smarter government policy, not a retreat into market fundamentalism.
Deirdre McCloskey: Cheer up: Don’t believe the gloomsters claiming that the sky is falling, and that we are doomed to stagnation. No it isn’t, and no we aren’t. The gloom produces policies of zero sum, protecting what we have. But the recent history tells of spectacular positive sums. China and India produce riches and engineers at astonishing rates. Wages in the old rich countries are said to be stuck, but they’ve actually kept rising, once allowance is made for the immense rise in the quality of goods and services.
As for the robots taking our jobs, since modern growth got going—around the year 1800—technological unemployment has never happened, so don’t believe that some half-understood phantom of artificial intelligence is going to put you out on the streets. Be of good cheer. Since 1800, real income has increased 3,000 per cent in many countries, and soon the world. Let it happen.
Martin Wolf: Pathology, prophylactics and palliatives: Macroeconomics needs to grapple with three linked questions. First, what causes financial crises? Second, what policies would best reduce the risks of such crises? Third, what should the policy response be to crises once they have happened?
On the first, how should we understand the interaction between the financial and monetary systems and the real economy? Sometimes the economy seems to depend on a combination of asset-price bubbles with the unsustainably rapid growth of debt. Why should this be so? On the second, are there more sustainable ways to generate demand? Might redistribution of income towards spenders be the answer? What role can government spending play?
On the third, are there alternatives to a combination of heavy government borrowing with supportive monetary policy? This combination has brought recovery. But the indebtedness built up before the crisis has, in part, just shifted onto the public sector. Moreover, even the private sector’s deleveraging has been modest. Economies remain fragile. Macroeconomics is, alas, not healthy.
Robert Gordon: Technology isn’t working: While we often hear that rising inequality is the greatest problem facing western economies, in the long run a greater problem is slow productivity growth. The slow rate of increase in the amount businesses can produce per worker accounts for wage stagnation and the growing fiscal burden of welfare payments, relative to the economy’s ability to raise taxes to pay for these entitlements.
In the US, compare annual productivity growth in the past seven years of 0.5 per cent with the 2.8 per cent over the 50 years between 1920 and 1970. What is the difference? The middle five decades of the twentieth century benefitted from an amazing multiplicity of great inventions—electricity and all it made possible, the internal combustion engine that replaced the horse with motor vehicles and air transport, and the whole realm of entertainment and communication inventions, such as the telephone, phonograph, radio, motion pictures, and TV.
In comparison, computers and the internet boosted productivity growth only briefly in 1996-2004, but since that era, in which paper and file cabinets were replaced by flat screens, search engines, and the internet, business methods have seen little further progress. So far, robots and artificial intelligence have made little difference in the daily lives of workers and consumers.
Barry Eichengreen: Get to work on jobs: The global crisis and populist backlash laid bare the fact that American “blue-collar workers” had been left behind by technology and globalisation. President Trump promises to rescue them by “making coal great again” and taxing steel imports. We need a better way.
The conventional wisdom used to be that if manufacturing jobs can’t be recaptured from robots and China, then the solution is better service-sectors jobs—jobs that were presumed to be safe from automation and import competition because they require situational adaptability, interpersonal skills and oral communication. But now advances in artificial intelligence raise questions about the future of even those jobs.
Still, jobs requiring workers to combine practical services, communication and empathy—care workers, for example—should remain safe for the foreseeable future. So the pressing question becomes how to better prepare workers for these particular tasks. This requires rethinking education, training and the nature of work itself—a process that has only just begun.
Jim O’Neill: Learn to learn from China: The presumption used to be that China would have to learn from the west if it wanted to keep developing, especially when it comes to the political system. But 20 per cent of the Chinese now pull in a western-style income of $40,000-plus per year—that’s 260m people living on western-style incomes, far more than in any actual western country except the US. So the question becomes: what can we learn from China?
In addition to detailed areas like maths tuition (where the UK is already running pilots based on the best Chinese schools) two big areas stand out. First, when it comes to big changes, we should ensure everyone is informed and prepared; the circumstances of the EU referendum is the kind of thing that makes Beijing doubt the wisdom of western-style democracy.
And then there is macro-economic policy. For at least 20 years, Beijing has shown it can head off problems, and deal with crises. Western experts have repeatedly predicted a UK-style housing bubble-and-burst for China, but its authorities have pricked bubbles before they grew too big. Bankers and hedge funds bemoan how hard it is to predict what Chinese policymakers will do next. But the Chinese authorities see their role as being to fix real problems, not to provide clarity to market participants.
Adair Turner: Clip property’s wings: In an automated economy, without intervention, the rewards are inevitably concentrated in various forms of rent—especially for those who own land in urban centres, technologies that benefit from network effects (Google, Facebook) and inventions. All of these things are concentrated in relatively few hands, fuelling the income gap.
So far, we’ve left land as a free-for-all, greatly benefiting its holders, and increased the advantages of those with intellectual property, for example by extending copyrights for decades after an artist has died. If we’re serious about inequality, we need to change course; economics should concentrate on devising new, smart taxes and regulations to put property back in its place.
John Kay: Embrace radical uncertainty: Between 1920 and 1950, a debate took place which defined the future of economics in the second half of the 20th century. On one side were John Maynard Keynes and Frank Knight; on the other, Frank Ramsey and Jimmie Savage.
Knight and Keynes believed in the ubiquity of “radical uncertainty”. Not only did we not know what was going to happen, we had a very limited ability to even describe the things that might happen. They distinguished risk, which could be described with the aid of probabilities, from real uncertainty—which could not. In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.
Their opponents insisted instead that all uncertainties could be described probabilistically. And their opponents won, not least because their probabilistic world was convenient: it could be described axiomatically and mathematically.
It is difficult to exaggerate the practical consequence of the outcome of that technical argument. To acknowledge the role of radical uncertainty is to knock away the foundations of finance theory and much modern macroeconomics. But the reigning consensus is beset with glaring weaknesses. Keynes and Knight were right, and their opponents wrong. And recognition of that is a necessary preliminary to the rebuilding of a more relevant economic theory.
Tim Congdon: Figuring out (again) where the banks fit in: Some big questions in economics come and go, but one is there all the time: how are national income and output determined, and what does the answer mean for unemployment and inflation? Economists flopped this exam question when it was put to them in the Great Recession of 2008. In the coming decade, they will be trying to do better.
Keynes is supposed to have supplied a good reply. Unfortunately, in the last 20 years, central banks have instead preferred “New Keynesianism,” a three-equation model which has been widely described as the workhorse of modern macroeconomic analysis.
But in 2008, it was useless. Not one of the equations referred to the banking system, or the quantities of bank credit and money, even though it is obvious that banks were important in the Great Recession. One of the equations (the so-called “Taylor rule”) prescribed heavily negative interest rates to deal with the slump. This would have been fine, except that interest rates cannot go much beneath zero. New Keynesianism ought long ago to have been sent to the knacker’s yard.
The main intellectual challenge for economics now, just as it was when Keynes was writing, is to identify how the banking system—with its alleged masters of the universe, and its undoubted manias, delinquencies and pathologies—interacts with the rest of the liberal capitalist democracies of today.