Claims that mainstream economics is changing radically are far-fetched

I have received several E-mails over the last few weeks that suggest that the economics discipline is finally changing course to redress the major flaws in the curricula that is taught around the world and that perhaps Modern Monetary Theory (MMT) can take some credit for some of that. There has been a tendency for some time for those who are attracted to MMT to become somewhat celebratory, even to the point of declaring ‘victory’. This tendency is not limited to the MMT public who comment on social media and the like. My response is that we are probably further away from seeing fundamental change in the economics profession than perhaps where we were some years ago – after the GFC and in the early years of the pandemic (which continues). My answer reflects the incontestable fact that the make up of faculties within our higher education systems has not changed much, if at all, and the dominant publishing and grant awarding bodies still reflect that mainstream dominance. There is still a lot of work to be done and a lot of ‘funerals’ to attend (à la Max Planck).

The recent March 2024 edition of the IMF’s – Finance and Development Magazine – provides some useful evidence to substantiate my view.

It features a focus on ‘Economics: How should it change?’ and contains various contributions from six mainstream economists.

The opening article – Rethinking My Economics – is written by Angus Deaton, the Scottish-born economist who worked for many years at Princeton University in the US and was educated initially at the University of Cambridge.

His most known work is in the area of ‘consumer demand models’ (microeconomics) and later, he published in the area of mortality rates and the role of opioids among middle class Americans.

His interview with the IMF magazine has been lauded by many journalists (and activists) as evidence that economics might be changing for the better.

I think that overstates what he said.

He did note that:

Economics has achieved much; there are large bodies of often nonobvious theoretical understandings and of careful and sometimes compelling empirical evidence. The profession knows and understands many things. Yet today we are in some disarray.

The media has seized on the disarray part and seems to have accepted his opening salvo about achievements.

In my view, macroeconomics as currently practised has only served to fictionalise the world and encourage policy interventions (or lack of them) that have served the elites – widened inequality, impoverished communities, hastened the damaging impacts of climate change, hastened the emergence of the labour market precariat and more.

To say that it is in disarray depends on who one consults.

Not many mainstream economists would agree with that statement as they continue on a daily basis to teach that fiction and publish non-knowledge in journal outlets they strictly control.

The media also tightly controls who they give a platform and that is why the public are barraged with a multitude of characters who all reinforce the fiction and make the listener feel inadequate if they should dare question the ‘truth’.

What is in disarray is the society where the outcomes of the inputs from economists manifest – the problems I cited above.

The casual worker on low pay who is bullied by their greedy boss and then has to go to supermarkets after work where the oligopolies gouge profits out of them feel the disarray.

The lack of coherent policy on climate change that is justified by the government as not having enough money is noticed when bushfires and floods destroy housing and communities, even if the victims of this policy failure do not really understand why the government won’t act.

Or they will personalise the failure to act in terms of thoughts that action would force taxes up which they do not want to pay.

Deaton also wrote:

We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought.

It wasn’t a case of “may have”.

The fact is that the mainstream economic profession were causal agents in the GFC through their assertions that finance markets would always deliver optimal outcomes, which was evidenced by the fact that their major analytical models did not even contain a financial sector.

Even now, there is no systematic integration of the financial sector in mainstream teaching models.

Deaton then admits that “I have recently found myself changing my mind, a discomfiting process for someone who has been a practicing economist for more than half a century.”

How so?

Well,

1. He now says that the dominance of the “virtues of free, competitive markets” has meant that mainstream economics has ignored corporate power.

He wrote: “Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.”

That is, without beginning with class conflict, an analyst has zero chance of gaining an understanding of the dynamics of capitalism, where capital seeks to influence outcomes in any way that advances their cause to retain their hegemony.

But if we introduced that into economic analysis there would be no mainstream elements worth retaining.

The dominance unit of analysis in mainstream economics is the individual.

Society is not considered.

Collectives are not considered.

Conflict is played down.

And when power does come up in mainstream economics the focus has been of trade unions as perverting the free workings of the labour contracting process.

2. He claims that economics has become obsessed with efficiency at the expense of considerations of equity – “what constitutes human well-being” and “We often equate well-being with money or consumption, missing much of what matters to people” and “In current economic thinking, individuals matter much more than relationships between people in families or in communities.”

However, even the focus on efficiency in mainstream economics is narrow and largely confined to analysing inputs and outputs in private cost/benefit terms, specifically in terms of the contribution to private corporate profits.

Mainstream economists subjugate the social for the private, yet what really matters to people are the social costs and benefits.

Once we include those and take into account collective issues, most of the so-called microeconomic theory of utility and preferences falls apart.

Interdepedencies are much more important to people than independent evaluations.

Neoclassical microeconomics ceases if we were to start from that basis.

3. Distribution – Deaton says that “social justice can be an afterthought” in economics.

The dominant paradigm is that economics is objective and about efficiency and optimality and considerations of equity are not the realm of economic thinking.

I was always bemused by that as a student – given I studied as unemployment was rising in the late 1970s.

I wondered how economists could be obsessed with making trains run on time (efficiency) and things like that, yet, urge governments to run fiscal surpluses which they knew caused millions of people to lose their employment.

The economists justified themeselves by inventing the devious notion of a natural rate of unemployment, which was consistent with optimality.

I won’t go into the ‘models’ that delivered that conclusion.

So as unemployment rose in the second-half of the 1970s, suddenly the natural rate estimates increased so justify the higher jobless rates and to eschew any action from government.

If governments were unhappy about the unemployment politically then the mainstream economists said they could cut welfare payments (aka making people starve and desperate for any work at any pay) and cut minimum wages (aka driving wages down to pennies so that capricious employers could make even more profits).

The greatest economic inefficiency is mass unemployment, yet the mainstream economics advocate using that to stop inflation, which itself is often the outcome of the abuse of market power.

For these reasons and others, Deaton is now thinking that:

1. trade unions may not be “a nuisance” and corporations probably have too much power in the contracting process, such that wages and working conditions are negotiated on an unlevel playing field.

Well the playing field under capitalism has never been ‘level’ – capitalists can live without working, while workers have to work to survive.

That fact creates an imbalance from the start.

Trade unions just attenuate that somewhat but do not alter the fact.

2. He now writes “I am much more skeptical of the benefits of free trade to American workers and am even skeptical of the claim, which I and others have made in the past, that globalization was responsible for the vast reduction in global poverty over the past 30 years. ”

3. “I used to subscribe to the near consensus among economists that immigration to the US was a good thing, with great benefits to the migrants and little or no cost to domestic low-skilled workers. I no longer think so.”

The last two points are worthy of separate blog posts from me and I will follow up in the weeks to come (probably).

But neither shift in his world view is really challenging the core of mainstream economics.

Another article in the Magazine – Wendy Carlin explains how a new approach to economics education can help address pressing societal problems – talks about a new teaching program that some economists, who would claim progressive credentials, have come up with.

Sure enough, the new approach considers “such issues as climate change, inequality, innovation, and the future of work” which the author claimed is “COherent and RElevant — the capitalization refers to the implementation of radical change in the introductory economics curriculum by the global CORE Econ project”.

She also said that:

A new curriculum must reflect the problems we now face and demonstrate that an economics education can provide the tools to engage with them.

So go to their treatment of fiscal policy – The government’s finance – and you will find nothing has changed at all.

We read that the presence of government debt means that periods of stimulus must be followed by periods of austerity.

Why?

We read:

1. “When there is a budget deficit, this means the government must borrow to cover the gap between its revenue and its expenditure” – which as a basis for establishing intrinsic knowledge about the way the monetary system and the role of the currency-issuing government operates is false at the most elemental level.

Such a government NEVER needs to borrow – so the term ‘must’ is false knowledge.

It would better to teach students the intrinsic facts first and then to articulate why, given those facts, governments continue to borrow.

I keep reading Modern Monetary Theory (MMT) economists say the role of government borrowing is to allow the central bank to reach their interest rate targets – through open market operations that drain excess reserves.

Logically that is one operation the central banks can use.

But even that claim misses the point that the central bank never needs to hold any government debt and can simply allow the short run interest rate to drop to zero as the competition among banks with excess reserves in the overnight, interbank market forces the rate down.

Further, even if the central bank wants to maintain a non-zero interest rate target as its expression of monetary policy, then it can simply pay the banks with excess reserves a return commensurate with that target so as to choke of any incentive such a bank has to try to loan out the excesses to other banks in the overnight market.

So in reality there is no role for government debt in that context.

We really have to see government debt as corporate welfare in a highly speculative global finance world with the government enhancing the profit-seeking prospects of the investment banks in a highly uncertain environment.

That is the primary role the debt now plays – where there is a currency-issuing government issuing the debt in its own currency that debt is risk free – it carries no credit risk for investors so is an ideal instrument to park cash in where there is increased uncertainty as to the returns on other more riskier financial assets.

It also helps the hedge funds etc ‘price’ the returns on the risky products they trade – against the risk free benchmark.

There is no mention of that in the CORE curriculum.

2. Moreover, we read “Government bonds are attractive to investors because they pay a fixed interest rate and because they are generally considered a safe investment: the default risk on government bonds is usually low.”

And then the discussion went into the concept of a “sovereign debt crisis” – and the students are taught that:

However, in 2010, there was an increase in interest rates on bonds issued by the Irish, Greek, Spanish, and Portuguese governments, which was a signal of a sharp increase in default risk—the likelihood that the government would be unable to make the required payments on its debt. It marked the start of the Eurozone crisis. Governments of countries experiencing a sovereign debt crisis may have no alternative to austerity policies if they can no longer borrow, because in this case they cannot spend more than the tax revenue they receive.

So students are not apprised of the fact that the Eurozone is a special monetary system where the 20 Member States use a foreign currency – the euro – which is the reason the debt they issue comes with credit risk (the risk of default).

That problem is unique to those states is inapplicable to currency-issuing governments which can always repay their liabilities as long as they are denominated in the currency in which they issue.

Why would one think it is useful not to allow students to understand that, Australia, for example, will never face a ‘sovereign debt crisis’ where the government will run out of money and be forced to engage in harsh austerity in order to persuade the financial markets to continue making loans to them?

Such misinformation complete distorts the way the students think about the world and the policy options that are available to governments.

In the case of the Economic and Monetary Union, if everybody understood the consequences of their nations surrendering their currency-sovereignty, then perhaps they might start to think about the benefits of exiting the common currency in a different way.

At present, such teaching makes out that all governments, irrespective of their currency status, have to impose austerity if there is ‘too much debt’, which blinds the student to understanding that the Eurozone is a particularly unique dysfunctional monetary system.

3. Further, the students in the CORE approach are confronted with this:

A large stock of debt relative to GDP can be a problem because, like a household, the government has to pay interest on its debt and it has to raise revenue to pay the interest, which may require raising tax rates.

Please explain Japan.

The only problem with a large stock of outstanding government debt is if the interest payments are such that the fiscal room for other expenditure (on social security etc) is squeezed relative to available real productive capacity.

But that is unlikely to happen and if it was a problem then the nation’s central bank can simply use its capacity to control yields – via purchases in the secondary bond market (which is sometimes called quantitative easing) and/or the government can just stop issuing debt.

The only reason government bond yields might rise to uncomfortable levels is that the government cedes autonomy to the financial speculators and allows the yields to be set freely in the auction process.

That is a choice of government not something that the financial markets can impose.

Just look at the way the financial markets have been continually pressuring the Bank of Japan to increase rates and end Yield Curve Control (so that the 10-year bond rate rises).

That pressure has been spectacularly unsuccsessful because the Bank of Japan officials know they hold the cards not the speculators and are using their monetary policy power as the currency-issuer to pursue policy objectives that do not prioritise rewarding the betting of the financial speculators, but, rather serve the broader interests of the Japanese people.

Conclusion

So not much to cheer about really.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.