\t\t\t\tAs part of the paradigmic turmoil that is confronting mainstream economists, we are witnessing some very interesting strategies. Imagine you establish a set of principles that are seemingly inviolable. They are the bedrock of the belief system, even though it is not called that. These principles then offer all sorts of predictions about, yes, the real world. They are without nuance. The predictions are so worrying, that politicians, whether they are knowing or not, proceed with caution in some cases, and, in other cases, openly damage the well-being of citizens because they have been told that shock therapy is better than a long drawn out demise into ‘le marasme’. The authority for all the carnage that follows (unemployment, poverty, pension cuts, degraded public infrastructure and services, etc) is these ‘inviolable principles’. Economists swan around the world preaching them and bullying students and others into accepting them as gospel. The policy advice is hard and fast. Governments must stay credible. Except one day they completely change tack and all the policy advice that established certain actions to be totally taboo become the norm. We observe things are better as a result. Does this mean those ‘inviolable principles’ were bunk all along? Not according to the mainstream economists who are trying to position themselves on the right side of history. Apparently, their optimising New Keynesian models can totally justify fiscal dominance and central bank funding fiscal deficits when yesterday such actions were taboo. Which leg are they trying to pull?
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So this set of principles is held out as a science – a body of principles embedded in an understanding of human psychology and incentive systems. Except, the practitioners forget to tell you that they are not sociologists and psychologists, nor are they anthropologists.<\/p>\n
And they ignore the fact that those social sciences actually are built on establishing a clinical and social understanding of human behaviour, motivation and organisation.<\/p>\n
And so these ‘principles’ create an image of humanity that no other social scientist or medical scientist, for that matter, can identify as being human.<\/p>\n
Never mind. Continue. Who are they to tell us what it right anyway?<\/p>\n
These principles then offer all sorts of predictions about, yes, the real world.<\/p>\n
The principles are abstractions but are held out as being of fundamental relevance to the real world.<\/p>\n
As a result of the nature of the discipline, the predictions have manifest consequences for human well-being, physical, mental, and material.<\/p>\n
And these predictions also condition the way our governments design and implement policy interventions, which link the world of thought to humanity.<\/p>\n
It turns out at some point, the predictions are so worrying that politicians, whether they are knowing or not, proceed with caution in some cases, and, in other cases, openly damage the well-being of citizens because they have been told that shock therapy is better than a long drawn out demise into ‘le marasme’.<\/p>\n
And all manner of damage is inflicted on communities around the world by governments who follow the advice of economists based on these inviolable principles.<\/p>\n
Anyone who dares contest them is summarily dismissed as being unknowing, ideological, dangerous leftist, stupid, and all manner of slights that I, personally, could document over my career to date.<\/p>\n
The principles are typically expressed in abstract mathematical language that even the true mathematicians find rather simplistic and naive.<\/p>\n
Never mind. Continue. Who are they to comment?<\/p>\n
The predictions and the abstractions sit uncomfortably next to each other.<\/p>\n
In fact, while the defenders of these principles dwill never admit it openly, the predictions are not directly derivable from the principles.<\/p>\n
The logic says they cannot be because in order to ‘solve’ the mathematical representations the ‘models’ (their abstract depiction of reality) are so simplified that they are incapable of ‘tracking’ the real world data.<\/p>\n
Which means in English that without further ad hoc<\/em> manipulation, the theoretical models have no empirical application.<\/p>\n So to satisfy some semblance of statistical congruency (using the established diagnostics of mathematical statistics and distribution theory), the operational frameworks deployed depart from the starting principles and framework.<\/p>\n If that doesn’t make sense, try this.<\/p>\n They justify the principles as being ground, for example, in optimising behaviour by humans. The so-called ‘micro-founded’ macroeconomic models.<\/p>\n They harp on to their students about the beauty and authority of these ‘micro-founded’ approaches.<\/p>\n But as soon as they have to apply those models to the real world, they introduce all sorts of ad hoc<\/em> manipulations, which help the statistical expression of the models ‘fit’ the data.<\/p>\n There are two problems for them as a result:<\/p>\n First, the predictions systematically fail to account for real world developments.<\/p>\n Fiscal deficits rise and interest rates or bond yields do not.<\/p>\n Central banks buy massive quantities of government bonds, effectively financing fiscal deficits, and inflation rates hover at low levels and price expectations follow.<\/p>\n Government debt rises but bond markets keep queuing up for more except in the Eurozone where they start pushing up demands for higher returns to accommodate the increased risk because they know the governments do not have their own currency any more.<\/p>\n Except, even then the ECB steps in an absorbs all the yield pressure using keystrokes in computers to buy huge amounts of government debt.<\/p>\n The Treaties are written to prevent the ECB doing that and the economists talk relentlessly about maintaining credibility (one of those principles that are allegedly inviolable) but still the ECB breaks taboo because they know without them the common currency collapses fairly quickly such is the dysfunctional nature of the monetary architecture the economists insisted was put in place – following their ‘principles’.<\/p>\n Second, and moreover, no-one owns up to the fact that once the highly abstract, simplified mathematical models, that are constructed following the application of these optimising assumptions, are tampered with in order to get any semblance of a statistical fit to the real world data, the users can no longer say that the results (the predictions) flowed from the principles (the micro-foundations).<\/p>\n Once the ad hoc<\/em> changes are made (lags added to relationships etc) then we are sailing in unknown waters – certainly not in any waters that their so-called optimising principles can apply to.<\/p>\n They don’t tell you that though.<\/p>\n If they did, their cover would be blown. They would lose their own perception of rigour or technical authority.<\/p>\n The reality is they have none.<\/p>\n Please read my blog post – Mainstream macroeconomic fads – just a waste of time<\/a> – (September 18, 2009) – for more technical discussion on this point.<\/p>\n So humanity suffers and none of these characters lose their jobs, go to prison for professional incompetence, or lose their pensions when they decide to depart the scene.<\/p>\n They wander around appearing at conferences, write Op Eds that just repeat and repeat, in some cases receive huge speaking fees from organisers who represent segments of society that are the winners of the application of these principles, and that has been the world for some decades now.<\/p>\n As time passes, we start to put two and two together. We get four.<\/p>\n We realise that the outcomes that these professionals promised us, if only we sacrificed and pulled our belts in, haven’t transpired.<\/p>\n We realise that our wages haven’t grown much yet incomes at the top-end of the distribution have gone through the roof.<\/p>\n We realise that the quality of our jobs, if we are able to keep one, have deteriorated.<\/p>\n More of us are forced onto contracts without the old protections.<\/p>\n More of us are ‘casualised’. They tell us that this helps us achieve work-life balance – which sounds beautiful – but is, in reality, a road to a low-wage, precarious life with little balance being evident – split-shifts, zero-hour commitments, capricious and bullying bosses.<\/p>\n We realise that the investment in our public education and health systems is falling and services are deteriorating yet profits in the privatised health care and educational sectors are booming.<\/p>\n We learn that private education providers are receiving massive contracts from government in the ‘competitive’ educational sector and provide students with libraries that consist of one shelf in a sparsely occupied office in a back street of our cities.<\/p>\n I was approached this week by a student from some private college in Australia which boast it offers the No 1 on-line MBA in Australia. He wanted me to send him a published article I authored in one of the top Australian economics journals last year – a totally mainstream journal at that – because his college does not provide access!<\/p>\n Go figure.<\/p>\n Anyway, then the tide turns.<\/p>\n There is a commercial property collapse in Japan that leads the government to break ranks with the neoliberals and increase fiscal deficits, see the Bank of Japan buying up massive quantities of government debt.<\/p>\n Interest rates stay zero for decades.<\/p>\n Bond yields fall towards zero and into negative space.<\/p>\n Inflation struggles to record positive numbers.<\/p>\n But that is Japan – ‘cultural’. It doesn’t apply to us.<\/p>\n Then there is the GFC.<\/p>\n Bank of England, the ECB, the Federal Reserve all start looking very Japanese.<\/p>\n The treasuries (Ministries of Finance) all start looking very Japanese.<\/p>\n Big deficits, big central bank bond buying.<\/p>\n No inflation.<\/p>\n No interest rate or bond yields breaking through any roofs.<\/p>\n Then comes the pandemic.<\/p>\n The whole world goes Japanese.<\/p>\n And guess what, the economists start shifting ground.<\/p>\n They have to because even they know how stupid they have looked over these various crises.<\/p>\n How stupid did Olivier Blanchard look when he had to apologise in 2012 for overseeing the IMF recommendations to impose harsh austerity onto Greece and then to discover the underlying modelling they had used to justify that program was deeply flawed?<\/p>\n Not a little bit flawed. Deeply flawed to the extent the applying it would have generated exactly the opposite outcomes to what the IMF claimed would follow from the bailout program.<\/p>\n How stupid did Reinhardt and Rogoff look when, after swanning around gaining world-wide attention for their debt threshold study (‘this time is different’) it was discovered by a postgraduate student that their spreadsheet calculations were wrong?<\/p>\n We will never know whether this was deliberate or just incompetence but policy makers took heed of their initial claims as part of the justification for imposing harsh austerity onto citizens.<\/p>\n