Saving the world from reemerging economic crisis

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Many of the criticisms people now make of economics have been made in the past. The Post-Autistic or Real World Economics Movement has been gaining prominence, but it has been around for a long time. The difference now is that the crisis seems to be proof that the criticisms are true. They are not so easy now for the mainstream of the economics profession to shrug off. In fact, many economists are taking the critique very seriously.
As we have discussed it last week, the difficulties in dealing with the problems we are facing now are primarily political and economic. To make people want to behave in environmentally sensible ways, are countries prepared to put suitable incentive structures in place? Are countries prepared to tackle the horrendous problems of corruption? Are governments prepared to pay for, or at least facilitate, the infrastructure developments which are needed? Can anti-corruption measures be made strong enough to allow resources to be used for the purposes for which they were intended?
Solutions to these problems require enormous changes in priorities and decisions at individual, local, regional, national and international levels. And discovering them will require recognition of the proposition that markets operate only according to the rules that people set for them.
No market can exist without some agreed process for the exchange of goods or services. Such an agreement implies some form of collective action. The simplest form of action is to arrange the location and time where exchange takes place. More sophisticated markets operate within a legal framework. This may include, for example, quality control of goods exchanged, health and safety regulations for their production, or measures to ensure that a ‘fair’ price is charged, whether through anti-monopoly legislation or in any other way.
It follows that there is nothing necessarily good about de-regulation. Some regulations are good and work well, others are ineffective or worse. It is an empirical question in each particular case as to what the best balance between legislation which reinforced by administrative controls and unfettered competition may be.
The other most important issue in this regard is the issue of risk and uncertainty. One particular distinction, forgotten by much of the neoliberal policy-making block is the distinction between ‘risk’ and ‘uncertainty’. This particular piece of amnesia allowed the 2008 financial crisis to occur. De-regulation made possible the behaviors which led to the crash, but the particular reason why de-regulation led to disaster was because it allowed financial institutions to treat uncertainties as manageable risks. Firms as well were encouraged by the over-riding imperative of the short-term profit motive to cut corners, to assume that disasters were for other people, even in circumstances of great uncertainty like deep-sea drilling in the oil energy industry.
At this point, one can ask that what then is this distinction? According to economists and business scholars, risk is a statistical concept, which tells us how frequently we can expect a particular occurrence of any well-known phenomenon to occur, under normal conditions. The whole important activity of insurance is based upon such functions, and there is nothing wrong with this, provided there has been a sufficient occurrence to allow risk to be calculated with confidence. If a large natural disaster occurs only once in 100 years, people do expect it occasionally to happen. People also take a calculated risk when they decide how high a sea wall to build.
But uncertainty is different. It arises when people do not have enough experience of the phenomenon in question to be able to calculate it statistically. It arises when people are concerned with a particular instance rather than with the generality of cases. It arises when they drill deep into a sea bed with geological characteristics about which they are uncertain. It arises when they launch a new type of financial product which packages a special insurance premium.
The most important question which can arise at this point is the following. How might revised ways of thinking be induced? As we can deduce from the above analysis and the actual experience, without revised thinking, economists can have little useful inputs into policy.
In thinking about the nature of economics, apart the proponents of Ayn Rand’s objectivism, economists study the behavior of individuals, organizations and institutions with regard to the production, distribution and exchange of goods and services. When they think that they understand a phenomenon, they construct a model to describe what they have found.
Until the middle of the twentieth century, such models were in large part qualitative. Neither the data (statistics) nor the tools to handle such data on any large scale yet existed. This did not prevent the legendary economists of Adam Smith and Karl Marx, Joseph Schumpeter and John Maynard Keynes from developing invaluable insights into economic behavior. All of them have a great deal to offer to the present day. Most economists viewed economics as a largely qualitative study, concerned in the first place with understanding the nature of economic behavior and its determinants and only then, with a small amount of quantification, with considering possible interventions.
Gradually, as statistical data increased and quantitative methods became more sophisticated, economists became preoccupied with describing rather than understanding. Underlying assumptions tended to be taken for granted and the determinants of economic behavior were increasingly presented in mathematical terms. The pinnacle of mathematical modeling was reached by the ‘quants’, whose cocksure modeling of financial markets played a significant part in the build-up to the 2008 crisis.
The beginning should be convincing people that change is possible. There is much to learn from the story of how neo-liberal ideology became dominant. To start to replace it, a far-ranging programme of public education and open debate must begin. In this regard some economists, politicians and leaders of the countries of the emerging markets block proposed their preferred alternative economic school of thought.
Our Prime Minister, Meles Zenawi can be sighted here as an example. As the direct opposite of the proposition of Ayn Rand’s objectivism, Prime Minister Meles in his many published and unpublished scholarly writings presented a theoretical criticism of the neo-liberal paradigm prescriptions regarding development and the role of the state in the economy.
Taking Africa as his primary focus, Prime Minister Meles assertively defends his proposition by arguing that various methods mostly variations of the dominant neo-liberal paradigm of development have been proposed to achieve the political and economic renaissance of Africa. However, Meles argued, the neo-liberal paradigm is a dead end and incapable of bringing the much needed renaissance of Africa, and that a fundamental shift in paradigm is required to effect the revival.
To this effect, Prime Minister Meles proposed his economic notion of “Developmental State” to make the renaissance of Africa a concrete reality.
In another development, the British economist, Judith Marquand, in her recent study suggested that the teaching of economics needs to be changed from top to bottom. Students need to have grounding in economic history, set in its social and political context. Marquand recommended that students should learn the field of economics as an “academic discipline of art”.
She explained that, students of economics should need to learn some social psychology, drawing on insights from Neuro-science and anthropology. They need training in social science research methods focusing heavily on areas which are often neglected in the training of economists – all the ethnographic methods. They need to think critically about selecting indicators; about the design of questionnaires; about the crucial importance of the assumptions when building models. They need to study the operation of current economic organization set in its political context. And they need some understanding of the rich heritage of economic thought.
According to Marquand, economics went wrong when it tried to ape what economists perceived to be ‘proper’ scientific method. She argued that we need to recognize that the practice of economic policy is an art, and that it needs to be a very public art, widely debated in every democratic society and we need a public literate in a revised economics, who can take active part.