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Economists and the Politics of Austerity

This wonderful post by Simon Wren-Lewis, who is far and away my favourite economics blogger, gets to the heart of austerity politics and its implications for economics as an academic discipline. The underlying question has long fascinated me: are economic ideas adopted by political actors as clothing for pre-existing policies or do these ideas actually shape political agendas in their own right? As Keynes purportedly remarked, “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”.  It’s an instance of a broader theoretical question about the autonomy of culture: how and to what extent are ideas causally efficacious? But dealing with the question at that level of abstraction isn’t enormously enlightening, which is why I find such a concrete instance of these issues (the role of economic ideas in formulating and justifying austerity politics) so interesting. Krugman offered an interesting perspective on this after the Reinhart and Rogoff scandal,

But what did go wrong? I’ve been seeing a lot of comments along the lines of “They’re all just tools of Pete Peterson”; so I guess I should say that this is, in these cases, way too crude an interpretation.

Notice that I say “in these cases”. There are indeed plenty of economists who are essentially hired guns for interest groups, and they don’t all work at right-wing think tanks. But the temptations that led to the current affair are, I’d argue, nowhere near that crude.

Start with R-R. The fact is that Carmen and Ken are fine economists. Carmen has been doing terrific empirical work on banking crises for a long time. Ken is arguably the world’s leading international macroeconomic theorist. In fact, the main reason I knew that the case for fiscal policy remained strong even in the context of New Keynesian models was that I carefully read the canonical text by Obstfeld and Rogoff.

So what happened here? My interpretation is that after writing a very good book, R-R dashed off a careless paper on debt and growth that was so much what the VSPs wanted to hear that it made them instant celebrities in a way they hadn’t been before — and they didn’t know how to say stop the merry-go-round, we want to think about this a bit harder. The temptation involved was one of fame and becoming a part of the alleged real world, not some crude mercenary consideration.

I think his point is an important one: we need to recognise that think tanks provide a mechanism for the consolidation of ‘hired guns’ (as part of a broader process of restructuring in the ‘market place of ideas’) but that self-interest can serve to mobilise academic endeavour in ways which extend far beyond ‘crude mercenary considerations’. But as Wren-Lewis observes, pursuit of this individual self-interest may prove extraordinarily damaging for the discipline as a whole:

As I argued in a recent post, what we have here is a combination of two things. First a strong political force that wants deficit reduction to be the focus of policy because it sees this as a useful way of reducing the size of the state. Second, public perceptions that try and understand events in terms of what they know: their own borrowing and spending decisions. So the need for immediate austerity becomes the dominant policy almost everywhere. I get frustrated sometimes that some colleagues, naturally concerned about the details of academic debate, cannot see the bigger picture here. The bigger picture is the marginalisation of our discipline – used when it suits a particular political purpose, but ignored otherwise. If policymakers and the pundits just pick up economic ideas when its suits them, and when the analysis or facts do not suit them just make stuff up (examples from US and UK), economic analysis just becomes fodder for speech writers. That reduces the discipline to an academic game, and soon those same people will ask: why are we paying people just to play games?

So how do we get macroeconomics back into fiscal policy making? First, we need to sort between politicians and political parties that are quite happy with the current state of affairs, and those who are not. Those who are not need to fight fire with fire, replacing one bit of homespun thinking with another which gets us closer to how policy should be made. One way of doing that is to replace the ‘state as an overextended household’ idea with the ‘state as an innovative firm’.

I find his proposed solution quite compelling. Rather than nervously attempting to triangulate their way out of a corner that the Conservatives have backed them into, the forceful promulgation of an alternative metaphor (the state as “a firm that decides to undertake these investments by borrowing when borrowing is cheap”) could be an effective strategy for Labour. But what really interests me about this post is his diagnosis of the underlying political situation facing economics as an academic discipline. Tom Medvetz has offered a really astute analysis of the underlying structural changes that have transformed the interface between the academy and politics in the United States over the last half century:

While social scientists with little left to prove in the academy can afford to reinvest their academic capital in pulibc debate – and often do – rank-and-file scholars have little incentive to follow this route […] the growth of think tanks over the past forty years has played a pivotal role in undermining the relevance of autonomously produced social scientific knowledge in the United States by fortifying a system of social relations that relegates its producers to the margins of public debate. To the degree that think tanks arrogate for themselves a central role in the policy-making process, they effectively limit the range of options available to more autonomous intellectuals, or those less willing to tailor their work to the demands of moneyed sponsors and politicians […] The rise of think tanks must therefore be set analytically against the backdrop of a series of processes that have contributed to the growing subordination of knowledge to political and economic demand – including the reassertion of control over the economy by holders of economic capital, the development of specialised forms of political expertise, the growth of the mass media as a conduit for the imposition of market forces into politics, the corportization of the university, and the withdrawal of the state from the financing of public education. The question posed acutely by the rise of think tanks in America concerns the social value of social scientific knowledge itself: Put simply, should money and political power direct ideas, or should ideas direct themselves?

Tom Medvetz, Think Tanks In America 225-226

The diagnosis offered by Wren-Lewis concerns, from this perspective, the long term implications for academic economists of the tendency to, as Medvetz describes it, “engage in policy debate by imitating the style of intellectual production institutionalized in the space of think tanks”. While it’s not possible to prevent policymakers and pundits from ‘picking up’ economics ideas when it suits them, this deleterious trend rapidly intensifies with each aspirational economist who actively embraces this situational logic in the pursuit of self advancement (or ‘relevance’). Could the impact agenda be seen as an attempt to institutionalize this strategy within the academy, rather than merely leaving it to the power of incentive structures emanating from outside academic institutions? Even acquiescence to it helps perpetuate the process. The only solution would be for more economists to engage in public debate, including on Twitter and blogs, though as Medvetz points out, this is a strategy primarily open to those who have ‘little left to prove in the academy’.

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