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CommentInsight & Opinion

Tired ideas won't save ailing Western economies

Graeme Maxton says the paucity of thoughtful debate about the causes of Western economic malaise shows up economists' one-dimensional view and leaves people ill-prepared for worse to come

PUBLISHED : Monday, 15 October, 2012, 12:00am
UPDATED : Monday, 15 October, 2012, 1:53am

Over the past 20 years, nearly everyone seems to have become an economics expert. Discussions about complex economic theories, once reserved for dusty lecture halls in elite universities, are now heard all over Hong Kong. The bars in Central echo with arguments about growth rates, deflationary spirals and cures for unemployment. Nearly everyone seems to have a view about the causes of the financial crisis, the value of quantitative easing and the fate of the euro.

In many ways, this is good. Modern economic ideas lie behind many of the world's problems and they may help us solve them. Debates about the role economics plays in our society should not be restricted to obscure academic journals.

To be useful though, these discussions need to be well-informed. We all need to understand what economics is for and what it can achieve. We should understand where it went wrong and why. And we need to know where the discipline's limits lie.

Unfortunately, because much of the professional insight offered on economics is so poor, the standard of public discussion is often woeful, particularly in the English-speaking world. This is because, for years, most Western economists have only provided a simplified, one-dimensional view of their subject.

Those living in the English-speaking world have been led to think that economics is governed by a set of simple, almost self-evident, rules - and it is not. They have been told that growth is the goal. Growth is not just desirable, but essential, even though no one bothers to explain what it is actually for. Costs should always be minimised and returns always maximised, they are told, regardless of what this means for society, jobs or the environment. The consumer is "king", economists tell us, because growth requires ever more consumption, even though many of the world's scarce resources are subsequently wasted. Government intervention is always bad, they say, even if it reduces duplication. Competition is always good, even if it leads to a handful of companies dominating entire industries globally.

Even now, economists tell us that companies and markets should be lightly regulated, despite this leading to a catastrophic and entirely avoidable economic bubble. The "invisible hand" remains in charge, because to try to guide it, they tell us, would simply be wrong.

There is almost no serious debate about the role economics played in creating the crisis. Few bother to ask why, if they are so smart, so few economists saw it coming. No one asks why economics ignores the role of the finance sector. There is no discussion about how we might regulate markets efficiently, as there is in the non-English-speaking world. Few seriously question America's policy of quantitative easing, or ask why it has achieved so little, though the reasons are easy to see.

The growth over the past two decades in the US and much of the developed world was the result of ever-rising borrowing, not higher wages. Real incomes actually fell. It was too much borrowing that created the debt bubble, and the crisis. Printing money does not fix that problem. Consumers and banks around the world are still hopelessly overstretched, making a return to consumption-driven growth impossible, no matter how much money is printed. Fixing the debt problem requires something much simpler but much less seductive - patience and time.

The reason that this is overlooked, of course, is that the entire modern Western economic edifice depends on the belief that there can be ever-rising consumption. Businesses are dependent on continuous growth, to keep their profits rising and their shareholders happy. Governments believe growth is necessary for them to create jobs, which is nonsense. As economist and philosopher Kenneth Boulding once said: "Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad - or an economist."

Worse, by underpricing the resources we use today, we are drawing on future growth. Because modern economics undervalues the costs of environmental degradation and the fact that our grandchildren will pay more than us in real terms for many depleted raw materials, we have penalised future generations and the planet to have the consumption-driven engine running faster now.

Most obviously of all, almost no one has asked why the growth of the past 20 years has actually increased income inequality globally when economists promised it would do the opposite.

The poor level of discussion in the English-speaking world about the sources of the West's economic misery has also encouraged politicians to pretend that there is a quick fix, even now, five years into the crisis when there is little to suggest that their policies have achieved very much at all.

This means that the citizens of many countries are not just ill-informed, they are also ill-prepared for what is still to come.

Graeme Maxton is a fellow of the Club of Rome


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Mr Graeme Maxton has a point. I would also say that I for one find it puzzling that economies that do well, such as China, Switzerland, Korea, etc, produce few if any of the "bright" and "recognized" economists. Rather we see that the crisis prone Anglo-Saxon countries in particular produce the largest numbers of nobel prize type characters in economics. Clearly some thing is not right with the subject.
The author is a little over-critical of analysis of economics in the English-speaking world. The newspapers are full of articles questioning the wisdom of QE, the incessant drive for growth etc etc. Whether the majority of people read them is, if course, a moot point, the truth is most people are more interested in sport and celebrity gossip than economic theory and consequently are not particularly enlightened when it comes to discussing our current economic travails!
In his article the author ignores one of the basic dilemmas of economics - that constant growth is both desirable and yet not the answer. Desirable for two reasons: first, humans are naturally acquisitive creatures that have an instinctive urge to get more and more material goods even if they don't need it all. Conspicuous consumption is not just a late 20th century phenomenon. Secondly, in a rising tide all boats go up; so in a growth environment more people are improving their lives and so are more content. By contrast, in a stagnant economy, as in Europe now, a section of society will be getting poorer even as some do better, and that does not make for harmony - hence the civil unrest in some European countries.
The irony is that whilst absence of growth leads to unhappiness, the presence of it does not lead to complete happiness. Studies have shown that what really makes people happy is doing better than their peers, not just getting richer with them. But economics alone cannot solve that problem!
Absolutely correct! Modern economics are based on sets of assumptions made simple for class-room purposes, neglecting or ignoring numerous practical constraints and different sets of macro- and micro-conditions, then applied blindly by economists, politicians and decision-makers, and helplessly accepted by most common folks. "Real" macro-economics should be aggregate of micro-economics composed of individuals which are widely diverse as in some normal or skewed distribution, and often than not with conflicting interests and objectives. As pointed out, the assumtpion of possibility of infinite growth based on infinite availability of resources, focusing on short-term rather than balancing the longer term costs and benefits leads to numerous "problems" we are now facing.


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