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