Blessed are the Economists, for They shall inherit (what is left of) the Earth…

It is a truth now universally acknowledged that an economist trying to understand a problem, must be in search of a model. Unfortunately, many of them no longer seem to work.

This is a point that Robert Skidelsky (a British economic historian, generally considered the definitive biographer of Keynes) makes in his recent, essentially polemical book “Money and Government: The Past and Future of Economics”.

It is almost an axiom that the upper policy levels of most governments are riddled with economists, as are central banks. They may not obviously be in charge, but they are very influential.

Unfortunately, as Skidelsky points out, many of them are captives of intellectual orthodoxies which, while no longer able to explain the world as it is, nevertheless permeate their thinking. The classic example is inflation. Above a certain level, inflation is considered (quite reasonably) a “very bad thing”- something to be managed and tamed- as the late Paul Volcker famously did in the early 1980s as Chairman of the Federal Reserve. Therefore, in the wake of the Great Financial Crisis (GFC), there was (and still is) great concern that the printing of money by central banks, their monetization of government debt (cf. Japan), and repetitive “quantitative easing” (done in one form or another by most major central banks) would cause a rapid and potentially uncontrollable rise in inflation. That has demonstrably not happened.

Similarly, NAIRU (the Non-Accelerating Inflation Rate of Unemployment) and the so-called Phillips Curve (plotting the relationship between inflation and unemployment) remain tenets of economic orthodoxy, even when, as in the US and the UK, levels of unemployment are at very low levels without visible signs of changes in levels or expectations of inflation.

Now we are not, of course, advocating that the involvement of economists in policy-setting and -management should be avoided (having a weak spot for the Bank of England’s Andy Haldane); but rather that, as in most areas of political economy, a diversity of views and rigorous empiricism should be encouraged. Repeatedly stating that something should work, when it manifestly does not, is both fatuous and harmful.

The problem is that, if the orthodox economists (and their educational approach) remains dominant, nothing changes; and hand-wringing or bluster are hardly effective in terms of economic management. Certainly, there remain “orthodoxies” that do hold true, such as the fact that high or arbitrary levels of tariffs are not only harmful in a macro sense, but also a hidden tax, with little, if any, offset in terms of domestic job creation. Nevertheless, change is sorely needed.

In reality (and hardly alone in this respect), many economists and the policy makers they advise are focused on yesterday’s “battles”; blithely ignoring or downplaying the issues that matter in the real world, such as how to identify why levels of productivity change; how to deal with a potential decline in the sustainable demand for labour; the impact of demographics on demand; or the changing landscapes of the financial industry.

At Awbury, we are strong believers in the potency of studying and trying to understand the world as it is and may become, not as we might wish it to be. Some models are always necessary; but becoming in thrall to any particular approach is something we aim to avoid. What always matters is exploring, testing and incrementally enhancing what demonstrably works!

The Awbury Team

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