By Philip Pilkington, a journalist and writer living in Dublin, Ireland
Working as a journalist and as an opinion writer each have their charms. Journalists have the pleasure of discovery and revelation: uncovering new facts, talking to people, sometimes acting as a catalyst to move events forward.
Opinion writing, aside from being a comfy way to make a living, gives the writer greater stylistic freedom, and the challenge and opportunity of making a dent in readers’ views. The problem is that you have a limited amount of space and, often, an easily distracted readership. Now, that’s fine for something like, say, an observation about an upcoming election or the loutish behavior of a major sports figure but it is a patently awful format from which to raise Big Questions.
The normally sound Clive Crook fell into this trap in an opinion piece at Bloomberg, “A Crisis of Leadership, Not a Crisis of Capitalism.” Bluntly, this article is a train wreck.
Why? Because Crook broaches one of those Big Questions. Actually, no, he broaches several of those Big Questions, but he stepped up to – or should I say: into – one that really yanked my chain. He asked whether mainstream orthodox economic theory should be subject to severe criticism or not.
According to Crook it shouldn’t be. Why? Well, first of all because:
Proponents of this cliché are dealing mostly in straw men.
Read the piece again. Now look at that sentence. Clichés and straw men? For shame, Mr. Crook, for shame. Because Crook’s discussion on this issue is filled with the former and populated only by the latter.
According to Crook the mischaracterisation of mainstream economics that bounces around the bad corners of the internet is the one that claims that mainstream economics “says markets are always right.” No, Crook. What characterises mainstream economics and why many of us strongly disagree with it is that it says that the market is always right in the long run.
Big difference. Orthodoxy can claim that the market is filled “with externalities, imperfect competition and other forms of market failure” and consign these to the short run. But it can then steamroll right over these inconsistencies in the long run. In the long run, according to orthodox economic theory, there is equilibrium.
Having defeated his straw man, Crook moves on to his next cliché:
Orthodox economics, according to its critics, says investors are rational and prices embody all information, so bubbles are impossible and the crash we just experienced never happened.
What a mess. Again, Crook confuses the long run and the short run. Sure, little bubbles – foam, if you will – is expected to occur in some variants of orthodox theory; some variants coming out of the Chicago school, on the other hand, do indeed deny this completely. Regardless, no mainstream economic theory can account for major debt deflations like the one we are currently experiencing. Indeed, how can a debt deflation occur in a model that doesn’t include debt – because, if Mr. Crook doesn’t remember from his schooldays, let us remind him: mainstream economics does not take private sector debt into account at all! And some critics don’t like that much.
See how misleading this caricature is? But it’s not surprising. Crook wants to dip his toes into the water but he doesn’t want to jump in – after all, he’s a journalist and, well, he just bought that suit. Academics in heterodox economic departments have been working on these failings of the mainstream construct for over 80 years. You’re not going to deal with them inside 1,200 words. Next time, tell your editor that you’re taking the day off.
One more thing. Crook spent a good half of the piece mumbling incoherently about why we should have a mixed economy with strong regulation. Great. Gold star, Mr. Crook. Here’s the problem: in order to get a mixed economy we need to run some pretty nefarious deficits. This is one of the biggest issues surrounding the economy right now – and it’s one that is getting lots of play in the media because they love drumming up hysteria over government debt to flog their papers so I’m sure Crook is somewhat aware of it.
Mainstream economics and heterodox economics have VERY different ways of looking at government debts and deficits. I won’t get too far into this (it’s a complex topic and I don’t pretend to nail it inside a paragraph) but in order to establish a mixed economy today with anything close to full employment the deficits that would have to be run would be enormous. If you have a meaningful government sector, it will need to accommodate the desire of households to save and businesses to invest (we’ll simplify the problem and assume imports and exports are balanced). If businesses don’t invest enough, or worse, are net savers, as they have been in the US since 2003, you need the government to run deficits. And with households working hard on delevering and businesses cautious about spending, we really need deficit spending to stave off deflation.
Like it or not we will end up running these deficits eventually. We will just run them over the course of maybe ten years – that’s what happened in Japan after their debt deflation which began in 1991; they now have a government debt-to-GDP ratio of 220%!
Actually this might be a good opportunity to mention Crook’s friends in this regard. No mainstream economist can coherently explain why the Japanese are not experiencing (a) skyrocketing interest rates and (b) high levels of inflation. I repeat that: no mainstream economist can explain this coherently. For years mainstream economists have been warning of the ‘dangers’ of these deficits – all the while interest rates and inflation have been at historically low levels for twenty years.
Now, since most of the West is going down this path I wouldn’t mind a school of thought that can explain this. And there is a school of thought out there that is very hostile to orthodox economics and can explain this perfectly well (a certain prominent member of this school was also the man who theorised our recent bubble and collapse over 60 years ago).
But hey, what do I know? These days I’m just a blogger. And all these criticisms are just straw men and clichés… right?