Economics today is often portrayed as an increasingly scientific discipline. Highly abstract, qualitative, and most of all, seemingly impossible.
If at a party you mention Thomas Piketty or Milton Friedman in conversation it is likely those on the receiving end of the conversation will give you a vacant glare, perceiving you wrongly to be some kind of wizard. Indeed the increasing quantification of the subject reflects this perception. Various models have become the norm. Economists somehow managed to think up terms such as the ‘Capital Asset Pricing Model’ and the ‘Efficient Market Hypothesis’. Physicists and mathematicians rushed to join the Wall Street party, the next thing you know there are securitised derivatives, Collateralised Debt Obligations and Credit Default Swaps.
Then 2008 happened. Economics likes to present itself as scientific and precise; that only boffins can understand it. But in reality it is highly politicised and self-defeating. The discipline is a problem manufacturing machine.
As Dan Rodrik has recently pointed out in his new book, models are not always correct. Humans do not always act rationally whilst policies do not always work as intended. Economics has become an increasingly restricted paradigm. Policies and ideas are pedalled, tomorrow they are read, and next year they become mainstream - even if they do not work. Our political elite, especially in the UK, appear unable to challenge such a trajectory. They relish the opinion of technocrats.
The concept of Austerity highlights this perfectly. In the post crisis world, from the Brussels to London, this is the ‘accepted’ route back to a boom. The fairy of the private sector will lift up the failing public sector. We are told over-spending prior to the crisis is the cause of all ills. We must be frugal like a household. This is absurd. OECD debt was actually falling before the crisis; its increase was a direct result of the required and necessary bailout packages. The British debt to GDP was at 2.7% in 2007: this is far lower than the level New Labour inherited in 1997; even lower by historical standards.
You simply cannot cut your way back to prosperity. Spending cuts actually reduce the level of demand in an economy, leading to lower overall output, with the net-effect of discouraging business and consumers. This is partially why quantitative easing has been such a failure. Nearly a decade on we are still waiting for this miracle to occur. Even despite these failures there is ideational hegemony. Why won’t the European Central Bank secure the debt of Greece? Why won’t the British government increase demand through a wholescale house building project? It is incredibly frustrating. It is time for a new path forward.
Singapore offers this; a dynamic, viable and realistic model truly fit for the innovation required in the Twenty-First century. This is vital not just for boosting growth – it paradoxically challenges the prevailing paradigm of our time. If you read The Economist you would be forgiven for thinking the East Asia city-state was a free market paradise. Indeed, most neoclassical economists laud Singapore’s model for these very reasons. However it is not just the country’s free trade and attitude towards foreign direct investment, though vital, which have propelled it to such heights.
Let’s check the facts. The Singaporean government owns all land, the government housing corporation supplies 85% of all housing whilst 22% of total GDP is supplied by state-owned enterprises. The world average for the latter is only 9%. For Singapore its growth has been led both by construction and the service sector. One might even call this apolitical in the current thinking. Once more reality defies economic models and popular perception.
This is the eclectic approach to economic growth which we need. Forget left and right. Forget state and market. It is time we found a healthy balance. Policy makers should seriously be looking at the extension of network governance. Growth and prosperity cannot be provided by one agent or actor. This is a move beyond ideological lines, and one which is necessary. The state is typically seen as being the provider of prosperity; yet financial institutions are now providing huge commitments to social justice. As Singapore demonstrates we should not stick with conventional thinking, just because the ‘experts’ say so.
A networked market between the state, financial institutions and public-private partnerships is our future to growth. If managed and implemented correctly. No particular entity, model or institution holds a monopoly on growth. The success of emerging markets in the European Union rested on these partnerships.
The pooling of resources, knowledge, and expertise should not be frowned upon. Friedmanites must not reach for the whisky when policy makers suggest increasing aggregate demand through deficit financing. Nor must the hard left balk at the idea of investment banks becoming key players in stimulating whole sectors of the economy.
It is time to be bold and end this paradox of policy. Remember – economics is not the stuff of wizardry. If we are to solve this crisis we need to rewrite the rules of the global economy.
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