Wednesday, 23 April 2014

The Case for Economic pluralism

Michel Ghassibe, second year economist at Cambridge University and president of CSEP, explains how the different schools of Economics thought were alternatively in the spotlight throughout the 20th century. The integration of Economic pluralism in one's education is the best solution against these monopolistic shifts between different schools of thought. 
Many schools of thought have always competed for the dominant position in both the academia and the policy-making world. John Maynard Keynes’s School managed to establish an intellectual monopoly in the three decades following the end of World War II. It was centred on the notion that the economy is unstable because consumers and investors are driven by the spontaneous animal spirits. Its solution to these challenges, adopted by governments at the time, was to manage these fluctuations in demand through aggregate demand management by the state, nationalisation and fixed exchange rates to promote an export-led recovery.

It then fell out of fashion rather abruptly when it could not respond to the challenges posed by the supply shock caused by the oil crises of the 1970s, as well as by the low productivity of domestic industries. Economists then re-embraced the Neoclassical school, which had its roots in the early 20th century and concentrated mainly on the supply side of the economy to explain its fluctuations. A neo-liberal stance was accepted, leading to more market deregulation, particularly in the financial and housing sectors. The dominance of this school of thought continued until the 2008 financial crisis, when it could not offer much in response to the collapse of the highly unregulated financial system.

What looks to be a common feature of the above-described intellectual monopoly cycles is that the macroeconomic conditions predetermining the demise of a particular stream of thought are self-induced by the very fact that a monopoly was in place. Indeed, the post-war policy-makers in the UK were not hedging their risks by looking for theories alternative to demand-management until the International Monetary Fund forced James Callaghan to declare that Britain “could no longer spend its way out of a recession”. Notwithstanding the political costs, it could be argued the transition could have been much smoother had such non-Keynesian measures as, for instance, the Public Sector Borrowing Requirement, been introduced earlier.

A similar story continues for the rise and demise of the neo-liberal economic agenda. Given the deregulated financial markets leading to ballooning asset prices, little was to cushion the potential risks carried by the above phenomenon. Just like the major corporations were following Chuck Prince’s advice of “dancing…as long as the music is playing”, policy-makers decided to dance along without any major changes in the regulatory framework, despite a number of warnings coming from such experts as Nouriel Roubini and Nassim Taleb to name a few.

Despite the introduction of an updated Basel III regulatory framework, my perspective is that in the aftermath of the 2008 crisis, both policy-makers and academics are still in a process of search for a new monopoly. In the British context, such grand-scale experiments as successive rounds of quantitative easing joined by austerity seems as rehearsals before an establishment of a new intellectual regime, largely similar to the one preceding the crisis. However, given the past history of monopolies being in place, this looks like a rather risky approach, as the new monopoly will be in place until it catalyses macroeconomic conditions that will make it no longer viable.

But could anything else be done? Yes, there could. The perspective offered by economic pluralism is that when it comes to understanding the economy, there should be no intellectual monopoly in the first place. Policy should be borrowing ideas from a number of schools of thought, which in turn requires an equal consideration to be given to all of them. In the context of British experience, this would mean the post-war economists and policy-makers thinking about potential supply-side measures when demand-management seemed to be leading the recovery, and their colleagues in the late 20th century thinking about the limits of human rationality and sudden booms and busts.

My belief that in order for pluralism to enter both the academia and the policy-making world, it has to be integrated into one’s life in the period of intellectual formation. CSEP’s aim has been to build and sustain a platform for a debate between different schools of economic thought that would encourage interdisciplinarity and promote challenges to the economic mainstream. Luckily, we are not alone in our beginnings. CSEP’s creation also foreshadowed the emergence of many similar societies across the UK. In January 2013 the Post Crash Economics Society of Manchester University launched its campaign for a more pluralist curriculum which has featured in a number of Guardian articles. In June 2013 a national body, Rethinking Economics was launched at an LSE conference which has now expanded to become a network of over 2000 young people and has branches as far afield as the US, Canada, Germany, and France...

Michel Ghassibe

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