In 1932, Professor Joan Robinson published an essay entitled Economics is a serious subject: the apologia of an economist to the mathematician, the scientist and the plain man. Her conclusion was that what ever defects economics may have in explaining the Great Depression, taking the advice of economists may be better than taking the advice of the first person encountered on the street. The economist, in their capacity of amateur doctor, should be frank about the limitations of their knowledge, and avoid the unjustified self-assurance that can alienate governments and result in them turning to bankers, industrialists, and practical men for advice. But, just as it is better for a patient to seek advice from a physiologist about an illness than to consult the next man met in a street, so it is better to consult an economist about the economy. For, as Robinson points out, ‘the first man that meet may be an undertaker who has his own view of the course that the disease ought to follow’.
It might be helpful to remind ourselves of the analytical tools that professional economists can offer to add value over a layman’s point of view, or — as Professor Robinson would have put it — the ‘practical man’s’ intuition. Relying solely on a naïve intuition can lead one astray: ignoring opportunity costs, or seeing more jobs as a benefit rather than a cost. Concepts such as supply and demand, opportunity cost, deadweight, and substitution effects provide a powerful toolbox that has been at the heart of the intellectual imperialism of economics. This has led economic analysis to intrude into matters and areas that might have been considered to possess natural frontiers protecting them from the attentions of the economist. Among these are sex and race discrimination, fertility, education, the law, crime, and the arts.
This autumn, Policy Exchange has acted in the spirit of Joan Robinson’s advice, and has held and been involved in several events that have explored the big questions in economics arising from the policy response to the Great Recession, and the challenges it has thrown up. Last week, we welcomed some of the UK’s most distinguished economists and policymakers to a conference we held to interrogate the legacy of Maynard Keynes. 2016 is the eightieth anniversary of the publication of The General Theory, and also the seventieth anniversary of Keynes’ death. During the conference, we looked at Lord Keynes’ role in British public life as a Treasury official, the first chairman of the Arts Council, and as one of the most remarkable investors and financial market speculators of the 20th century. Dr Gerard Lyons also recently took part in a conference hosted by HM Treasury that examined the 1976 economic crisis, during which the UK had to turn to the IMF for assistance ‘when Britain went bust’. This was the culmination of a series of economic crises that resulted in the UK abandoning the post-war Keynesian economic consensus in a speech delivered by James Callaghan to the Labour Party Conference in October 1976. Earlier this autumn, Policy Exchange hosted an event at the Labour Party conference that explored the way that radical Keynesian economists, such as Professor Wynn Godley, tried to develop an alternative economic strategy, and also addressed the scope that the contemporary Labour Party has to develop a different approach to the broad direction macro-economic policy has taken since the 1980s.
Are we still all Keynesians in the intellectual framework of macro-economic analysis?
These occasions form part of a coherent Policy Exchange interest in the principal intellectual challenges facing modern advanced economies. The seminal event in modern economic history is the Great Depression, which led to the development of modern macro-economics and the analysis of the economy as a system. Keynes’ General Theory, published in 1936, played a huge part in shaping this analysis, with its concepts such as aggregate demand and the multiplier. Most economists, including those who explicitly reject much of the Keynesian analysis and policy agenda, would readily acknowledge that they owe a huge intellectual debt to Keynes. The macro-economic framework — and the national accounts that are used as part of the debates about inflation, unemployment, and growth — emerged out of the work that economists embarked upon under the direction of Lord Keynes in the 1940s. In opening our Keynes conference, Lord Macpherson, as the former permanent secretary at HM Treasury, made it clear that ‘we are not all Keynesians now’, and provided a cogent restatement of the Treasury view modernised for contemporary challenges. As Lord Macpherson made clear, this is a policy reflex that remains rooted in Gladstonian liberalism.
A great time to be an economist at a think tank
The Great Recession has shaken economists and policymakers. Even the most intellectually confident economists recognise that much of what they had thought of as settled is now open to interrogation and re-examination. There has been a revival of the great tradition in political economy. The principal economic questions are no longer narrow technical matters to be settled by the application of mathematical logic and models that are remote from institutional practice and indifferent to economic and financial history.
In the 1970s and 1980s, many of the most arresting pieces of economic analysis came from the financial markets and journalism. In London, Mr Gordon Pepper’s Monetary Bulletin was published by his firm of stockbrokers, Greenwell’s. Professor Tim Congdon at Messels and later at Lombard Street Research, and Professor David Smith, with his elaborate monetary model at Williams De Broe, were among economists in the City, who made significant contributions to the public discussion of the time. The bank reviews published by the clearing banks also provided important platforms for economists such as Lord Kaldor, Professor Milton Friedman, and Dr Walter Eltis, to explore economic ideas in a lucid and practical manner. On Wall Street, there were similarly important intellectual contributions from economists, such as Dr Henry Kauffman at Solomon Bros. The role of economic journalists was also important. The columns of Sir Samuel Brittan in the Financial Times and Tim Congdon and Mr Peter Jay in The Times — and Jay as the presenter of ITV’s Weekend World — played a seminal role in disseminating challenging ideas that fundamentally changed the way policymakers thought. The journalism of Messrs Brittan, Congdon, and Jay played a central role in the revival of intellectual interest in monetary economics in the UK — as, in America, did the comment pages of The Wall Street Journal, under the direction of Robert Bartley for thirty years. The Journal was intellectually provocative, and gave an important platform for writers and economists interested in supply-side economics, generally, and tax reform, in particular.
Neither the City nor the newspapers play the same role, today. Yet there has never been a more interesting time to be an economist. This is reflected in the liveliness of the economic blogs that are often distinguished by the direct and expedite manner in which they transact ideas. Among them are Marginal Revolution; Paul Krugman and Brad DeLong’s blogs; and institutionally sponsored blogs, such as the Liberty Street blog of the Federal Reserve Bank of New York. Economists working in think tanks are fortunate to have a platform to contribute to the contemporary economic debate. The combination of intellectual freedom, an orientation to policy, an injunction to identify practical remedies to improve economic welfare and policy, and the imperative to express ideas lucidly and persuasively, provide economists at think tanks with a great opportunity.
Mathematics, charlatanry, and the deformation professionale of academic economics
In a lecture in New York in September 2016, Professor Paul Romer — an economist who has made a huge contribution to the literature on growth theory, and is now the chief economist at the World Bank — delivered a powerful rebuke to modern economists about the misuse of mathematical techniques and modelling. In his view, the subject has made no progress in fifty years in sorting out the problems of identification and causation. Worse, economics may have regressed: academic economics rewards ever more narrow and recondite models than are remote from real-world institutions and events. Romer claims that ‘macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as ‘’tight monetary policy can cause a recession’’’. Keynes was, himself, a mathematician. His father, Nevil Keynes, had made a significant contribution to logic, publishing Studies and Exercises in Formal Logic in 1884 — a book that favourably influenced the research of Charles Dodgson (aka Lewis Carol), the author of Symbolic Logic, published in 1896. As a young man, Maynard Keynes worked on probability theory and on improving index numbers. It is fair to say that he did not make much progress with either, and that the modern index numbers we rely upon for time-series data, were the result of the work of the American economist, Irving Fisher. Fisher was the author of the famous monetary accounting identity, and, like Keynes, a remarkable financial market speculator — although his trading on borrowed money ultimately led to personal financial ruin, and the liquidation of all his assets.
Keynes understood the rigour that mathematics offered, and was alert to its potential limitations. He regarded both probability and economics as branches of logic that should employ reasoning, intuition, and judgement appropriate for a non-numerical subject. In his Treatise on Probability, he dismissed the practicality of using statistics to verify economic models, and argued that most claims made for statistical inference were logically unsound instances of ‘mathematical charlatanry’. He was critical of the ‘application of needlessly complex mathematical apparatus’. At our conference, Lord Skidelsky — Keynes’ biographer — expressed the hope that progress will be made in changing the direction of economics in university curriculums, and that the students at Manchester University who initiated the challenge to the present deformation professionale in economics will prevail.
Looking ahead: analysing an abnormal monetary world that has become ‘normal’
In the new year, Policy Exchange will be following up on these big questions. We will publish a collection of essays looking at Keynes, the General Theory, and his public life and activity as a financial market speculator, as discussed last week. We plan to embark on an extensive programme of research, examining monetary policy after the Great Recession, the interaction of monetary policy with macro-prudential regulation, and the future relationship between fiscal and monetary policy after a period of close to de-facto fusion. We will also be looking at labour markets, the future of work, the role of technology in the economy, and whether Keynes was right to worry about ‘technological unemployment’.