October 17, 2015

Crisis, cranks, and scientists

Comment on David Ruccio on ‘A gathering storm?’

Blog-Reference

The normal course of events is this: people look at the global/national economy or their regional/personal environment and see an acute or chronic defect (distribution of income/wealth/power/resources, unemployment, stagnation, exploitation, pollution/ depletion/extinction, asset bubbles, inflation/deflation, abuse/fraud/hype/deceit/ corruption, dysfunctional institutions, etc) and then come forward with the solution.

“A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties we had Major Douglas, and social credit — it can all be done with a fountain pen — and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Robinson, 1972, p. 8)

This is certainly not what science is all about. Broadly speaking: economics, understood as the collective scientific knowledge of economists, can tell with a sufficiently high degree of certainty how the economy works, what the critical functions are, how institutions have to be designed to guarantee the proper functioning of subsystems and the integrated whole and thereby contribute to the prevention of major crises in the short and long run. Thus defined, there is no economics.

Crises are the high time for political economists and the normal course of events is that suggestive quick fixes are applied. A grossly simplified example is to fight unemployment with prolonged deficit spending, which leads to growing debt, which at some point calls for helicopter money, which then can ‘be done with a fountain pen’.

There is not much to say against deficit spending or helicopter money as a commonsensical quick fix in case of emergency except that it has no sound foundation in something resembling a valid economic theory. No economist is needed to figure out this kind of ‘solutions’. In many cases they are not even innovative, e.g.: “Public works to relieve the unemployed is an idea as old as the Bible; ...” (Blaug, 1998, p. 662). The same holds for debt jubilees.

When a Heterodox economist sees a meltdown coming three ideas immediately cross his mind (i) confirmation, i.e. Orthodoxy is indeed a failed approach, and (ii), regret, i.e. Heterodoxy has failed to come up in due time with the superior paradigm, and (iii), to go with panic makers and cranks is not exactly what Heterodoxy is meant to be.

The grand task of Heterodoxy was and still is to figure out what an economy looks like that is free of major crises in a way that is scientifically more convincing than general equilibrium theory.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Robinson, J. (1972). The Second Crisis of Economic Theory. American Economic Review, 62(1/2): 1–10. URL http://www.jstor.org/stable/1821517.

Preceding 'Misplaced augurs of doom'