The central problem with economists is that not one of them fully understands how the world economy came to be in the mess it’s in. They can give partial explanations that describe a series of events and actions that have brought us to where we are, but these explanations are always incomplete. The complexities of national economies and how they interact is so bewilderingly multifaceted, the intricacies of the interactions among the myriad of variables so byzantine, that the human brain is incapable of comprehending them. Only a powerful computer would be capable of processing the millions of bits of information involved, and even if that were available, inputting the relevant data would be an overwhelming task. Anyone familiar with systems theory and chaos theory will understand this. So economists have to do the best they can with the limited information they have at their disposal and the inadequate processing capability available. So we ought not to be too critical of their inability to give us unassailable insight and clear direction. [more]
But an even greater problem with economists is that some are unaware of the problem just described. They exhibit a sad unawareness of their own professional ignorance of the complexities involved and their own inadequacies. The only thing that’s more damaging than ignorance is unawareness of that ignorance. This is compounded if the unawareness is accompanied by an erroneous belief in one’s understanding and competence. Some commentators on matters of economics are too willing to pontificate as if they really understand. This serves only to mislead those who listen to them. Occasionally an economist will admit that no one fully understands how we got into this financial crisis, how to adapt to it and how to counter it. We should be pleased rather than critical when Government spokespersons concede that the situation is exceedingly complex, not fully understood, and that proposed actions are by no means certain to work. ‘This is not a silver bullet’ is an oft-repeated phrase. There are commentators in business and in the media who concur, but there are as many smart-alecs who believe they know best and that proposed actions ‘won’t work’ or are ‘reckless’, are ideologically ‘outdated’, or more stridently, ‘stupid’. These people are a hindrance to rational debate.
Another problem with economists is that some are wedded to a particular theory of economics, a paradigm that governs their thinking. There are scores of theories, but the ones being touted in this debate on macroeconomics are Keynesian economics, Friedrich Hayek’s free market capitalism, and Milton Friedman’s monetarist, anti-regulation policies now advocated by John Taylor of Stanford University. The debate seems to be broadly between those who believe government needs to regulate financial institutions to avoid situations such as we now suffer, and free marketeers who eschew regulation, who believe private enterprise operating in free markets with minimal regulation is the way to prosperity. On ABC TV’s Lateline on Monday night Taylor argued this, if not convincingly, certainly persistently. He quoted the studies he believed showed the superiority of permanent tax cuts over stimulus packages, dismissed studies that showed the value of fiscal stimulus, would not contemplate similar studies of which he had not heard, confidently asserted that Barack Obama’s massive stimulus will not work, nor will Rudd’s modest package, and insisted tax cuts were the way to go. He would not be moved from his position. It is this dogged insistence by some economists that they are right, and others are wrong, that makes balanced discourse difficult. They talk with a certainty that is unjustifiable, yet political positions are adopted on the basis of their assertions, beliefs and advice.
The best that can be said of the Government’s $42 billion stimulus package is that it has the possibility of being effective in ameliorating the effect on Australia of the global financial crisis. There can be no certainty, a fact the Government acknowledges. But it is supported by many economists, most commerce and industry bodies, small and large business, the social service sector and unions. Treasury and the Reserve Bank support it although Reserve Bank member and professor of economics at ANU Warwick McKibbin doesn’t. The truth is that nobody knows, so the best the Government can do is to go with the best advice and the consensus, and see what happens. By contrast, the Coalition believes it knows best, that the Government is over-reacting and spending recklessly, that a package half the size would do, and that tax cuts would be better than ‘handouts’. They are not just following John Taylor’s line of argument; they seem to believe that the crisis is not sufficiently serious to warrant such a large package so urgently; they use words like 'knee-jerk reaction' and 'panic' to characterize the Government's actions. In fact they seldom mention the global financial crisis at all, as if it did not really exist. They seem to be living in a parallel universe, out of touch with reality and public opinion, which now rates the government as better able to handle the crisis, and as good at economic management as the Coalition. If you need any convincing of this, read Possum Comitatus’ piece in Crikey yesterday: The coalition got it really, really wrong on the financial crisis.
So the arguments will continue. The open-minded will concede nobody knows for certain what will work, and will do what seems to be appropriate; those who believe they have found the answer will not truck any argument with their position. Only time will tell what works, and even then the opponents will argue that it didn’t really work, or that some other factor brought about the result.
So the overriding problem with economists is that no matter what has happened, no matter what happens in the time ahead, there will be opposing views stubbornly held, adamantly advanced about what’s occurred and why. But the people will judge. They will decide whether they have benefitted from the Government’s actions, and just as importantly whether the Government has done what the public expected it to do. So far they have given the Government a big tick.