Friday, July 15, 2011

Sincere, but often wrong

In March 1981, 364 economists signed a letter to The Times.  They were the luminaries of the British economic establishment.  The previous year the inflation rate in the United Kingdom reached 18 per cent and Margaret Thatcher, elected prime minister in 1979, was determined to reduce inflation through higher taxes and government spending cuts.

The economists protested there was ''no basis in economic theory or supporting evidence'' for such a policy in the middle of a recession and the country's social and political stability was threatened.

In question time in the House of Commons, the leader of the Labour Party, Michael Foot, asked Thatcher to named two economists who agreed with her.  She named Alan Walters and Patrick Minford.  Walters was her economic adviser and Minford a professor at the University of Liverpool.  After question time on her way back to her office, Thatcher apparently told an aide:  ''It's a good job he didn't ask for three.''

By 1983, the UK inflation rate fell to less than 5 per cent.  Most of those 364 economists are now long forgotten.  They're famous only for being so wrong.  One of them was Mervyn King, now governor of the Bank of England.

A fortnight ago, Tony Abbott was asked why most leading economists in this country supported a carbon tax or an emissions trading scheme rather than the Coalition's direct action plan.  He replied ''maybe that's a comment on the quality of our economists rather than the merits of the argument''.

On Wednesday, a survey of 140 local economists by the Economic Society of Australia showed 60 per cent of them thought the carbon tax was good economic policy.  Twenty-five per cent thought it was not.  It's a popular misconception that anyone calling themse1f an economist is therefore somehow imbued with a belief in free markets and economic liberalism.

Franklin Roosevelt's New Deal, which socialised vast tracts of the American economy, was the brainchild of economists.  Presumably Barack Obama is being advised by economists.

The most brilliant economist of the 20th century, John Maynard Keynes, provided the excuse for governments to wield unprecedented power in Western economies after World War II.

Membership of the Economic Society of Australia is open to anyone of good character interested in economics.  Karl Marx would qualify for membership.  He had an interest in economics, although his treatment of his family might mean he'd fail the character test.

Abbott was being altogether too kind about economists in this country.  He could have accurately said the only thing a survey of economists in Australia would ever reveal is that most of them are inclined to the left and centre-left of politics.

In 1974, before the federal election, 130 economists signed a letter supporting Gough Whitlam's economic policies.  The major economic reforms in Australia of the past few decades have been championed by a handful of individuals, some of whom were economists, but many who weren't.

A brief survey of recent economic history demonstrates that as a whole the economics profession has contributed little to the debate on how to liberalise the Australian economy.

Probably the most important economic reform of the 1980s and 1990s was deregulation of the labour market.  The seminal analysis that shaped policy for a generation was an article by Gerard Henderson, ''The Industrial Relations Cub'', that appeared in 1983 in Quadrant.  Henderson was a political scientist, not an economist, and Quadrant is not an economics journal.

Another example of economists missing in action is privatisation.  In the 1980s, during the arguments about the privatisation of government assets, most economists were nowhere to be seen.  Privatisation was an agenda driven almost exclusively by politicians.

In the mid-1970s, as stagflation was demonstrating the failure of the policy consensus, most Australian economists continued to cling to the Keynesian orthodoxy.  When Milton Friedman first visited Australia in April 1975, Friedman was treated as a celebrity because his views were so far outside the mainstream.  (Friedman's performance on the ABCs Monday Conference program was so popular it was screened again six weeks later).

No doubt the 364 economists who attacked Thatcher, and the 130 who thought Gough Whitlam was a good economic manager, were sincere in their beliefs.  No doubt all those economists who in 2011 think a carbon tax is a good idea are sincere in their beliefs too.  But sincerity doesn't stop them being wrong.


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