Where economics went wrong, by David Blanchflower

The Independent’s economic columnist David Blanchflower has a chapter in a new book. It can be found here (entitled “Where were you?” in the “forthcoming books” section).

In the chapter, David brings together many of the arguments of his fizzing recent columns for The Indy – such as how the Bank of England completely missed the Great Recession, how Labour’s fiscal stimulus helped boost growth and how the Coalition deluded itself into believing that fiscal consolidation would be expansionary.

But David also argues that something went disastrously wrong in the profession of academic economics in the years before the crash.

It became, in his view, woefully uninterested in hard macro data:

“Academic economists seem to me to have little knowledge of where the economy is and any interest in data revisions, qualitative surveys of even macro-forecasting.  When I was at the Bank of England trying to work out whether the economy was collapsing and needed outside advice on what was going on in the economy I received little help.”

Academic economists also stopped grappling with important  questions, instead focusing on irrelevant ephemera. As he puts it:

“A ‘major’ contribution on a totally trivial technical point in the economics profession usually receives more approbation and attention, and even a salary increase than a small contribution to an important question.  Trying to solve some narrow theoretical point may well be less than useless.  The big emphasis on theory in many UK economics departments seems to have been a mistake as it has done little or nothing to improve the human condition.  Playing clever mind games, which is the equivalent of counting angels on pinheads, should be a hobby rather than an activity subsidised by the British taxpayer.”

There’s also a rather striking  table in the chapter that David has compiled from OECD data which shows just how weak the UK’s economy has been by comparison with our economic peers since the end of the recession.

I’ve pruned it and turned it into a chart here:

So, after crisis-rocked states such as Greece, Portugal, Ireland, Spain and Italy, the UK has had one of the weakest expansions in Europe in the past three years. Our cumulative quarterly percentage GDP growth has been worse than the eurozone average – something to remember next time the Chancellor complains that the Continent’s spiralling crisis is dragging Britain’s economy down.

There’s plenty more interesting stuff like this in David’s paper so do check it out.

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• julianzzz

  Ah but when all the incompetent middle managers are free to sack workers for looking at them in a funny way, then the economy will improve, you’ll see!

• pilsden

  Looks like a correlation with gdp deficit ratio’s to me.
  Try reading all of the  Reinhart and Rogoff work.
  Will views change now Posen is at the Petersen institute?
  Pre recession UK govt spending in real terms rose 53% and GDP 17%
  makes you wonder why people are advocating more of the same type of keynsian stimulus when there is no evidence of a multiplier .
  US debt rose since 2010 by $2.2 trillion on a base of $13.3 so their growth
  hasn’t really improved the position

• Kugelschreiber

  David Blanchflower  (what a funny name for an economist, shouldn’t he be a botanist, or , alternately be called David Moneypenny or something!)   appears to be right about current Economics studies producing “no improvement in the human condition”.

  No one yet seems to have worked out for example how to steady the economy, so that we have smooth development rather than all the booms & busts.

  I wonder why?  Perhaps the actual solution would be just to adopt a completely different economics system?  But what! And how!

  Maybe THAT is what they should be doing, in the way of the “practical” studies recommended by Blanchflower.

• Kugelschreiber

  That is such a pretty & such a clear diagram.  Poor old Greece, hanging upside down there.     If only we could just solve everything by just EXTENDING those columns a bit or something & then magically transferring it to the REAL WORLD!

  I suppose God could do that, but maybe he/she doesn’t like to interfere with the economy. Is he/she a bit of a laissez-faire ruler?   Maybe he/she is a free marketeer

• Kugelschreiber

  34 pages in Blanchflower’s chapter, that’s gonna take me a month.  Thank goodness he looks like a nice writer in the sense of expressing himself clearly & interestingly with also paragraphs

   (I cannot cope with the Holy Walls of Text some writers inflict upon us, those walls only serving to stand between the reader & the writer , blocking all communication)

• Kugelschreiber

  Re this excerpt from Blanchflower’s chapter:
  “This
  paper is about the need for engagement and involvement of the economics
  profession in the problems of our day, principally on the macro-economy,
  because that is where the most important problems are”

  Wouldn’t it be great too if the PUBLIC understood a little more about Economics?  And of course I suppose this could be achieved by more economists appearing in various parts of the media, endeavouring to explain things to us amateurs in a nice,  digestible way.

  That would be a great thing, because it might help us discuss things on forums without resorting to SWEARING, because that is all we understand about Economics, how to swear.

• http://www.facebook.com/profile.php?id=100001710173545 Mike Hall

  ” No one yet seems to have worked out for example how to steady the
  economy, so that we have smooth development rather than all the booms
  & busts.”

  Actually, they have, & warned about the crisis in the US, EU & especially the Eurozone years before the bust.

  Twenty years of recent development drawing on numerous economists work before that. It’s called Modern Money Theory or MMT. Far from being a theory it has a near uniquely correct understanding of the modern monetary system & macro economics. It also offers policy prescriptions that could quickly restore our economies & recover to (near) full employment and prosperity.

  Near all mainstream economists, due to intellectual ‘capture’ or the vested interests of the financial sector (who employ most economists & still profit from the mess), or both, are too frightened to either engage or challenge it.

  To quote former central banker, later Professor of International Finance & globally respected expert on monetary systems, Belgian economist Bernard Lietaer :-

  “Academically, MMT has never been challenged. From what I study on it, they are right.”

  A new text book will be out soon, co-authored by the modern developers Profs. Randall Wray & Bill Mitchell (with help from a small number of other collaborators, academics & practitioners).

  A useful primer is here:

  http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

  Bill Mitchell’s extensive blog commentary on the global crisis & MMT solutions is here:

  http://bilbo.economicoutlook.net/blog/

  The global crisis is the inevitable culmination of the substitution of evidence based, logically based economics thinking over the last 3 decades with an ideologically driven false understanding, in the vested interests of financial sector elites who profit excessively from boom & bust cycles. The ‘Great Moderation’ as this period was (now laughably) called was a lie, a constructed myth, which infected all mainstream areas of macro economics practice, education & media commentary.

  Mere weeks before the bust, this mainstream, outside of the few lucky guessers that should really be called Mystic Meg, had no clue whatever the crash was coming. More than 4 years on, the mainstream slience as to why? is still deafening.