Monday, 28 January 2013

When the facts change, I change my mind. What do you do, sir?

Jim O'Neill, the chairman of Goldman Sachs Asset Management has asked George Osborne to do just that, change his mind on austerity:  "Based on my business experience, if what you thought was not delivering what you expect to be the outcome surely you have to change what you thought a little. At a minimum, a repositioning of the stance, if not a full change.' This goes right to the heart of one of the greatest puzzles facing anyone interested in the evolution of economic thinking in general and the processes by which we learn collectively in economic matters. 

There is now growing evidence that the austerity policies deployed in several European countries and elsewhere do not produce the desired results. In most countries where similar measures are deployed growth remains sluggish, unemployment increases and deficits and debt do not decrease. Austerity is failing by any economic measure that could be applied, including the objective of deficit and debt reduction for which they were primarily designed. 

Nonetheless, public and political support for the policy remain strong. This is striking since the proponents of austerity are often seen as hard-nosed economic experts who, thanks to rigorous analytical training and knowledge of the facts, possess a firm grasp of the workings on our economic system. They dislike inflicting harsh measures on pensioners and others as much as anyone else. Occasionally, they even shed a tears about it. Still, they know (because they're experts) that if expenditure is not reduced the inexorable logic of our economic system will punish us in the future. In contrast to this, critics of of austerity are often portrayed as bleeding-heart liberals who may occupy the moral high ground, but whose views are ultimately naive and irresponsible because they fail to consider the facts. 

The question is: how can we explain that experts fail to react in to empirical evidence? More than anyone, they should be able to react and incorporate new evidence into their models. This is a complex question and I will return to this in the future, but here is a tentative hypothesis: if you look at the notion of austerity, that is the idea that there are beneficial effects associated with abstaining from consumption, in the history of economic thought, you notice that it is often, indeed, mostly proposed for moral and political reasons. It is normally the opponents of austerity who use the language of economic efficiency and the defenders of abstinence who wheel out morality. This is most striking in the early modern period when enlightenment thinkers like Mandeville and Voltaire challenged the condemnations of luxury consumption that were based on religious and philosophical precepts. They challenged these views not by challenging the underlying morality but by ignoring it and focussing instead on the economic effects of consumption. They did not ask anymore 'how much should we consume' but 'what will happen if we consume more or less'. 

Today may not be entirely different. That austerity policies continue despite the fact that they don't work in a narrow economic terms may be because they rest on on normative statements that are not open to critical scrutiny based on empirical facts. If you advocate austerity because you believe that the state should be smaller or because you think that there needs to be a period of atonement after the excessive consumption in the recent past, or if you think that we need to consume less in order to save the planet then there is not set of economic data, no economic outcome that will lead you to to change your mind.

No comments:

Post a Comment