Sebastian Foulkes-Best, student at the Cité Scolaire Internationale de Lyon (CSI), France
In France, when you get into ninth grade, the classes and work are similar to the year before, although harder. Though there is one thing to get excited about, and that is that you have to do a one week internship in a company or organisation of your choice. That is how I, Sebastian Foulkes-Best, 15 years-old ended up at the OECD for a week. I wanted to get a closer view on economics, a subject that already interested me, and I thought that working and seeing the day-to-day operation of an organisation such as this one would be a good way to find out if economics is what I want to study (and possibly work in, later on).
The problem is that we all know what people like bus drivers or cashiers do, simply because we see them every day. But what about economists? Most of us end up thinking of the well-known nerdy stereotype, constantly with his head buried in numbers and data, or the talking head that gets cited in the Financial Times and says what inflation or GDP will do next year. I was to discover that these (like most stereotypes) are both totally wrong.
I had not heard of the OECD, but when my mother talked to me about it, it seemed like a great place. It was partly the way I had imagined it, with long corridors and impersonal offices but I never ever would have thought that a château would be used to host these offices. The Château de la Muette was (to me at least) the most beautiful part of the OECD, even though the Delta building was well designed and pretty too, but in a more modern way. (Also, I imagined the canteen as serving bad quality food, which again was totally wrong.)
My idea was to try to talk to some economists about what they did and how they got into the profession. I had the chance to interview many of them, including the OECD’s chief economist Catherine Mann and Professor Diane Coyle who was at the OECD to give a seminar on GDP. This was an enormous privilege and made me feel very adult but also a little out of place. They both gave fantastic answers to my questions and I even got my copy of Sex, Drugs and Economics (an introduction to economics written by Diane Coyle) autographed.
Basically the economists (at least the ones I talked to) do a research process to end up with a policy being communicated to the people that will be able to use it to make our lives better. It all starts with an intuition, a thought that maybe something isn’t going quite right (for example, productivity growth). Then, there is the formulation of the question that they will try and answer (for example: “Is there a problem with productivity growth?” or “Is productivity growth slowing down?”). Economists then collect data and transform it into usable and understandable graphs to either confirm or refute this hypothesis. Then, after the study of the data transformed by economists and the answer to the first question (such as: “Yes, there is a problem with productivity”) starts the second part of the job: finding the solutions. They look closely at why there is a problem (econometrics are usually used) and how it can be solved (the suggestions and solutions that will be written in the policy). Once that is done, the formulation of a policy to solve the problem ends the research process (for productivity growth) and it all starts again for a new problem, a new intuition.
Another part of what economists do is to communicate the findings to the people, companies or countries to whom those findings are relevant to make lives better on a larger scale (“Better policies for better lives is the slogan of the OECD after all”). Obviously the jobs of the people that communicate require a whole new set of skills other than the skills needed by the people who do the hardcore data finding and refining, who in turn need different skills than the ones needed by the people that will implement the policies.
One of the first things I learnt while interviewing economists at the OECD is that there is no one economist, they all come in different shapes and forms. As Sabine Zigelski said, “It’s a career that is very hard to predict. When you start studying economics there are so many different options, which can be frightening because for a long time you don’t know where you will end up”. I literally have not found one common thread between the careers of the economists I’ve interviewed. For example, out of the people I interviewed: one studied philosophy, one played the trombone for 10 years, one worked for the Canadian government and now they all work at the OECD.
A recurring theme in the interviews was that economics, more than just a matter of facts and numbers was, a way of thinking more than anything. Which explains why it then gives such a free career path for anybody wanting to study or work in it. Philosophy for example, helped my interviewee question the basic assumptions that the markets are based on (the market is always clear, people are rational, those types of things). These seemed ridiculous coming from a philosophical perspective where you have to justify every premise and cannot really assume anything. But especially, as economics are used at a very high level of government, how could governments make large decisions that would influence people’s lives following something that seemed to be using shady assumptions? That is what got my interviewee interested in economics, and he now works at one of the most respected economic organisations in the world, the OECD.
As a conclusion, I’d like to mention that even though I am honoured to have met them, I only got to interview a small number of the OECD staff, therefore this article is not a summary of the OECD but more a report of my experience here. Indeed, the economists here work on a very vast range of subjects (health, agriculture, outer space, environment, education…) and it would be impossible for me to cover all of them in only one week.
Now that I have met some economists, and more or less understand what they do, I think I would like to become one.
You can hear Catherine Mann’s interview here. The charts she refers to were presented at the launch of the OECD study on “The future of productivity” at the Peterson Institute for International Economics in Washington with Jason Furman, chairman of the US President’s Council of Economic Advisors. You can see the charts and find out more about the event here.
If you’d like to work for the OECD, visit our careers page.
Answering the Queen’s question: New approaches to economic challenges
Lord Robert Skidelsky, Emeritus Professor of Political Economy, University of Warwick, based on remarks made at the launch of the OECD Initiative on New Approaches to Economic Challenges (NAEC) on September 18th
“Why did no one see it coming?” asked Queen Elizabeth II of Great Britain, shortly after the world economy collapsed in 2008. In addressing the question to a group of economists, the Queen was spot on. As OECD Chief of Staff Gabriela Ramos said, “The crisis struck at the core of tightly held economic ideas, modules and policy”. I would go further. Crisis struck because of tightly held economic ideas, models and policies. The policy models used pre-2008 were wrong or seriously flawed; this contributed to the collapse, chiefly by omission. The OECD’s New Approaches to Economic Challenges (NAEC) report recognises this, arguing that the challenge is for economists to develop a better sense of how economies work; and for economic policy to develop policies which reflect this understanding.
To put the matter concretely, we have to determine under what combination of policies and institutions the macro economy will exhibit good performance, defined as cyclical stability, high employment, decent growth rates, stable prices, and human and planetary well-being. I would like to discuss questions which have occurred to me since 2008 along with some observations from the latest NAEC report, which gives much food for thought..
First, money and banking. Monetary policy is not mentioned by NAEC. Orthodox macro policy before the slump consisted of “one target, one instrument”. The target was the inflation rate; the instrument was interest rates. This was clearly inadequate. But we haven’t yet sorted out what should be the proper aims of monetary policy, what is properly monetary and what is properly fiscal, what is macro and what is micro. For example, bank regulation is micro, but it increasingly counts as part of macro policy. Perhaps we should call macro any micro event or institution which has macro effects.
The NAEC report calls for “Better integration of financial sector”. What does this mean? Does it mean “better able to serve the needs of the real economy”? If so, what reforms are needed? I’m disappointed that NAEC didn’t challenge the orthodox view that financial innovation is good. What it does is to make the economy more financial – that is, enable more and more people to earn their living making money out of money. We have to ask further questions on money, starting with whether the central bank can control the credit system to avoid boom and bust. And if not, what is the alternative? What has been the impact of quantitative easing (QE)? The Eurozone is gaily embarking on a massive monetary expansion, when most of the evidence suggests very limited effect for reasons Keynes would readily have recognised.
There is a cluster of issues around fiscal policy. The NAEC report talks of “promoting fiscal soundness and fostering the counter-cyclicality of macroeconomic policies”. What is meant by “fiscal soundness”? Does it mean balancing the budget? What is meant by balancing the budget? Which budget? All governments are embarked on deficit reduction. We are rarely told which deficit they are planning to reduce. Are there safe upper limits to public deficits and debts? What are the best ways of financing public borrowing -bonds, QE, Treasury bills-and under what circumstances?
Can the public accounts be differently presented to bring out the capital/current account distinction? Should governments have off-budget accounts, for instance a National Investment Bank?
Forecasts of inflation, output gaps, multipliers have been fairly consistently wrong ever since the crisis struck. The whole question of forecasting needs a serious look. Forecasts are highly model dependent. If the model is wrong the forecast will be wrong – or wronger than normal.
Jobs. What is Europe’s natural rate of unemployment? How is it estimated? If, as in Europe today we have zero inflation and unemployment at 10%, is this Europe’s natural rate? Or has the term lost any useful meaning?
Where are the jobs in the future to come from? The NAEC report doesn’t mention the impact of automation on jobs. It talks about need to enhance human skills and capital, which is simply conventional wisdom. Are humans destined to “race with machines” or “race against machines” to quote the question raised by Brynjolffson and McAfee.
Economic growth. NAEC wants both “economic growth and well-being” and “economic growth and environmental sustainability”, in other words all the good things in life simultaneously. And so say all of us. But we can’t have them. Continuation of the kind of growth we have had in the past will certainly be inimical to the well-being of humans, and of course of the planet. Growthmanship, and its associated consumerist culture, needs to be challenged much more vigorously.
Distribution and inequality. NAEC writes of “Increasing evidence that large income inequality undermines growth and well-being, by reducing investment in skills by low-income households”. It says that taxation systems need to be reformed to ensure they are “progressive enough”. But what is progressive enough? And what changes in politics will be needed to bring about more progressivity to offset the rise in inequality? Where is the political support to come from?
The woeful state of economics. NAEC says disappointingly little about this. It says economics should draw insight from sociology, psychology, geography, and history. I completely agree, except that philosophy is omitted and history put last. A reading of Aristotle would be a sound corrective to all those who place their faith in financial innovation and consumerism. A knowledge of history would correct the bias of economics to a priori theorising beautifully expressed by the 19th century French economist Jean-Baptiste Say: “What useful purpose can be served by the study of absurd opinions and doctrines that have long ago been exploded, and deserved to be? It is mere useless pedantry to attempt to revive them. The most perfect a science becomes the shorter becomes it history…” We are still waiting for the perfection which will abolish the need for history.
The webcast of the NAEC launch is available here
How much is enough? Money and the good life Edward Skidelsky and Robert Skidelsky
Keynes: The return of the master Robert Skidelsky
The OECD Initiative on New Approaches to Economic Challenges (NAEC)
Mathilde Mesnard, Coordinator of the OECD Initiative on New Approaches to Economic Challenges (NAEC)
New economic and policy thinking is required today more than ever. On September 18th, the OECD Secretary-General launched a discussion on the New Approaches to Economic Challenges (NAEC) Synthesis report with OECD Chief Economist Catherine Mann, Lord Robert Skidelsky and Jean Pisani-Ferry. The launch event was in the best tradition of NAEC seminars with hard questions being asked about the report and the OECD’s policy approaches.
OECD Chief of Staff and G20 Sherpa Gabriela Ramos put several questions to the panellists about the current state of economic policy and the progress made since the economic crisis. We very much welcomed the perspectives of all the speakers. Jean Pisani-Ferry talked about the difficulties of incorporating risk into policy-making. He also suggested that policymakers base what they do on particular theories shorn of nuances and assumptions which are accepted by the research community. This often means that policy is based on over-simplification.
Catherine Mann questioned how far the agenda on complexity could be taken forward at the OECD. To help answer this, a NAEC workshop is being held at the OECD on Complexity of the Economy: Research and Policy Implications on 26-27 October. It will explore complexity research in finance, sustainability and macroeconomics as well as complex systems methods and data analysis.
We were encouraged by Lord Robert Skidelsky’s remark that the latest NAEC report gives much food for thought. We also welcome his positive remarks on our inequality work and attempts to inform our policy advice by looking to insights from other disciplines, in particular history. Indeed we have made a special effort to learn lessons from the OECD’s own history to inform NAEC. Lord Skidelsky observed several omissions in the NAEC report. Yet the NAEC Synthesis report was a continuation of two reports submitted to the Ministerial Conference Meeting in 2014 – the first Synthesis and NAEC: The Financial Stream.
Skidelsky mentions that NAEC does not examine monetary policy. This issue was addressed at length in the 2014 Synthesis. The report argued that monetary policy contributed to excessive policy accommodation in the lead-up to the crisis. It called for further investigation into the effects of unconventional monetary policy noting that while successful, the long–run effects as well as the short-term effects of an eventual tapering of these measures needed to be closely monitored. A major lesson of the crisis is that both fiscal and monetary policies alone are not sufficient instruments, even more so when interest rates are close to the zero lower bound.
He stated that NAEC did not challenge the wisdom of financial innovation. Yet numerous OECD Secretariat papers in the NAEC process identified poor micro-prudential regulation, excessive leverage and too-big-to-fail business models as prime reasons for the financial crisis. The crisis emphasised the limits to regulatory capacities in the financial sector, and how fragmented regulatory frameworks generated information and implementation gaps. We have questioned not only the merits of financial deregulation but also financial innovation arguing that the rents were extracted to a very large extent for the financial sector itself.
More recently with NAEC work on finance and inclusive growth, we have argued that if the financial sector grows too large, it can undermine growth and increase inequality. We have pointed to the need to ensure that the financial sector contributes to strong and equitable growth by avoiding credit overexpansion and by improving the structure of finance. Yet the launch event clearly indicated that the financial crisis exposed weak understanding of the inner workings of banks and financial institutions in the OECD. Analysis of financial markets and capital flows could also be strengthened.
Skidelsky asks another fundamental question, where are the jobs in the future going to come from? Dirk Pilat, Deputy Director of the OECD Science, Technology and Innovation Directorate responded during the debate that this issue is very much an issue on the table at the OECD, and at the heart of current discussions on productivity and inclusive growth. In fact a Labour Ministerial Meeting will take place early next year on this very subject. New production technologies and automation have always been disruptive with new jobs being created while others are lost all the time. The question remains if there is something new in terms of the amount of disruption caused by the next production revolution.
All speakers debated the merits and demerits of siloed approaches to research and policy-making. Gillian Tett from the Financial Times will address the OECD community in a NAEC seminar on October 12th outlining her new book The Silo Effect. Tett examines how silos can prevent us from seeing risks because we are so consumed with our own area of expertise that we are unaware of information from allied silos and thus fail to see the big picture. She also outlines how the effect of silos could be mitigated by keeping boundaries of teams fluid, rethinking how incentives can stifle collaboration beyond a team, and ensuring the broadest information flows. NAEC can help counter the Silo Effect – we should strive to create more joint teams; promote and support horizontal projects and further cross-committee discussion among the various OECD Committees.
The discussion of the report underlined the importance of creating a space for debate and fresh-thinking at the OECD on the fundamental issues facing economists and policy-makers. It also spurred continued efforts in searching for for new approaches to economic challenges.
To mark the centenary of The First World War, we will be publishing a series of articles looking at what has changed over the last century in a number of domains. In today’s post, Professor K. Vela Velupillai of Trento University and The New School, New York, discusses economic theory.
When Archduke Ferdinand was assassinated on 28th June, 1914, economic theory was very much a European “monopoly” – with only a few isolated contributions by great American economists – notably Irving Fisher – to the lasting development of the subject, none of whom would reach the pioneering status of a Walras, Pareto or the young Schumpeter. So this is very much a Eurocentric narrative, for that was the way the story of economic theory in 1914 seemed, even at that time, to the pioneers of the field. It was to Vienna, Lausanne and Cambridge that the narrator of the origins of neoclassical economic theory turned, or to France, England and Scotland, for the pioneering work of the classical economists.
That being said, the most important event on the eve of August 1914 from the point of view of monetary theory and policy, was the establishment of the US Federal Reserve system, with the Federal Reserve Act of 23rd December, 1913. It far exceeds in significance the creation of the European Central Bank and the Euro Currency area, from every point of view, but particularly in the monetary policy ramifications in this era of so-called globalization of currency markets (even if not of labour markets and, to a lesser extent, commodity markets).
The Federal Reserve Act of December, 1913 and the birth of modern macroeconomics – especially at the hands of Knut Wicksell, were the result of the bimetallist controversy in the US in 19th century (using both silver and gold in the monetary standard), and the 20-year period of deflation from 1873 to 1893. Thus, the golden era of the gold standard – with its close ‘cousin’, the gold exchange standard – came to occupy the seemingly impregnable institutional framework for the conduct of monetary policy in almost all the (then) advanced industrial countries. It was to take the monetary dislocation and disorientation caused first by the hyperinflation in the immediate post WWI years and then the Great Depression before these golden fetters were discarded. But they would always hover in the wings of orthodoxy and its eternal extolling of the virtues of monetary neutrality.
Back to the one or two of the broader arenas of theory, in those halcyon, pre-WWI years. A.N. Whitehead and Bertrand Russell’s monumental Principia Mathematica had been completed in 1913, the same year, Diederik Korteweg vacated the Chair of Mathematics at the University of Amsterdam in favour of Luitzen Brouwer, whose inaugural lecture on Intuitionism and Formalism was to throw down the gauntlet to the Logicism of Principia Mathematica (the view that some or all of mathematics can be reduced to formal logic) and the Formalism David Hilbert. In April of the following year Wittgenstein began writing what eventually came to be the Tractatus Logico-Philosophicus, working on it all through the war while on active service and a prisoner.
Just as the hostilities started, Dennis Robertson submitted A Study of Industrial Fluctuation (note: Fluctuation – not Fluctuations!) for a Fellowship election at Trinity College Cambridge. There is not a single mathematical equation or formula in this wonderfully “modern” book, with a message that is still relevant – although there are graphs, charts and tables galore. The one graph was prefaced with the characteristic Robertsonian wit: “Diagrammatic representation, though not completely satisfactory, will perhaps be found useful by some.”
There are no mathematical equations in Keynes’ first published book either, Indian Currency and Finance, published in 1913, and there is no evidence whatsoever in the 600 or so pages of Wesley C. Mitchell’s Business Cycles that such a thing was even envisaged by that great founding father of the NBER (and of my own New School University!). What, alas, many at the so-called frontiers of research in economic theory and behavioural economics missed was the exceptionally prescient Human Behavior and Economics: A Survey of Recent Literature by Mitchell a year later in (1914) that ends by saying: “[I]n embracing this opportunity [to profit by and to share in the work of contemporary psychologists] economics will assume a new character. It will cease to be a system of pecuniary logic, a mechanical study of static equilibria under non-existent conditions, and become a science of human behavior.”
It is particularly pleasing to remember that this classic by Mitchell is succeeded in the same issue of the Quarterly Journal of Economics, by Maynard Keynes’s own nascent contribution to a field in which he was to stride like a colossus, in the interwar period: an institutional analysis of monetary experiences.
Mitchell’s plea for an economic theory, underpinned by a theoretically sound psychology, seems to have been answered by the practitioners – and claims – of a version of behavioural economics, without sacrificing their homage to the altar of the neoclassical triptych: preferences, endowments and technology. Thorstein Veblen’s passionate advocacy of an evolutionary approach to economic theory – to which Marshall was not unsympathetic – has become a new orthodoxy at the hands of evolutionary game theory.
The supreme dominance of the so-called fundamental theorems of welfare economics would, I am sure, induce discomfort in Marshall and Pigou. The “old” welfare economics they carefully (even lovingly) developed, so that the economic theory they fashioned as a development of Ricardian equilibrium economics could serve as a basis for enlightened policy, became the “new” welfare economics at the hands of Kaldor and Hicks. This was basis for the development of the fundamental theorems of welfare economics – although the mathematical framework in which it was encapsulated, primarily by Arrow and Debreu (but not in their fundamental joint paper of 1954) – which is the basis for the nihilistic policy frameworks of every kind of orthodoxy, from Hayek to Lucas, via Friedman.
How much of the economic theory that is being taught, and practiced, via an underpinning of economic policy – both monetary and real – couched in monumentally irrelevant mathematics, would be strange and unfamiliar to our neoclassical masters? To Jevons and Marshall, to Walras and Pareto, to Menger and Wicksell, to Edgeworth and Pigou? None of them may well be sure-footed in the non-computational, uncomputable, undecidable, unsolvable mathematics that encapsulates the formal economic theory they fashioned, in the golden decade culminating in the tragic year of 1914.
But they would be eminently comfortable in the safely ensconced orthodox economic theory of today – although Marshall may be an outlier and Wicksell a dissenter!
If you’d like to find out which famous painter was interested in the non-Euclidean geometry of relativity in Einstein’s physics, or who invented purchasing power parity, download the pdf of the unabridged version of Vela’s article here.
In October 1929, with storm clouds gathering, economist Irving Fisher warned against blind panic. “There may be a recession in stock prices, but not… a crash” since “Stocks have reached what looks like a permanently high plateau.”
A bit earlier, President Hoover could claim with pride that: “Given a chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation.”
The working man would be the first to profit, with the US Department of Labor’s New Year’s Forecast promising that “1930 will be a splendid employment year.”
Entrepreneurs were buying their rose-tinted glasses from the same shop as politicians and academics. Thomas Watson, founder of IBM looked forward “with confidence to the progress of business in 1929“.
Then came Black Thursday, October 24th 1929, with the New York Stock Exchange down 11% on opening. Things improved temporarily in later trading, but a whole series of Blackdays lay in store and the stock market crash would soon provoke the worst depression the world had ever known.
It seems astonishing in retrospect that the optimism mentioned above seems to have been crash proof. The Chairman of the Continental Illinois Bank of Chicago stated that “This crash is not going to have much effect on business“. Away from the grubby world of wheeling and dealing, the Harvard Economic Society’s Weekly Letter dated January 18, 1930, agreed. “With the underlying conditions sound, we believe that the recession in general business will be checked shortly and that improvement will set in during the spring months.” The Letter went bankrupt shortly afterwards.
And today? You may remember the bemused question about the latest crisis Queen Elizabeth asked at the London School of Economics in November 2008: “Why did nobody notice it?”
For Professor John Kay of the London Business School and Oxford (and visiting Professor at LSE) one of the reasons is the dominant approach of the profession itself. “If much of the modern research agenda of the economics profession is thus unconnected to the everyday world of business and finance, this is also largely true of what is taught to students [who] could import data on GDP and consumer prices into a statistical package … but would be little better equipped than the person in the street to answer questions such as ‘why were nationalised industries more efficient in France than in Britain?’”
The Institute for New Economic Thinking asked a number of economists to respond to Kay. You can find their replies here.
What do you think? Have the economists and analysts got any better since the Great Depression, or is their main preoccupation explaining why their last forecast was wrong, but we should trust the new one?
Well-done Paul the Psychic Octopus! The soothsaying cephalopod maintained his 100% record by tipping Spain to win the World Cup last night. England fans can take comfort from the fact that Paul was born in the Sea Life Centre in Weymouth before his record-breaking transfer to Sea Life Oberhausen in Germany.
There’s little comfort for other experts though. At the end of the day, you’re only as good as your last prediction, and it turned out to be a disappointing tournament for the highly-paid stars of UBS and the other big names of financial forecasting Brian Keeley reported on here.
None of them spotted the winner. None of them spotted the Great Recession either. In that, they were like most economists, apart from the ones who always forecast shocks and crises, knowing they’ll be right sooner or later (there were 195 stock-market crashes and 84 depressions between 1860 and 2006).
They did get it right about football ruining money though. When France were eliminated, shares in French broadcaster TF1 who’d bought the retransmission rights plunged on the Paris stock exchange.
Can a profession that seems more comfortable describing what has happened than in predicting what will happen be called a science? In fact, using the ability to predict the behaviour of large systems as the criterion would exclude disciplines such as weather forecasting, which is like economics in many ways.
Einstein summed up the difficulty of meteorology and other fluid dynamics studies when he remarked that before he died, he hoped somebody would explain quantum mechanics to him, and that after he died, he hoped God would explain turbulence. In one sense though, it doesn’t matter if you can’t forecast the evolution of turbulent flow.
Aircraft designers, for instance, don’t have to predict when a plane will meet extreme turbulence – but they do have to make sure it won’t disintegrate. A similar attitude could be applied to economics – try to understand the basic mechanisms and at least give useful strategies for avoiding disaster.
For economists, this means developing models to describe how systems work. To do this, in common with other social sciences, economics has borrowed many of its concepts and tools from the physical sciences (the notions of flow, masses and reactions, for example) although the “hard” sciences have usually moved on to a new paradigm long before the sociologists and economists.
Has economics come up with anything worthy of the insights of other fields? When challenged by mathematician Stanislaw Ulam to name one social science proposition that was both true and non-trivial, Paul Samuelson nominated comparative advantage, arguing “That this idea is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them”.
At least some of the scepticism about economics arises when a doctrine, tool or method is used to explain much more than its intellectual underpinnings can bear, as when it is assumed that economic agents act rationally.
On the other hand, applying strict economic analysis to a subject not usually treated in this way can be highly entertaining. Adam Smith’s “invisible hand” inspires Peter Leeson’s wonderful title The Invisible Hook: The Hidden Economics of Pirates. Leeson explains, among other things, why working conditions on 18th century pirate ships were immensely superior to those on merchant and naval vessels. And why we should see that Long John Silver’s peg leg was a negative externality with obvious implications for his labour market utility. Arr.
Pity the poor economics undergraduate. Seduced by descriptions of a discipline that “examines how a society provides for its needs”, he or she hands over their student loan and enters the tent with the others. When they wake up the next day, it’s all utility functions, general equilibrium models, externalities, stochastic variations, and trying remember what the difference between monetary and fiscal policy is.
When the jargon does pass into everyday speech, it’s usually a bad sign. Three years ago, few of us had ever heard of “subprimes” for instance. Sometimes though, a term may be technical but its meaning is clear, as in Paul Krugman’s response to our post about the OECD Economic Outlook. Krugman takes issue with Pier-Carlo’s Padoan’s definition of “contractionary”, and the fundamental disagreement is about aspects anybody reading the New York Times will understand, such as inflation and unemployment.
Too often however, debates about economics are conducted in a language that clouds the issues even for experts. So when they want to make themselves understood, they abandon the concepts and vocabulary of the profession and resort to analogy and metaphor.
The debate on the latest Outlook is no exception. Writing in the Financial Times, Martin Wolf launched a stinging attack (as the papers say to distinguish them from soothing attacks) on the Outlook’s recommendations, notably on the need for fiscal consolidation. To get his point across, he writes “Let us translate this proposal into ordinary language: ‘If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.’ But might it not make sense to get better first?”
Nouriel Roubini uses an even more striking image to describe the mixture of bad loans and other dodgy ingredients that went into creating derivatives: “If you put rat meat and trichinosis-laced pig parts into your sausage, then combine it with lots of other kinds of sausage (each filled with equally nasty stuff), you haven’t solved the problem; you still have some pretty sickening sausage.” And once the financial system starts digesting that…
There’s nothing new about this. In an article about the need for clarity in discussing economic policy, Robert Skidelsky quotes Jonathan Swift, writing in the 18th century: “Through the contrivance and cunning of stock jobbers there hath been brought in such a complication of knavery and cozenage, such a mystery of iniquity, and such an unintelligible jargon of terms to involve it in, as were never known in any other age or country.”
Unfortunately, clarity doesn’t necessarily mean accuracy. Take a look at RBS’s accounts of itself in 2007 when the bank was going to hell in a hand basket. Below a bunch of photos of young people grinning inanely at percentage signs, we read that: “RBS is a responsible company. We carry out rigorous research so that we can be confident we know the issues that are most important to our stakeholders.” Presumably making money wasn’t one of them. To be fair to RBS, they do “recognise that some people’s financial needs may be better fulfilled by organisations outside the banking sector”. The British taxpayers who bailed them out for instance.
Taxpayers everywhere have a right to be informed in intelligible language about the trillions of dollars they’ve been asked for over the past couple of years, and to be told what happened to all the promises of profound change. For the time being though, words written by Rudyard Kipling almost a hundred years ago seem to sum up the situation: “Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew”. Was that the end of the bad old ways? Kipling goes on to bemoan the fact that “the burnt Fool’s bandaged finger goes wabbling back to the Fire”.
Future of capitalism debate with Robert Skidelsky at OECD Forum (Thursday 27 May 2010)