Reality killed the Washington Consensus

19 April, 2015 at 17:01 | Posted in Economics | 1 Comment

Over the past three years research coming from [IMF] increasingly challenged the orthodoxy that still shapes European policy making:
 
reality-header2-2

First, there was the widely discussed mea culpa in the October 2012 World Economic Outlook, when the IMF staff basically disavowed their own previous estimates of the size of multipliers, and in doing so they certified that austerity could not, and would not work …

Then, the Fund tackled the issue of income inequality, and broke another taboo, i.e. the dichotomy between fairness and efficiency. Turns out that unequal societies tend to perform less well, and IMF staff research reached the same conclusion …

Then, of course, the “public Investment is a free lunch” chapter three of the World Economic Outlook, in the fall 2014.

In between, they demolished another building block of the Washington Consensus: free capital movements may sometimes be destabilizing …
 
These results are not surprising per se. All of these issues are highly controversial, so it is obvious that research does not find unequivocal support for a particular view. All the more so if that view, like the Washington Consensus, is pretty much an ideological construction. Yet, the fact that research coming from the center of the empire acknowledges that the world is complex, and interactions among agents goes well beyond the working of efficient markets, is in my opinion quite something.

Francesco Saraceno

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  1. Economists kill the economy
    Comment on ‘Reality killed the Washington Consensus’
    .
    Francesco Saraceno writes about failed Orthodoxy: “These results are not surprising per se. All of these issues are highly controversial, so it is obvious that research does not find unequivocal support for a particular view. All the more so if that view, like the Washington Consensus, is pretty much an ideological construction.”
    .
    The Washington Consensus was built on standard economic theory. It is well known that this theory does not satisfy the scientific criteria of material and formal consistency. Therefore, it is a priori impossible that economists can offer scientifically founded advice.
    .
    “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)
    .
    For lack of the true theory, economists have only vague and commonsensical ideas about how the actual economy works. So they cannot help politicians to steer the economy. Worse, they usually make matters worse, or, in more practical terms, they bear the responsibility for high unemployment (for the correct employment theory see 2015).
    .
    The problem is not so much ideology, the root of the malaise is the collective inability to trump up the new economic paradigm.
    .
    “… we may say that … the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives …” (Feyerabend, 2004, p. 72)
    .
    Egmont Kakarot-Handtke
    .
    References
    Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge
    University Press.
    Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment.
    SSRN Working Paper Series, 2576867: 1–11. URL http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=2576867.
    Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
    Method in Economics and Econometrics. Cambridge, MA: MIT Press.


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