Brexit — a rejection of mainstream economics

26 June, 2016 at 13:53 | Posted in Economics, Politics & Society | 5 Comments

If, as a result of Brexit, the economy crashes it will not vindicate the economists, it will simply illustrate once more their failure.

rocket-science-pic

We, at Policy Research in Macroeconomics (PRIME) call for an urgent, independent, public inquiry into the economics profession, and its role in precipitating both the financial crisis of 2007-9, the subsequent very slow ‘recovery’; and in the British European referendum campaign …

Economists have once again proved themselves not only irrelevant, but a dangerous irrelevance.

For too long they have resisted call after call for reform. If they will not do it themselves then it is time for others to take control. The profession should be brought to account through a public inquiry into the this failure.

While it is risky to second guess public opinion, it may just be that the prospect of hardship to come might not have been very compelling for those already suffering the hardship of low wages, insecure low-skilled jobs, bad housing, high rents, an under-resourced and increasingly privatised NHS, and other forms of public sector ‘austerity’.

With this historic vote, the British people have not just rejected the EU. They have done something that should worry the British establishment, and their friends in the City of London, and internationally, far more. They have rejected economics – and in particular the dominant economic narrative …

The “experts” and the economic stories they tell, have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international co-operation and co-ordination is vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets – in money, trade and labour – must be unfettered, detached from democratic regulatory oversight, and must be trusted to ‘govern’ whole countries, regions and continents.

The British people have today rejected this mainstream, orthodox economics, a strain of fundamentalism that they may rightly judge has proved deleterious to their own economic interests.

Ann Pettifor

And in case you — like e.g. Simon Wren-Lewis — think this kind of critique is only coming from ‘heterodox’ economists like Ann Pettifor and yours truly — well, then maybe you should read what a former Governor of the Bank of England has to say:

404168975Since the crisis, many have been tempted to play the game of deciding who was to blame for such a disastrous outcome … A generation of the brightest and best were lured into banking, and especially into trading, by the promise of immense financial rewards and by the intellectual challenge of the work that created such rich returns. They were badly misled. The crisis was a failure of a system and the ideas that underpinned it, not of individual policy-makers or bankers, incompetent and greedy though some of them undoubtedly were. There was a general misunderstanding of how the world economy worked …

If we don’t blame the actors, then why not the playwright? Economists have been cast by many as the villain. An abstract and increasingly mathematical discipline, economics is seen as having failed to predict the crisis. This is rather like blaming science for the occasional occurrence of a natural disaster. Yet we would blame scientists if incorrect theories made disasters more likely or created a perception that they could never occur, and one of the arguments of this book is that economics has encouraged ways of thinking that made crises more probable …

Brexit — and its disdain of the establishment — will send well-earned warnings to politicians all over the world …

Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

trumpIn the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

Thomas Palley

5 Comments »

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  1. Remove all privileges for depository institutions, aka “banks”, and then they can’t create so much trouble. Why, for example, is government provided deposit insurance needed when accounts at the central bank are inherently risk-free and we could all have accounts there? Cui bono that we can’t? Is it not the banks themselves and the most so-called creditworthy, the rich, at the expense of the rest of us and of economic and social stability as well?

  2. I doubt mainstream economics will be affected by this. I doubt that austerity policies will even change. If anybody voted to exit the EU because they thought conventional economic policies would change they were sadly duped. Neoliberalism has taken over the EU, but the policies can continue, and most likely will, outside of it too.

    • Actually if you look at country size and GDP by capita for advanced country there is a strong tendency that GDP by capita decreases with the size of the country. It is good to be small and make local economic decisions in other words. It appears that small countries are more immune to centralizaing economic policies than big countries.
      Brexit should have the result to increase local decisions and reduce bad economic decision, that is increase GDP by capita.
      For some reason there has been a religious belief in globalization and centralization of economic decision making, despite that even Paul Kurgman has admited that NAFTA has not increased growth in Mexico.

  3. It is nonsense to suggest that Brexit is a rejection of “mainstream, orthodox economics”.
    The primary concern of Brexiteers was excessive immigration into the UK, as clearly emphasised by the poster:

    Orthodox EU policies similarly oppose labour mobility other than internally within the EU.
    Brexit aims are thus similar in kind (not a radical rejection) of the restrictive labour mobility policies of the EU establishment.

    EU policies also restrict free trade, especially in agricultural goods. Brexit will thus free the UK from these restrictions. In this respect, Brexit may be seen as a return to mainstream free market economics for goods. This is the complete opposite of Ann Pettifor’s thesis. However, immigration was the dominant issue.

    The quoted comments from Mervyn King’s book seem to be even more off-target.

    • “It is nonsense to suggest that Brexit is a rejection of ‘mainstream, orthodox economics’… Brexit may be seen as a return to mainstream free market economics for goods.”

      Thanks for showing the poster. It is anti-immigration but certainly not racist as has been stated in the US media. I’d call it an economic issue.

      I suggest that Brexit is a rejection of ‘mainstream, orthodox economics’ as imposed by the European Union. Meanwhile, Scotland apparently is getting ready to reject mainstream, orthodox economics as imposed by the UK.

      I think voters don’t so much care whether economic policy is mainstream and orthodox or not. I think voters care if the economy is good or bad.


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