Monday, March 24, 2008

Political Economy

One interesting feature in "the Independent" newspaper is its You Ask the Questions column. Joseph Stiglitz was "grilled" in the latest. For example:

What are the implications of recent economic developments for the teaching of economics?

John Baxter

London N1

The idea that markets are "self adjusting," that free, unfettered markets lead as if by an invisible hand to the well being of all, has been repeatedly refuted (the Great Depression was the most telling refutation). But it is a lesson that has to be learnt over and over again.

The challenge is to get the right balance between markets and government, to get the right form of regulation that allows for innovation – but not the kind of financial innovation that we have just seen. Instruments that were supposed to reduce risk actually increased it.

Stiglitz is a Nobel Laureate in Economics. That's worth noting; economics is regarded as being as scientific as chemistry, medicine and physics! (Maths has to make do with the Fields Medal.) Marx called the subject "political economy" - it is far more apt as it shows economists are really peddlers of ideological mumbo-jumbo. As an editorial in "the Economist" from 2nd June 1973 put it (quoted in the SPGB pamphlet on Marxian Economics)

If economists today took more trouble to explain in simple language what they are trying to prove and what relevance it might have, the gulf between theory and practice might be closed somewhat. As it is, more and more economists fill more and more pages of learned journals with an endless stream of ill-written, verbose, half-baked mumbo jumbo which has as much value to policy makers as the chattering of starlings.

Stiglitz's answer is an explicit attack on standard, free-market economics. The market, argue some defenders of capitalism, possesses this "invisible hand", which secures prosperity and democracy for all; the concept dates back to Adam Smith.

Quite what he has in mind on the right balance between market and government is not clear. History has shown Keynesian economics to be just as big a failure.


Londonsocialist said...

Actually a "Nobel" prize for economics doesn't mean all that much. In fact it doesn't really exist. Alfred Nobel (the explosive manufacturer)left money in his will to set up a foundation to award prizes only in physics, chemistry, medicine and literature. The Norwegian parliament added a "Peace Prize" in 1901. It was in 1968 that the Bank of Sweden instituted "The Bank of Sweden Prize in Economic Sciences in memory of Alfred Nobel". So, it's really only a Bank of Sweden prize. And what's a prize from a bank worth (in academic terms, that is)?

ajohnstone said...

As said , plenty of cticism , but little meat on the bone from Stilglitz .
"The regulators were clearly not doing what they should have been doing; and the regulations themselves have not kept pace with innovations in financial markets. Financial markets were very sophisticated in slicing and dicing risk, but they were very bad at assessing risk. They made a large number of elementary mistakes – which should check our confidence in their ability to manage risk. There needs to be much better regulation of these new instruments, at least when people are gambling with other people's pension funds."

Although this comment by him is of interest .
Condemning the Bush administration for the "trillion dollar war" in Iraq, Professor Stiglitz said: "We might have had a financial crisis without the war, but if we did, it would not have been as deep or severe."