Paul Romer is an economist highly respected by his peers, and about to become the Chief Economist at the World Bank.
He’s also just published a paper rubbishing the last 3 decades of macroeconomics.
Starting with “For more than three decades, macroeconomics has gone backwards”, Romer compares the belief that economies are only kicked out of ‘equilibrium’ by unpredictable external shocks to a kind of physics that only works if there are “trolls, gremlins and aether”. The belief that monetary policy – Reserve Bank adjusting interest rates, or printing money – has no affect on the economy is clearly fantasy.
These attack have long been made by Steve Keen, but this is the soon-to-be Chief Economist at the World Bank, as I said.
So it’s time to junk these out-dated theories. Romer proposes agent-based modelling – a kind of giant professional version of Sim City as the Guardian link puts it. An economics that doesn’t assume we’re all perfectly informed and perfectly rational and only in pursuit of money, and models that as lots of pseudo-random decision by lots of ‘agent’ – virtual people.
Keen’s analysis, as economists all struggle with what caused the GFC & Great Recession, is that recession is caused by a collapse in debt-financed demand. The higher the level of private debt, relative to GDP, the more unstable the system becomes. Which certainly chimes with the noughties experience.
Which leads some to question about our creation of that debt. Is capitalism as inherently flawed as Piketty says?
Colin James had an excellent column a couple of weeks ago, looking at how long the policies of the 80s and 90s take to affect social mobility and cohesion, long after the shock to inequality.
The Financial Times’ eminent Martin Wolf, once a cheerleader for the financial practices that gave us the global financial crisis, last week asked: “Is the marriage between liberal democracy and global capitalism an enduring one?”
He went on: “Democracy is egalitarian. Capitalism is inegalitarian, at least in terms of outcomes.”
“Widely shared increases in real incomes played a vital part in legitimising capitalism and stabilising democracy.” But now there is a “poisonous brew” of “growing inequality and slowing productivity growth”.
Martin Wolf, in addition to now wanting to see redistribution (or predistribution?) of wealth and reduced inequality, is also keen for monetary policy changes, that would curtail the debt-fuelled boom-bust.
The idea that private banks shouldn’t create money, just the government, has been one that has struggled to gain traction among politicians and economists, even though most people assume that’s how our system works. In fact, with fractional reserve banking, most of our money is created out of thin air by private banks for their own gain. When governments do it, it’s “printing money” and crazy, but private companies doing it for their own wealth is just normal.
Those financial institutions with their fear-greed swings create the debt-fuelled boom-bust cycles. Is it so mad that government (or more probably indirectly through the Reserve Bank) could in fact have complete control of money supply and create a small amount of money each year at a targeted rate of inflation, reducing the need for its own debt or taxes (or increasing supply of social needs)?
Economics is certainly in need of some new ideas, because our current settings aren’t working for society or the environment.