By Anatole Kaletsky
April 4 Here is a list of economic questions
that have something in common. In a recession, should
governments reduce budget deficits or increase them? Do zero
percent interest rates stimulate economic recovery or suppress
it? Should welfare benefits be maintained or cut in response to
high unemployment? Should depositors in failed banks be
protected or suffer big losses? Does income inequality damage or
encourage economic growth? Will market forces create
environmental disasters or avert them? Is government support
necessary for technological progress or stifling to innovation?
What these important questions have in common is that
professional economists can't answer them. To be more precise,
economists can offer plenty of answers about government
deficits, printing money, inequality, environmental issues and
so on, but none of these answers is authoritative enough any
longer to persuade other economists, and never to convince the
world at large.
Take two examples. On whether government borrowing
aggravates recessions or promotes recoveries, the world's most
eminent economists fall into one of two violently conflicting
schools. The world's most important central banks, the U.S.
Federal Reserve and the European Central Bank, hold
diametrically opposing views about the effects of quantitative
If economics were a genuinely scientific discipline, such
disputes over fundamental issues would have been settled decades
ago. They are equivalent to astronomers still arguing about
whether the sun revolves around the earth or earth around the
How should politicians and voters who look to economists for
guidance respond to this cacophony? Writing this week from Hong
Kong, which is hosting a galaxy of economic superstars at the
annual conference of the Institute for New Economic Thinking
(INET), I can offer a partial answer.
INET is a $150 million foundation created four years ago to
support academic research and teaching in economics that break
with the assumptions of natural equilibrium, market efficiency
and statistical predictability that were largely responsible for
the policy mistakes that produced the 2008 financial crisis.
Economics is ultimately a study of politics, psychology and
social behavior. It is therefore as close to philosophy or even
theology, as to physics, biology or engineering. Just as
philosophers and theologians still argue about the same issues
that preoccupied Plato, Kant and Descartes, economists see no
shame in continuing the debates over budget deficits, monetary
policy and full employment launched by Keynes, Wicksell or
This political and moral aspect of economics suggests a
reason for the subject's remarkable prestige and power, despite
its obvious failings. Economists have become a secular
priesthood, turning the political orthodoxies of their times
into comprehensible narratives, thereby promoting social
stability and democratic consensus.
In the 40 years since the mid-1970s, the dominant schools of
academic economics have preached the virtues of free markets,
competition and small government, helping to legitimize widening
disparities of wealth and income as economic necessities,
dictated by natural laws of market competition that were
impervious to political interference or social control.
In the 40 years before that - from the Great Depression and
Keynesian revolution to the Great Inflation and monetarist
counterrevolution - economists played the opposite political
role. Their job was to persuade conservative business interests
that active government, fine-tuning of economic cycles, welfare
safety nets and redistributive tax systems were indispensable to
the success and even survival of capitalist free-market
If we look back to the 19th century, to the origins of the
modern capitalist system, we can see economists playing other
politically legitimizing roles - establishing respect for
private property, competition, free trade and voluntary
contracts for mutual beneficial exchange, in a world that was
still largely feudal, with wealth distribution justified by
heredity, violence or military conquest.
As Keynes famously said, "The ideas of economists, both when
they are right and when they are wrong, are more powerful than
is commonly understood. Indeed the world is ruled by little
else. Practical men, who believe themselves to be quite exempt
from any intellectual influence, are usually the slaves of some
What makes Keynes's comment so relevant today is that the
economic system is again in a process of transformation. It is
now fairly clear, as suggested in my book Capitalism 4.0, that a
new model of global capitalism is evolving out of the 2008
crisis, just as it did out of the crises of the 1970s, the 1930s
and out of the collapse of feudalism in the early 19th century.
We are still waiting for the parallel transformation in economic
thinking, but some of its features can be discerned.
The first is a recognition that the world is too complex and
uncertain to be analyzed with models that assume a natural
equilibrium of a future that is predictable, at least in a
probabilistic sense. The second is that even competitive and
perfect markets can make disastrous mistakes. The third is that
a world economy that is highly unpredictable must be managed
with fairy broad and flexible tolerance ranges for indicators
such as inflation, government borrowing or unemployment, instead
of the precise inflation targets of the pre-crisis period.
In short, enlightened economists are starting to recognize
that their models must describe a world that is imperfect,
unpredictable and unstable. Enlightened policymakers are
starting to understand that rigid rules devised many years ago -
for example, the Maastricht deficit targets now threatening to
destroy the euro - are no longer relevant in the new world.
The next phase will be for politicians to explain to voters
that, in a rapidly evolving global economy still struggling to
emerge from financial crisis, there is nothing wrong with
imperfect solutions - for example, budgetary policies that "kick
the can down the road" and "muddle through."
Victor Fung, head of Li & Fung, a company that brought
globalization to China, set the tone in his welcome speech to
the INET conference, which his Fung Global Institute
"Americans believe that every problem has one ideal
solution. The Chinese believe that every problem has multiple
solutions and that each solution will lead to new problems down
That may indeed be the new economic thinking.