It’s often thought that academic economists remain hopelessly divided along their old ideological lines. While it’s true that lots of controversies persist, there’s actually a great deal of agreement on a range of issues. If one compares it to the political arena, the ‘dismal science’ can often look rather united.
The IGM Economic Experts Panel regularly polls a variety of economists from leading American institutions. Some issues are far from controversial, while others are more mixed. Let’s begin with the least surprising areas of agreement.
85% think that ‘freer trade’ is a net-positive. 93% disagree with the idea that America should replace its discretionary monetary policy regime with that of a gold standard. 79% agree that the US government should increase spending on infrastructure.
A clear majority agreed that, because of the ‘leave’ vote, the UK’s real per-capita income level is likely to be lower than it would otherwise have been, a decade from now.
Concerning a tax reform bill like the one backed by the Senate last week, most don’t see it substantially increasing US GDP in the next decade, and they’re extremely confident that it will raise America’s debt ratio. Similarly, 84% disagreed with Treasury Secretary Steve Mnuchin’s claim that the plan will pay for itself. Of course, the fact that academics almost universally slate Trump’s proposals will come as a surprise to no one.
As for whether the increased use of AI and robotics will substantially raise long-term unemployment in the advanced economies, views are rather mixed. A clear majority, however, think that the overall benefits will be large enough to compensate those most negatively affected.
The idea of raising the federal minimum wage to $15 by 2020 is another area of controversy. Asked in 2015 about whether the move would substantially lower the employment rate for low-wage workers, the IGM poll found that slightly more agreed than disagreed. A plurality decided to tick the ‘uncertain’ box. That debate pretty much comes down to whether you think the Econ 101 model holds true for real labour markets.
In the realm of UK monetary policy, a poll of 47 economists conducted by Reuters (prior to the Bank of England’s November rate hike) found that a large majority thought it ill-advised.
Although it’s now above target, weak growth and low wage pressures mean there’s an argument for allowing the inflation rate to overshoot. The move has since been compared by some analysts to the ECB’s reckless decision to tighten during the sovereign debt crisis six years ago, but it can be said they’re being hyperbolic; the British economy in 2017 is a far cry from that of Greece or Spain in 2011.
A Heterodox Insurgency
The mainstream is less divided than you might imagine, but views of the ‘heterodox’ variety are on the rise, and it’s here that the disagreements are a lot more pronounced. Taking place largely on the popular economics blogs, the debates usually float to the surface on more obscure media sources, like Russia Today’s finance show, ‘Boom Bust’.
On the conservative side, a key issue that divided Milton Friedman and Friedrich Hayek – whether central banks should adopt a loose monetary policy stance in response to recessions – is still a point of contention. Hayek’s descendants in the Austrian school regained some popularity after the 2008 crisis, but for the most part, ‘market monetarist’ views have a lot more influence within the profession’s mainstream.
One idea that seems to be popular in libertarian circles is that of ‘free banking’. The concept is popular among the anti-government types who encourage people to stock up on gold and silver (or more often these days, crypto). But the idea does have a small following among economists.
Hayek himself endorsed a form of it. In such a system, the commercial banking industry wouldn’t face any special regulations, and banks would issue their own notes. To give them value, they could be converted into an asset. But that isn’t so different from today’s banking system. Granted, the regulatory framework is extensive and highly complex, but individual commercial banks do in effect have their own money – liquid liabilities, i.e. deposit accounts, convertible to the state’s fiat currency at a 1:1 ratio.
Of course, a lot of free banking advocates don’t like central control of the monetary system, so they’d want to reinstate a gold standard. That disregards the obvious drawbacks, namely a hugely inhibited monetary policy, and as Friedman noted, the large cost in resources required to produce the commodity.
Modern Monetary Theory
Over on the other side of the spectrum, one school of thought that’s been receiving quite a bit of attention recently is that of ‘Modern Monetary Theory’ (MMT), which is very similar to Abba Lerner’s theory of ‘functional finance’. One of its foremost proponents, Stephanie Kelton, now writes op-eds for the New York Times. Some aspects of the theory are really rigorous, like the work done on banking operations by Scott Fullwiler. It provides a unique way of looking at monetary theory; FT Alphaville’s Izabella Kaminska likened it to an autostereogram.
Its historical view of the origin of money centres around the power of states to enforce the use of their currency, using taxation to establish its value. Advocates will often highlight the fact that governments (the central bank and the treasury are consolidated in a lot of their analysis) can create money whenever they like, and so can’t become ‘bankrupt’, in the usual sense of the word.
Follow the logical steps from this, and one will reach the conclusion that the only real budget constraint faced by a government is that of inflation. However, this isn’t nearly as heretical an insight as its proponents often assume. Plus, it doesn’t apply to the governments which lack monetary sovereignty. Perhaps more importantly, the single-constraint concept only works in theory, where the MMT folks are quick to consolidate the government sector.
In real life, central banks are not at the behest of the treasury – they don’t directly purchase its bonds or credit its account. So modern monetary theory seems to be describing the way that a system of public finance theoretically could work, and only partially how it actually works.
For the government to spend, it needs to move funds from the private sector into its account at the central bank, through taxation or borrowing.
Of course, when an entity borrows in a currency over which it has substantial influence, the mechanics involved are quite different to when it borrows in a currency over which it has zero influence.
But that doesn’t mean it’s ok to pretend that it completely controls the whole system; economies are subject to the unpredictability of human behaviour. In addition, money isn’t just a creature of the state. All assets possess some degree of the adjective ‘moneyness’, as the blogger JP Koning termed it.
Cash, central bank reserves and bank deposits are the most liquid forms of money, so they sit at the top end of the spectrum. Further down are things like gold, foreign currencies, cryptocurrencies and the shares of money market funds. In their quest to emphasize the state’s importance in the issuance of money, modern monetary theorists can often exaggerate its role.
It is doubtful that this will ever really apply to MMT, but some schools of thought that begin life in the heterodox realm are gradually absorbed by the mainstream. With Richard Thaler’s Nobel Prize, there’s no longer any doubt that behavioural economics is front-and-centre in the profession.
Another branch might eventually follow suit: the attempts to apply complexity theory to economics, for example via the Institute for New Economic Thinking at Oxford University, and researchers at the Santa Fe Institute. In a similar vein, the field of agent-based computational economics employs dynamic models containing more realistic and heterogeneous agents.
Some observers expect these computer simulations to soon rival the DSGE models commonly used in macroeconomic analysis. But regardless of the changes that may await the profession in the coming years, right now there’s a lot of agreement on some important policy debates. Whether or not this eventually filters through to policy is another question entirely.
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