The (mis)rule of the econocrats: How to re-politicise economics

Steve Keen

The financial crisis demonstrated extraordinary failures on the part of policy elites and economic experts. And yet we remain governed by technocrats. We need to re-politicise economic policy-making, or else repeat the mistakes of the past. By Karel Williams, Mick Moran and Andrew Bowman.

Why should we grant individuals or small groups the authority to govern without democratic intrusion? One standard justification is that they possess a form of expertise which enables them to govern better than representative or participatory democracy ever could. Technocrats are not autocrats because they know what they’re doing and everyone will be better off if they’re left alone to do it.

A particular type of technocrat, the econocrat, is afforded a degree of deference usually associated with medical professionals, engineers or natural scientists brought into the policy arena. Scandals surrounding Foot and Mouth disease, BSE, and GM crops eroded public confidence in scientific expertise, and ushered in experiments with participatory risk management which fundamentally questioned the governing role of technocracy. The economic crisis poses similar questions as to whether the econocrats really know what they’re doing, but appears to have had no comparable impact. There is much popular hostility towards bankers but that has not translated into a more general questioning of the social status of economic expertise.

As past experiences demonstrate, failure to see a crisis coming is par for the course in all economic cycles. Nonetheless the failure of present day economic experts, using model-based and professional forecasts, to raise the alarm about the banking crisis beginning in 2007 was truly startling. A study by the Dirk Bezemer of the University of Groningen, for example, identified some 10 economists who did so. One of the ten, Professor Steve Keen, has pointed out that what really unites this grouping is their collective distance from the mainstream neoclassical economics taught in universities, which treated the financial system as a neutral intermediary for ‘real’ exchange and ignored the significance of the dynamics of private debt.

The most remarkable thing about this though is not so much the ex ante failure of prescience, but the fact that ex post there has been very little change in terms of what is considered reliable economic expertise. The crisis did induce a short-lived questioning of expertise but that was followed by a remarkable re-legitimization.

Take central banks for example. In the 1980s and 1990s, central banks were granted independence from political interference on the grounds that they were competent in technical matters of monetary policy which should be insulated from political pressures. Elite central bankers were either oblivious to or non-plussed by the asset price bubble expanding through the 2000s – fixated as they were on targeting price inflation. But, Mervyn King, Ben Bernanke and Jean Claude Trichet all not only retained their posts after the crisis, but were handed a greater level of responsibility than ever before.

With governments in the EU, US and UK either politically incapacitated or ideologically set against both a serious active fiscal policy and fundamental banking reform, they were handed a larger role after the crisis in a form of central bank led capitalism. Unaccountable econocrats have been implicitly tasked with preventing a depression and/or securing the recovery through rounds of quantitative easing in the US and the UK, and the extension of ultra-cheap loans to Eurozone banks through the European Central Banks’ Long Term Refinancing Operation.

Besides central banks, one could similarly point to university economics departments, private banking institutions, the IMF and the business press as further cases where epic failure has gone unpunished and the claims of authority have not been challenged. How has this come to be?

Most of the major reflections on what-went-wrong, from the Treasury’s Bischoff Report of 2009 to the Independent Commission on Banking of 2011, have framed the financial crisis as a form of technical accident, an identifiable engineering error in a mechanical system: incentives in the banks were set wrong; regulators paid too little attention to systemic risks; derivatives became too complicated to manage; mathematical risk models were unfit for purpose.

One effect of this framing has been to solidify the position of existing technical experts within the system. The framing suppresses the political dimensions of the crisis (an oversized banking system capable of undermining democratic politics) and ignores the radical technocrats such as Adair Turner and Andy Haldane who have asked more fundamental questions about the social contribution of financial services. Given this framing, the task at hand is to rectify the discrete flaws in an otherwise sound system by making existing forms of regulation more complex and more responsive.

And so, as dubious firewalls are erected to separate retail and investment banking, neoclassical macro-economists tinker with their dynamic stochastic general equilibrium models to retrospectively incorporate financial market imperfections. Things change in order that fundamentally things stay the same. Rather than the outcome of a serious learning process, these texts and new models are a performance of reflection in the genre of auto-biography, they expose the protagonists’ weaknesses and shortcomings, but never so much as to fully undermine their standing. We have arrived back in a position akin to that of exotic derivatives pre-crisis: stop worrying, and trust the experts.

This trick will be harder to pull off than previously. Trust in elites of all kinds and by all measures are touching all time lows. Recent flurries of media interest in modern monetary theory and the spat between Steve Keen and Paul Krugman over the role of banks in money creation suggests a growing appetite for economic iconoclasm and a growing audience for the marginalised heterodoxies.

Any challenges are unwinnable, however, if the political architecture remains unchanged. Neoclassical economics has won, not because it describes reality accurately, but because it describes a reality which dominant interests want. It would help to have a new breed of more competent and modest technocrats and economic experts. But the first priority is to have a revitalised democratic politics, in which economic expertise is treated as provisional and uncertain rather than trusted unconditionally, and in which  the illusory dividing line between the economic and the political can be broken down. {jathumbnailoff}

Originally published on Open Democracy under a Creative Commons by-nc-sa license.

Image top: neeravbhatt.