After the director of research at the London School of Economics explained to Queen Elizabeth the origins of the 2007/08 credit crunch she asked “..why did nobody notice?” A simple question, but one which challenges not just failures of individuals but systemic failures of the science of economics. There have long been jokes about the uncertainty of economics but the failure of the profession to provide any indication of the scale of the problem that hit the US and then the rest of the world in 2007/08 challenged the very foundations of the subject.
Since then there has been a lot of rethinking and indeed some identification of trends which preceded the crisis that suggest a new “normal economics” which may render standard fiscal and monetary responses to recessions inadequate. Close to the heart of the crisis was Lawrence Summers, as Director of the Economic Council for President Obama he shaped much of the policy response to the Great Recession. In late 2013 he reintroduced the concept of “secular stagnation” originally coined in 1939 by Alvin Hansen in his address to the American Economics Association. Hansen’s argument was that certain factors (the lack of technological innovation and population growth) had created a context where low rates of growth would be the norm going forward.
Whilst a war and the reconstruction of Europe proved Hansen wrong there is real concern similar issues are now in play and set to create a new low growth norm. The issues around secular stagnation have been explored in a series of essays brought together in “Secular Stagnation: Facts Causes and Cures”. Whilst there is a variety of positions taken this collection of essays does contain some consistent themes.
Aggregate demand is seen as weak and with interest rates at the zero lower bound there is not much scope for monetary policy to stimulate investment. Demography with population growth slowing and life expectancy increasing the dependency ratio is set to increase across the world. In other words the number of those being kept by those who are working is set to increase. High levels of public debt support austerian policy positions limiting the scope for debt funded public investment. Limited potential for technological innovations that are truly generically transformative like the steam engine and electricity.
Clearly each of these is subject to debate and argument. An additional one is the issue of inequality. This is seen as having been on a dual path. Internationally, levels of inequality have been declining as developing nations, notably China and India have integrated into the global economy. Intra-nationally, however, inequality has been increasing across the world. Wealth and income has become ever more concentrated in the hands of the 1% indeed even more so in the hands of the 0.1%.
It is not moral concerns of fairness that are the principle issues under discussion. Consumer capitalism needs consumers. If wealth is too concentrated then effective demand in the economy may be undermined. Added to this economic concern is one about the extent to which a modern democratic society can operate effectively if wealth starts to dominate the body politic. Stresses may start to build which the political process does not seem to be able to deal with, leading to dissatisfaction, cynicism and ultimately disengagement. Democracy may not be the best system of government but it is the best system to avoid getting the worst system of government.
Economics as a subject is in as much a turmoil as the phenomena it studies. There are many who think the global financial system created over the past 30 years is inherently unstable. If this is the case there is much to fear in the future as it is this system which animates an underlying economy which itself now appears to have a series of structural challenges to overcome. One ray of hope is a renewed interest in the notion of political economy. A view point which does not think The Economy is “a thing”subject to laws of rational agent utility maximisation. Rather it is a space which is rational and irrational to shifting degrees. Where different groups contest for power and advantage and where today’s orthodoxy can quickly become yesterday’s prejudice. Perhaps most important of all it is an area susceptible to rational policy interventions. It is not and should not be ruled by the TINA theory because there are alternatives.
“Secular Stagnation: Facts Causes and Cures” is an excellent review of key current issues in economics. It is available on line at: http://www.voxeu.org/content/secular-stagnation-facts-causes-and-cures