South African-British. Economist, adviser, author. Director of Policy Research in Macroeconomics (PRIME)
1. Why does economics matter?
Economics matters because it has an enormous impact on government policy and on policies which affect all of us in everyday lives; employment, investment and our incomes - all of these are determined by economic policies, or economic theory which informs economic policy. So economics is terribly important because it does shape our lives. If you think about just the very recent history, the economists had argued that after the Great Financial Crisis it was absolutely essential that governments should never have public debt exceed 90 percent of GDP. That shaped a decade of a very, very weak recovery from the crisis. I mean, A) there was the catastrophe of the crisis from which the whole global economy had to recover.
But then this was made worse by economic theory and policies in forming policy in the European Union and here in Britain and to an extent in the United States. People lost their jobs. And theory had informed the crisis itself.
The idea led by Alan Greenspan and other prominent economists, which is that the market should be left to its own devices and can be trusted to discipline itself and to not go overboard, that theory was so flawed and gave us a catastrophic crisis. Millions of people lost their homes and their jobs and their savings and their investments and so on and so forth.
So economics really, really does matter.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?
Well, for me there’s a very big problem about calling it a science in the first instance. I’m appalled at the absence of rigor amongst economists. And the reason I’m quite fixated on the 90 percent question is that there was a claim made that if public debt exceeds 90 percent of GDP, that’s very bad for the economy. This morning, the very same economists that advocated the 90 percent, Professor Ken Rogoff, was on our radio saying 90 percent doesn’t matter anymore.
So if a scientist, if someone, for example, an aeronautical engineer, advised an airline company that this amount of load 10 years ago was totally unacceptable, but now you can have this load and there was a crash, or something went badly wrong, the scientists would be hugely discredited.
And I think just to come back to the analogy with aeronautical engineers, aeronautical engineers are required to ensure the plane stays up in the air and doesn’t crash and kill hundreds of people.
Economists don’t have that kind of accountability and don’t apply the same level of, if you like, scientific rigour to their theses, to their hypotheses, that aeronautical engineers do so. So I’m not answering your question because you’ll say that I’m comparing theorists with engineers here.
But the aeronautical theory that upholds the engineering is good theory, it’s proved, it’s been tested and so on. The theory that upholds the engineering undertaken by a government is not as sound and as rigorous in my view.
3. What role does economics play in society? Does it serve the common good?
The thing is, that’s a more difficult question because economics can be extraordinarily helpful in serving the common good. And there have been periods in our history in which economics has done that, has achieved that, and I’m referring in particular to the period known to all economists, no matter what their views are, the golden age of economics, which ensured that there were high levels of employment, decent levels of income and so on and so forth.
So economics is quite capable of serving the common good.
I’m not sure that it has done at all times in history or that it does now. There are two reasons for my concern about that, and one is that we face a common threat, global common threat, which is climate breakdown and biodiversity collapse. And economics doesn’t really have the answer to how to deal with that. Insofar as economics has tried to deal with that, it’s argued for deferring the crisis - for deferring the solutions to the crisis, should I say - because the solutions will be cheaper in the future than they are now. That’s Mr. Nordhaus.
And there again is an example of policy informing engineering and informing politicians who very conveniently simply delayed action and deferred responsibility for attending to the common good.
So we are in a position where we face a global threat and economics hasn’t been able to prepare us for that threat.
This is bringing me on to my favourite subject, which is the international economic system, which is the thing that we should be able to draw on in order to deal with a global threat. That system is informed by economic theories that, in a sense, have taken the role of managing the system much less seriously.
So the theory is that the markets can be trusted to manage the international financial system. And we find that actually that may be the theory, but that markets can’t function without central banks, without public authority and public resources.
So it’s not that markets aren’t entirely independently managing the financial system, but by, if you like, conceding to markets the power to manage the international system, governments have given up and given away their power to work internationally and to work together internationally to tackle a big threat such as climate breakdown.
Of course, this hasn’t always been the case. There was a time when we recognized - in particular after the catastrophe of the Second World War - that we as nations must work together, we must develop an international system that works for all of us, and we must cooperate and coordinate to maintain and support the system.
Both on the left and the right of politics today we have a feeling that actually the international system should be left to its own devices: it manages perfectly well and anyway good for us because we have Internet and foreign holidays and exciting places to visit and we can use our credit card wherever we want.
So we - the public, the polity, if you like - has also accepted that the international system does not have to be managed and does not have to be used just to meet and to deal with common good challenges. And that’s a result of economic theory.
4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?
Right? I mean, I think one of the problems is economics being isolated from the other academic social sciences, essentially, because economics has to embrace all of those things.
It has to have a sense of society. It has to have a sense of history. It has to understand these other social forces within which it plays a part. And I think it’s the fact that economics has detached itself from those or that economists talk as if they are detached and as if this is a machine or if you like, this is an engine that they tinker with and all they have to do is tinker with it and all will be well.
That, I think, is what has been so dangerous about the impact of economics on society. But on the other hand, while it’s been dangerous, it has been hugely advantageous to particular sectors of the economy. And you will know that I have a real beef about the finance sector.
The finance sector is very happy for its activities to be detached from social and other impacts, really, so it suits a certain sector of society. It suits a particular economic grouping for us to detach economics from these other impacts.
And I don’t think that it’s possible for us to do that. And unfortunately, the other aspects of the social sciences, the other social sciences, come back to bite us ferociously. What’s very interesting to me, to come back to the real world, is that the economic theory that was applied post-GFC was suddenly transformed post-pandemic.
And the reason it was transformed wasn’t just that this is the only way to deal with a pandemic - government to spend and to replace the massive fall in income that occurred as a result of people being forced to stay home by the state - what also was happening was economists recognizing that the decade after the financial crisis led to the rise of populism, to the rise of authoritarianism and of presidents like President Trump, Bolsonaro, President Modi in India and so on.
And those elections and those results, those social impacts have been very damaging in turn for the economy. And I think economists are waking up finally to this and retreating and stepping back from the policies they advocated post-crisis, knowing full well that that led us down a really very dangerous path.
So I think this detachment from the other social sciences places us all in peril, really.
5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?
Absolutely. And the question is, how do we do that? And I think the way we do that - and for me the problem isn’t so much as economics as the economics profession, and the economics profession is pretty closed to alternative ideas. So I don’t think you could hold economists accountable. You can’t charge Ken Rogoff for the costs of his advice, which were immense.
But you could allow more alternative views, you could allow alternative views come forward to those of Ken Rogoff.
But the economics profession is such a closed shop. I’m not an academic economist, thank goodness, but I have friends who are academics and who struggle to get their papers published, who struggle to get their voices heard, and then who struggle to get platforms or to get articles in newspapers. And that, as far as I’m concerned, is a form of discrimination which is deeply harmful to the profession. Let a thousand flowers bloom, let people speak and avoid censorship.
But I think within the profession we get censorship and we get the elevation of those who’ve made mistakes, who are not isolated for that, are not denigrated for that or are not downgraded or what is the word when you lose your position in the department, and they tend to be rewarded for their errors. I think that means economics is not being held fully accountable. I want to concede that there is a fair amount of heterodox thinking going on and there are departments and there are places and we all go looking for these places where alternative ideas can be debated and discussed and so on.
But the majority and unfortunately the most important places - powerful institutions, and I think here of the economics department in Cambridge - are amongst the most closed, basically.
So I think that’s how we hold economists transparent. It’s by exposing them and exposing that sector and opening up the sector to more alternative ideas.
And I feel particularly bitter about Cambridge. I made a speech at Cambridge about Keynes, where is treated as a kind of novelist of economics of the early 20th century and not taken seriously at all. And when I spoke at one of the anniversaries, I think of the general theory, I got a very hostile reception not just from economists but also from their students who of course have all been indoctrinated in an anti-Keynesian point of view.
6. Does economics explain Capitalism? How would you define Capitalism?
Do I feel that economics explains capitalism? No, I don’t think it does. And I’ll say why in a moment. How I would define capitalism, I would define it as government by the market with its major goal being something called growth and profit seeking, essentially. So for me, that’s what capitalism is. And I’m not against capitalism and capitalism hasn’t always been a malevolent force. But the minute capitalism has become, in the words of Polanyi, disembedded from society, when it’s been allowed to, if you like, drift into the global stratosphere and to act without restraint or proper regulation, democratically determined regulation, then capitalism becomes something quite different.
So for me, the real problem at the moment with capitalism is that it’s highly financialized, it’s rentier capitalism now essentially, and that for me is not old-fashioned capitalism.
My dad, after the Second World War, without any experience at all, decided to open up a business without any experience and with a very poor education because he’d left school early to go to war.
And he was very entrepreneurial and very brave. And I, as a child, lived through the dramas of entrepreneurial life, capitalist life, really. And my dad eventually did really well and we managed to buy a fancy car and improve our living standards. So I would all recognize that.
I don’t think that that kind of capitalism prevails any longer. The idea now is for capitalists not to take risks and certainly not to carry the burden of losses associated with those risks. I heard this morning as our chancellor promised to guarantee the banks and developers six hundred thousand pounds for individual mortgage applications. In other words, to invite people who don’t have enough money to apply to buy a house and to give a government guarantee of six hundred thousand pounds each, which amounts in total over the time period to billions of pounds.
And this is a kind of subsidy to banks. It says to banks: “we’d like you to take more people onto your books, but we don’t want you to take the risk and we don’t want you to face losses. We want to make it as safe as possible for you to take the risk of lending out a mortgage to someone with a not-very-high income.”
Now, banks play a really important part in our economy and to an extent need some sort of protection.
But I find that I find that increasingly across the board, tax payers are providing guarantees, guarantees not just against losses, but guarantees of future income. Where I live, we’re about to build a new nuclear power station and taxpayers are guaranteeing a foreign company streams of revenues into the future for the next 30 years, about which we know nothing. But they’re now being guaranteed a rate of profit and a stream of revenues, which my dad would have loved that kind of guarantee. And so would I have, and my dad’s kind of capitalist doesn’t exist, I mean, you’ll be crazy if you did what he did.
And for me, this is why capitalism is self harming at the moment: is because he did take risks. He was enterprising. He did invent new ways of working and so on. It was a very basic business he was in. But why now would you want to be entrepreneurial?
Why would you want to risk an investment in, for example, the creation of new assets when you can invest in existing assets like Victorian property in London, built, you know, in the 18th-19th century, and the government backs you up basically. And all you do is sit on your butt and collect the rent from that asset or else collect the capital gains that you make on the sale of that asset, without the effort of being entrepreneurial and in creating new assets.
And I think that has been very damaging to capitalism at the moment.
7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?
I do like that question, it really sent me spinning away last night as I thought about it. Of course capitalism has survived probably for longer than other systems, but is now suffering from the same weaknesses that led to the collapse, for example, of the Soviet Union and of so-called communism. And that system from its head, its start, was attempting to be authoritarian, was doing what the economics profession has done, which is to censor any dissent and to close down. And I’m very conscious of that at the moment as we remember Rosa Luxemburg, who attacked Lenin for his authoritarian tendencies.
So right at the start of the communist system there were weaknesses. And that’s beginning to look like a weakness in capitalism. So, yes, I don’t think that global capitalism can survive. I think it’s already, if you like, disintegrating. And I’m very struck by Pettis and Klein’s book “Trade Wars are Class Wars” because the internal inequality that has led to expansion in trade and the financialization of the global economy has caused so much alienation that we’re seeing it - that system of of capitalism. And perhaps I’m waffling here, I’m aware of how unacademic I am being here.
But, you know, capitalism has evolved. And I suppose that is why it has lasted for longer than most, because it’s changed its spots along the way. Now, I would say that the capitalism - I’m a Keynesian, I thought what Keynes argued, and I’m very obsessed by this at the moment, in 1919 when he pleaded with Wilson and the leaders at Versaille to assume public authority over the international financial system and to strip Wall Street, if you like, of control of the system. And he was defeated in that.
He put forward a plan which would have enabled Germany to raise finance for recovery and indeed would have enabled the whole of Europe to return. And he was defeated by Wall Street essentially on that.
And that was catastrophic. That proved to be catastrophic for European and global society.
But he had a plan because he was a capitalist, was Keynes right. And that plan was then adopted in 1933 by Roosevelt.
And I’m very struck by Rauchway’s history of the New Deal, in which he argues that on the night of his inauguration Roosevelt (who was probably muddled about this all the same) adopted the policy that Keynes had argued, which was that the gold standard was the government of the system by Wall Street. And that had to be changed. And the government had to be put in the driving seat of the economy, not Wall Street.
And he immediately began that process by demanding that the banks hand over their gold.
And then we had a period of capitalism in which in my view was really quite benign. There was, well, having said that an awful lot went wrong.
But period ‘33 to the war was a period of recovery from crisis. And it was a flowering of, first of all, employment and secondly, the creative arts. You know, Steinbeck’s Grapes of Wrath emerged from that, and also tackled an environmental crisis. And then we had a devastating war which, in my view was still the aftermath of 1919.
And then there’s a post-war era, the 45 to 70s, or I would put it 60s, the late 60s until the moment of the Nixon shock, when actually it was a golden age and capitalism did well. And then it changed its spots again and it became highly financialized. And now it’s the extreme kind of rentier rentier capitalism which could change and it could change.
And I suppose, although I’m a lefty, I’m really actively arguing for it to change back to what it was after 1933 and after 1945. And many think that’s delusional. But it is, and I recognise as a social Democrat, that actually this would only save capitalism from itself, really.
But I think it’s persevered because it’s changed its spots. And unless it changes its spots very dramatically now we will move into an era I would like to just broadly define as that of fascism, and heaven knows where that will lead us. But knowing how flexible capitalism can be at changing itself, I’m not going to bet on it being destroyed as a system.
8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?
I’m actually a socialist and I love the way Polanyi defines socialism. He defines it as the subordination of the self-regulating market to the interests of society.
And I can’t envisage a future in which there are no markets, and I think that there’s a utopian view that you can live in a world without markets.
But I would like to see the markets subordinated to the interests of society, which as Polanyi argues, was always the case. We’ve had markets for more than 5000 years according to the anthropologists and archaeologists, but it was always embedded.
And for me, that is really what socialism is about, it’s about subordinating the self-regulating market to the interests of society.
And can I just say, you know, I want to get a point in here because this is the OECD. And I don’t know if you were there when I made my contribution about the OECD’s role in growth.
And actually, I have a book now and I haven’t yet had time to read it, by a man who has done nothing else but examine the OECD’s role in the whole concept of growth.
AoE: Is this Mattias Schmelzer’s book?
Yes. So the point is that - and this takes us back to economics, has given us this idea of exponential expansion of economic activity regardless of, and actually that’s what capitalism has to do in order to increase the rates of profit and so on. And I think that for me, socialism will be about reminding capitalism of the finite nature of the Earth’s assets and of the need to operate within those finite boundaries, if we are to survive as a human civilization.
And so we have to get over this idea. And I try to explain this in terms of, you know, we will want to meet society’s essential needs, whereas capitalism at the moment wants to meet unlimited desires and wants and the exponential rise in those desires and wants. And we can’t have that. So I think that would be the way I would see things: to see the market subordinated to the needs of society and the economy subordinated to the finite limits of the ecosystem.