It is worth stressing that the current mainstream debate is largely focused on how macro policy should be designed in periods, as now, when inflation and unemployment are both broadly “acceptable”, and when there is no obvious emergency at hand.
The much more serious challenge of how policy should adjust in the event of another crisis – a renewed recession; a major outbreak of deflation; a permanent slowdown in productivity growth; a political crisis over rising inequality; or a financial disruption, such as a Chinese debt implosion or a break-up in the euro – were not much addressed at the recent IMF gathering.
In the not-very-unlikely event of any of these threats manifesting themselves, there is no obvious “play-book” being presented by mainstream macro-economists to future policy makers. As in 2008, policy-makers would have to fend for themselves, but with far fewer options available to them.
These are the concluding paragraphs from a blog post by Gavyn Davies. The blog post is titled, ‘Has the rethinking of macroeconomic policy been successful?’. These paragraphs give us the answer that either the author has to his own question or the answer that we should be forming in our heads. Gavyn Davies has not gone so far as to give a direct answer to his question. But, these paragraphs are clear enough. Needless to add, TGS agrees because this has been TGS’ refrain.
Policymakers cannot provide futuristic answers. That is why all the ‘early warning responses’ that are produced after each crisis are good in predicting the last crisis but are of little value in anticipating future crises. That is as much as a limitation of the discipline of economics as it is of human beings.
Where does this human limitation come in to play? In two ways, as is evident in the case at hand. We are not good at solving complex cognitive problems. Period. That is what years of research into human brains and thought processes have shown. That is why too much of breathless intonations of the brilliance of current and potential scientific breakthroughs leave TGS underwhelmed. While at a scientific level these may have benefits, there may be costs which we may not comprehend right now. More than that, these will not solve humans’ age-old problems of greed, jealousy, insecurity, anger and ego. On top of these brittle mental foundations, more scientific breakthroughs could be more problematic than useful. Hence, I must add, parenthetically, that I was rather unimpressed by Yuval Harari’s ‘History of humankind’. I was not impressed. That was a digression. Let me get back to Gavyn Davies and his economists.
What is the second way in which human limitations have come into play? Gavyn Davies footnotes that the ‘Institute of New Economic Thinking’ is thinking about the issues that ‘mainstream economists’ are not thinking about (or, cannot). But, they were not invited to the IMF conference on ‘Rethinking macro policy’. I rest my case.
(ht George Magnus’ tweet for this article)