A strong and sustainable global recovery needs to be built on balanced global demand. Significant weaknesses exist across G-20 economies. I am concerned by weak private sector demand and continued heavy reliance on exports…. Our ability to achieve a durable global recovery depends on our ability to achieve a pattern of global demand growth that avoids the imbalances of the past…. In some countries, strengthening social safety nets would help boost low levels of consumption. In others, product and labor market reforms could strengthen both consumption and investment. I also want to underscore that market-determined exchange rates are essential to global economic vitality.
This excerpt from President Obama’s letter to his G-20 colleagues ahead of the summit highlights many of the themes that global financial leaders discuss at such gatherings, but it is also notable for its tone of scientific certitude. There are readily identifiable characteristics of poorly functioning economies (“weak private sector demand”, “heavy reliance on exports”, “low levels of consumption”), and specific policy interventions that will cure these problems (“strengthening social safety nets”, “product and labor market reforms”, “market-determined exchange rates”). Fixing economies, in this view, is much like fixing a car. Take your car to the best mechanic you can find, and he or she will identify and correct the problem. Take your economy to the best economist you can find, and he or she will—in just the same way—identify and correct the problem. So how do we find the best economist for the job? It turns out that this isn’t so easy.
Macroeconomics is the branch of economics concerned with the economy as a whole. Mainstream macroeconomic policy is divided into two camps: Keynesians and monetarists.1 Obama’s letter is representative of the former viewpoint. It calls for active intervention in economies by government, direct “stimulus” spending, and a focus on consumer demand. Milton Friedman is often identified as the intellectual father of monetarism: the doctrine that the government’s only macroeconomic role should be controlling the supply of money in the economy.
Sociologists2 and philosophers of science3 concerned with expertise have proposed several possible criteria for deciding whom to believe in cases where we don’t have the necessary knowledge to make a decision on our own. Four popular criteria are credentials, experience, track record, and bias. Given two purported experts we often look to their professional status first for an idea of which to believe: Do they have a Ph. D. or are they a professor? Do they have peer-reviewed publications? Our next possible step in judging expertise is to ask whether our candidates have experience within the domain of the question. On issues of global warming we value the advice of climate scientists over geological engineers, for instance. Thirdly, we might ask whether those experts have gotten similar questions correct in the past. And finally, we might look to other, “external”, factors that might make us distrust an expert’s advice. If somebody would benefit personally from our taking a course of action, or has strong prior political views that could influence their answer, we tend to be more wary of their advice.
Neither of the first two criteria is especially helpful in evaluating advice from economists. There are many economists who have roughly equivalent credentials and experience who nonetheless disagree markedly regarding policy. What about track record? Keynesianism has been around since the Great Depression, and Friedman’s monetarism dates from the mid-1950s. While Keynesianism has certainly been the dominant doctrine for most of this period, both of these views (and many others) have guided the policies of many states at various times. Allan Greenspan, chairman of the U.S. Federal Reserve for almost twenty years, was, for instance, a strong monetarist (though he famously recanted after the 2008 crisis). Surely we can look at history to determine which of these doctrines work better?
The stock market crash of 1929 triggered the Great Depression. Herbert Hoover’s interventions were insufficient, but Franklin Delano Roosevelt’s New Deal and increased government spending eventually led to recovery by the beginning of World War II. Or was in not the stock market but bad monetary policy by the Federal Reserve that caused the depression? Or was it World War II that caused the recovery rather than Roosevelt’s policies? Or did World War II actually make things worse? Economists have been arguing these points for nearly a century now, with no clear resolution.
But it’s not just the messiness of history at fault. Economic models are complex mathematical descriptions of the economy. The models take inputs such as current GDP, inflation, and worker productivity, and output predictions for those values in the future. Some models use monetarist theory while others are Keynesian. In theory we could look at the predictive success of these models and infer which underlying theory better describes the economy. However, in sociologist Robert Evans’s study of economic modeling in Britain during the 1990s, he found that none of the models under study performed uniformly better than any of the others: some models predicted some changes better than others, while other models predicted other changes better than those.4 Even incorporating all the best current data, all of them performed pretty poorly.
So while history is not useless for judging macroeconomic theories, it does not leave us with a clear picture.
The final criterion for choosing an expert is bias. Paul Krugman (an avid Keynesian), for example, has strong egalitarian and liberal views. This no doubt predisposes him to prefer a style of economic management where the government takes an active role in the economy. So maybe we shouldn’t take his economic advice at face value: perhaps he’s just really good at making a convincing-sounding argument whether or not the facts support his position. But on the other side, monetarist economists like Allan Greenspan owe their philosophical allegiances to the likes of Ayn Rand and Robert Nozick, libertarians who argued that any kind of redistribution of wealth was morally equivalent to theft.5 Both sides of the argument about how the economy does work subscribe to competing views of how it ought to work.
Where does this leave us? Evans argues that the problem is not a lack of policy consensus among economists, but a lack of institutional mechanisms for mediating disputes. Diversity of opinion among policy makers forces their interests, values and assumptions into open debate, whereas consensus creates an illusion of objectivity. Economic models do tell us something about how the economy works, just not everything. What this ought to allow for is a public debate over the normative side of economics: what are, as a society, our economic values?
The problem with Obama’s letter is that it sweeps these issues under the carpet, making economics look like car repair. The scientific and objective language of the letter conceals the unavoidable reality that Obama and the G-20 leaders are doing politics, not simply implementing rational governance. There are plenty of mainstream economists who disagree with Obama’s economic policies. We need to raise the level of debate within society so we can have an informed discussion—a political discussion—not let a select few make these decisions behind closed doors while pretending that it is merely a matter of sound policy.
- Yes, I’m aware there are many other views. ↩
- Collins, Harry & Evans, Robert. Rethinking Expertise. University Of Chicago Press (March 1, 2009). ↩
- Goldman, Alvin. “Experts: Which Ones Should You Trust?” Philosophy and Phenomenological Research, Vol. 63, No. 1 (July 2001), pp. 85-110 ↩
- Evans, Robert. Macroeconomic Forecasting: A Sociological Appraisal. Routledge (1999). ↩
- Though Nozick allowed for one-time reparations for past injustices. ↩