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Tuesday, August 19, 2003

Economics, Politics and the Blogsphere

Frans has a cool new blog format. He too has been away on holiday in the also-sunny Tuscany, but nonetheless found the time (and the energy) to worry himself about the relationship between politics and economics.

During my stay in Tuscany I read Stiglitz book “Globalization and its discontents”. I learned a lot from it, especially reading between the lines and combining/confronting his statements with my own views and convictions until now.

Stiglitz writes that “ironically” (crucial adjective) modern economical insights on the functioning of imperfect markets were acquired in the same time that the market-fundamentalists of the Washington Consensus were most fanatical and successful. Strange to call that an irony! It’s proof of a devastating gap between economists and politics. This refers to what I mentioned in another note on tapping the blogosphere: “it would be nice if there could be a way for politicians to “tap” the best available debates of economists and other scientists. Here internet might come handy…Could the “economy-blogosphere” be used for this purpose?”

To make this work I think it would help if blogging economists like you should be more precise on the nature of the statements you make: which of the statements are tentative, which provocative, of which you are quite sure. Where are you just commenting on some current affairs, putting things in another perspective and where do you offer a sound advice. I realise that this is completely the opposite of your practice of “connecting”, “contemplating” and referring to a “beta-version” (of a book to come?) but I think it’s very important to prevent the way politics missed the economic points in the not ironic way Stiglitz refers to.

Interesting questions these, and just after I notice that Brad has got me pencilled-in as fair and balanced . Really I don't know that as things stand right now the blogsphere is in any position to help with Frans problem. Certainly in the better quality blogs there is a significantly higher level of argument and rigour than you will find in the normal media. I think I found this out to my cost in trying to write my last post. But it is not as high, or as rigourous, as in the conventional academic literature or scientific journals like Nature or Science. In contradistinction, what the blosphere does have to offer is freedom. It's writing with the chains and shackles off, and this means you can be now serious, now humerous, now responsible, now provocative in a way that is quite unique. This is why I once made the comparison with Kandinsky and the search for a new kind of 'formlessness', in particular as a way of handling uncertainty and ambiguity. You see all too often the traditional media trades in certainty and simplicity. I certainly wouldn't use the term ideology in this context, but simply a way in which the very structure of the message produces a certain effect.

Blogging is a process of discovery, a process in particular (as is all writing) of self-discovery. I started blogging becuase I wanted to know who I was, and what I could do, so maybe, in one sense the object of my blog is me. But in another sense I started blogging because I felt I had half understood something (the cursed demographic problem) and wanted a space in which to try and understand it better. One of the problems with changing the way you look at something is that the change doesn't come all at once, but in little droplets. Sure there may be ahaa experiences, or 'Paul on the road to Damascus' conversions, but normally it's simply a question of trying this and trying that until, as Wittgenstein says, the penny finally drops, or until two pieces of the puzzle finally fit together.

So here is the problem with indicating "which of the statements are tentative, which provocative, of which you are quite sure". Here everything is provisional, since whilst I absolutely agree with the idea that it's better to rebuild the boat while it's still floating than sink it and head for shore to try and build another, it's impossible to say in advance which pieces you're going to strip out and jetison, and which you're going to retain. The boat in question here being, I think, the corpus of knowledge know as neo-classical economics.

On the other hand, of course, there are some things of which I am quite sure. I am sure, for example, that the euro experiment won't work. But here we go, I can hear you saying, he's exaggerating, or being provocative again. So in order to communicate I need to be more tentative. Now for another dead certainty as far as I am concerned: those OECD countries with the most serious structural demographic problems are going to get into serious economic difficulties within the next decade - oh come off it, you've gotta be kiddin haven't you? Well, I could go on, but I think I've made the point. And the problem isn't just mine, it's one which affects anyone, in whatever field, working outside the mainstream. Of course, one day, if you're right, and if you get lucky, things change and suddenly you find that you've become the mainstream. But that, I reckon, is the moment to get out, and leave while the goin's good.

The problem comes about when the tide is just turning, this I take it is the 'irony' Stiglitz is referring to, when attitudes in the profession are just changing, but the change still hasn't filtered through to the institutional level. This is surely true today of the euro, where the number of thinking economists who are now having doubts is steadily growing, but at the political and institutional levels (Brussels, Frankfort) this is a taboo subject. One more irony to add to the list is the possibility (as I blogged earlier today) that in the country which gave Mundell the Nobel they may not vote to join his euro creation.

Well, since I've just been praised for balance, and since I more-or-less tried to defend him in my last post, perhaps it's time for a little reflection on Paul Krugman. The topic, you will remember is certainty and simplicity:

There's an interesting story in today's Washington Post about Wall Street's role in Argentina's debacle. There's a lot there I didn't know. But I think the story downplays the role of the convertibility law, which pegged the peso to the dollar, in two ways.

Some background: I was an Argentina pessimist long before it became fashionable. In fact, in 1995 I told a retreat of the Argentine Financial Executives Institute that I didn't expect the convertibility law to survive the decade. I was wrong, of course: it collapsed, bringing huge devastation, in 2001. (Incidentally, I gave that talk in Ushuaia, on Tierra del Fuego; so I have probably given the most southerly economics lecture in history.)

The reason I predicted eventual failure was that the peg deprived Argentina of crucial flexibility. And so it turned out: the rigidity of the Argentine system in the face of declining capital inflows, the Brazilian devaluation of 1999, and the rise of the dollar between 1999 and 2001 was a large part of what went wrong. But that wasn't the whole role of convertibility: it was also crucial to the bullishness of Wall Street. The article hints at that, but I think fails to grasp the full extent of the story.

Throughout the 90s, almost up to the bitter end, Wall Street was utterly convinced that Argentina's currency board - which in effect reproduced the gold standard - was simply a wonderful idea. When you raised questions about the economy's performance, the answer was always that this marvelous monetary system ensured the country's success. And Domingo Cavallo, the architect of the system, was treated as a hero.

Now the funny thing was that there was no evidence to back up this enthusiasm. There was and is a case for currency boards; there is also a case against. You can choose sides in that debate, but nothing in actual currency experience justified the huge enthusiasm of Wall Street economists. So why the wild enthusiasm? Because a currency board fitted a conservative ideology: by eliminating any discretionary monetary policy, it moved us back toward a pre-Keynesian world. That's why Forbes and the WSJ editorial page sang Argentina's praises; and Wall Street economists swallowed the whole thing.

Now I may be doing an overly close reading of the text here, but I understand Paul to be saying that there was a big problem with the convertibility law, that it deprived Argentina of the necessary flexibility , but that this rigidity fitted in perfectly with the conservative ideology of the times since by taking out any discretionary monetary (and fiscal??) role it moved things back to a pre-Keynesian world, and thus became the love-child of the Wall Street right wing. (Those of you who've been through econ 101b will surely know where I'm about to go now). In fact I found this argument so full of certainty and simplicity that I couldn't resist sending an e-mail, the text of which, since it is hardly personal, I reproduce below:

I'm fresh back from Provence, and going over your website I came across your recent piece on Argentina. Of course I agree about the WSJ. Personally I would never read the thing, and consider it's probably simply another example of 'whom the gods would destroy...........'.

No the thing that interests me is being right both before and after the event. Of course I fully accept you were trying to flag the problems with guaranteeed convertibility, but I would have still have come out much more strongly than you did after the January 2001 IMF loan. This loan has to have been the bigest of the big mistakes, and in my book caused that discrediting of all responsible politicians which now makes attempts to secure an Argentine revival something akin to trying to raise the dead.

Be that as it may, you wouldn't like to consider taking a second opportunity to be really right before the event and use the NYT platform to explain just what might be the problems for Bulgaria of a euro-lev peg, complete with IMF package and currency board, now would you? All the same arguments seem to me to apply, including the fact that you could substitute Poland, Hungary and the Czech Republic for Brazil.

I mean has everybody lost their critical faculties?

My interest, not surprisingly, is the demographic one: how can you get growth in an economy which is systematically losing its working age population to immigration?

But even on more conventional grounds the problem should be obvious. And, oh yes, almost everything you said about the Philippines could be said about Bulgaria.

But maybe the problem goes deeper:

"So why the wild enthusiasm? Because a currency board fitted a conservative ideology: by eliminating any discretionary monetary policy, it moved us back toward a pre-Keynesian world. That's why Forbes and the WSJ editorial page sang Argentina's praises; and Wall Street economists swallowed the whole thing."

And doesn't the euro itself eliminate discretionary monetary policy, isn't that just the problem Germany is having in trying to avoid deflation. But this is no case of 'right wing' ideology, it has the full backing of european social democracy. The reductionism doesn't work.

You are in danger of falling into (god forbid), George Bush's error, and seeing the world in black and white terms.

Being right before the event isn't a question of kudos, it's about trying to stop some things from happening before they happen, that's the point of the 'what did you do in the war dad' phrase, and that is the real spirit of Keynesianism, and of the cryptic remark he made about economists who can only tell us things are better once the storm has passed.

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