As the astute Will Davies describes here, the last few years have seen a paradox: even though the credit crunch was in many ways an indictment of free market economics - and the orthodox economists who propounded it - the period since has seen this perspective continue to define what is and is not possible in the face of the impact of the crunch. For example, Bank of England Chairman Mervyn King appeared both to admit in his BBC lecture last week that the Bank should have intervened when the markets were overheating, while generally resisting the idea that anything of significance (beyond quantitative easing) can be done now the markets are failing to bring about growth.
It seems that when it comes to market economics, we are like the followers of an end of world cult that was the subject of a famous study by social psychologist Leon Festinger. When the apocalypse predicted by the leader failed to materialize on the appointed day, his followers had to choose between rejecting their previous worldview or finding excuses for the prophecy failing; they overwhelmingly chose the latter.
I am not against economics, indeed I think everyone interested in public policy should have a basic grounding in the subject, but used as the basis for policy advocacy, economic predictions lack reliability, are bound up in disputed social and psychological assumptions and often betray political predispositions. One example lies in what could be termed the tragic irony of plan B.
In the face of last week’s local election drubbing and the resulting soul searching in Government, there is a strengthening case for a little judicious loosening of the binds of austerity. Some additional public sector capital spending plus more comprehensive underwriting of bank loans to SMS might not be a bad start. Such an adjustment would be in keeping with the shift of opinion against pure austerity in Italy, Spain and now France.
The idea that such a loosening would on its own lead to a huge backlash by the markets and spiraling borrowing costs for UK debt seems alarmist given that the markets are continuing to offer cheap loans despite the UK already having substantially overshot the debt levels which George Osborne predicted just two years ago.
But here lies the irony: because, for a variety of non-economic reasons, the markets trust the Chancellor and Prime Minister, the Government could almost certainly adopt a slightly more expansionary strategy without an adverse reaction. In contrast, if the Liberal Democrats switched allegiances tomorrow and an incoming Chancellor Balls was to take the same actions this might be seen as the thin end of the wedge and the markets could punish him.
In other words Balls’ approach may be best but only if it is implemented by Osborne. It is the economic equivalent of the Nixon to China phenomenon in which it is easier for hard liners to compromise than those who are suspected of lacking ideological rigor.
Although it arguably more relevant to public disgruntlement than all the other issues being chucked in the blame frame by anxious Conservatives, there is no sign of the Coalition shifting policy on austerity. But that the success of an economic policy might depend so much on whether the person implementing it is trusted does reinforce the contingent nature of economic prediction.
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