Mainstream posing as renegade

This is my account of yesterday’s debate on the Four Horsemen documentary. An earlier version appeared as a blog post on the Fundweb web site.

Last night I participated in a debate that reminded me of one of the main misconceptions in contemporary economics: that free market thinking is influential.

The occasion was a debate at the Frontline Club in London on the world’s economic plight (you can watch the video of the event here). It was pegged on the release of Four Horsemen, a new documentary directed by Ross Ashcroft.

The panel included Ashcroft, Mark Braund, professor Victoria Chick and myself. Ashcroft and Braund have together written a book to accompany the film and together run the Renegade Economist website. Phillip Blond, the director of the ResPublica think tank, chaired the event although he took it upon himself to participate fully as a speaker as well.

Regular readers of this blog who watch the film will be aware that I disagree with it on many points. But here I want to focus on just one of them.

An underlying theme of the film was that what it called “neo-classical economics” – and others have referred to variously as free market fundamentalism and neo-liberalism – has dominated the economic debate for three decades. According to this view, it was the ideological pursuit of free market dogmas that led to the emergence of a gigantic credit bubble that precipitated the economic crisis.

Many others have put forward this argument. I have written an extensive critique of one of them, David Harvey, here.

The problem is that it bears no relationship to reality. Free market economics had a brief flowering of popularity in the late 1970s and early 1980s but after that became a marginal force. Even Paul Krugman, a doyen of mainstream economics, conceded this point in his 2004 book on Peddling Prosperity although he often seems to have forgotten it since.

This is a big subject but one figure illustrates my point well: 40%. That is the projected level of state spending in Britain as a proportion of GDP even after the planned coalition cuts. It is also the approximate level of state spending in America if federal, state and local government is included.

For better or worse this is a world away from the limited government favoured by free marketeers such as Milton Friedman. For him the state’s role should be confined to such activities as running the army, courts, police and a monetary framework.

Nor do western politicians nowadays promote free market ideas.Even David Cameron, a Conservative, emphasises the importance of social responsibility and tackling inequality. Whether or not you support such priorities it should be acknowledged that they are completely out of line with free market thinking.

So, if economic policy is neither free market in rhetoric nor substance it is strange that its advocates are attributed with so much influence. In reality they are marginalised in politics and their hold over academia is exaggerated.

This all begs the question of why free market economics is so widely blamed for the crisis when it has so little influence. One reason is that those who were really in charge – who were overwhelmingly pragmatists rather than ideologues – find it convenient to heap all the blame on to the straw man of “neo-classical” economics.

Some of the leading advocates of this pragmatic orthodoxy appeared as critics of the supposed all-powerful neo-classical consensus in Four Horsemen. They included Joseph Stiglitz (Nobel prize winner, former chief economic adviser to ex-US president Bill Clinton, and former chief economist at the World Bank), Simon Johnson (former chief economist at the International Monetary Fund) and Gillian Tett (assistant editor of the Financial Times). These are all bright, well-informed people but they are spokesmen for the orthodoxy rather than critics.

Yet supposed opponents of mainstream economic thinking naively assume that such figures are somehow marginalised. The Four Horsemen website talks about how it allows leading thinkers to “break their silence”. Yet such experts are being quoted and feted all the time. I just typed “Joseph Stiglitz” into Google and got 4.6m hits while “Gillian Tett”, whose columns run regularly in the Financial Times, got 475,000.

Orthodox economic thinking is being presented as if it is somehow renegade.