Thursday, July 11, 2013

Crisis, Economics and the Emperor's Clothes

Serge Melki/Wikimedia Commons
Recently I've been in contact with Frans Doorman, an international development aid consultant with decades of experience in Latin America, Africa, Asia, and Eastern Europe, and author of Crisis, Economics and the Emperor's Clothes (also freely available as a pdf. ) His book's aim is to offer a critique on mainstream economics, and offers "a Fourth Way alternative to right wing ideology, left wing ideology, and the Third Way: the combination of right-wing economic and left-wing social policies that gathered momentum in the 1990s in many European social democratic parties." In essence this book is part of a growing trend showing a deep dissatisfaction with main stream economics, and its failure in finding solutions to the ongoing economic slump. Let me quote from this book's preface, that explains its rationale eloquently:

 "This book is a pamphlet: a call to action. Its origin is frustration, reflected in a simple question: Why aren’t we doing better? More elaborately: Why, in spite of enormous advances in science and technology, do society’s economic, social, and environmental problems appear to get worse rather than better? Why haven’t those advances led to more wealth, wellbeing and a brighter outlook for humanity? These questions apply in different measure to different types of problems and groups of people. Let’s focus.

One: why do close to half the world’s citizens, more than three billion people, continue to live in poverty, among them half the world’s 2.2 billion children?

Two: why, in the rich countries, are most lower and middle income earners and their families worse off financially than they were in the 1970s? And why, in the wake of the economic and financial crisis that started in 2007, are things getting worse rather than better, with millions of people having lost or loosing their jobs, homes, or both, and with tens of millions of young people unable to find employment?

Three: why does society appear unable to deal effectively....

with global environmental problems that threaten present and especially future generations, such as global warming, fresh water shortages, and the loss of agricultural land and natural ecosystems? Why, in the aftermath of the 2007 financial crisis, does meeting these challenges appear more remote than ever?

Four: why, in spite of continuing progress in science and technology, do pundits tell governments and citizens that for the time being they can pretty well forget about addressing the above issues, because they have to tighten their belts? Why is economic insecurity increasing, and why do many experts claim new financial, economic and fiscal crises are as good as inevitable?"

Doorman then continues offering his answer to these questions:

"The answer, so I will argue in this book, lies for an important part in the flawed precepts and faulty practice of economics. More specifically, it lies in the paradigm at the core of standard economics, the model of competitive equilibrium. As critical economists and others have already argued convincingly before me, many of the precepts underlying this model as well as the economic dogmas flowing from it are gross simplifications and worse, distortions of reality. Jointly with deficient methodology these shortcomings lead to a failure,unparalleled in any other science, to correctly analyze and predict the phenomena that are the subject matter of economics. And worse, the faults
of economics lead to economic policy prescriptions that, through their enormous influence in society, enhance the problems we’re facing or at best, hinder their solution."
What's interesting about Doorman is that he is not an economist, but a sociologist specialized in the sociology of developing countries, with real life experience working around the world. His call is for questioning the current economic dogmas, which may result in efficient economies but not in achieving sustainable and important societal goals, such as a decline in inequality, and a lack of dealing with climate crises and world poverty. One way of solving these issues, he states, is by giving the central banks the right to create money to finance those societal goals, rather than keep the right to money creation exclusively with private banks.
I find Doorman's criticism and solutions worth pondering, although not sure how it all would work in practice. Still, this book offers an interesting contribution to the current debate on who's right in solving the current economic challenges: the neo-liberal economists, who claim that we are "merely" facing a cyclical downturn and once the "damage" in the economies is repaired - by letting the market decide which companies should fail and by deleveraging - capitalism will again create wealth, prosperity and opportunities for all; the Keynesian  economists, who say that government support will be needed to get the economies working again; socialst economists, who believe that capitalism by definition will not solve those "other" societal issues, because it never has; and the Third way of right wing economics combined with left wing social policies - generally followed in Western-European social democracies -.   

For further information, for the Dutch speakers among us, see Frans Doorman's recent article "Crisis en Economie: hoe de economische wetenschap de aanpak van onze maatschappelijke problemen belemmert" in the Dutch magazine Civis Mundi.

See also below clip from an interesting U.S. based likeminded source, Econ4, an initiative by a number of economists, including Gar Alperowitz (University of Maryland), James Boyce (University  of Massachusetts) and sociologist, Juliet Schor (Boston College.)

Econ4's goal is:

"Our aim is to change both the economics profession and common-sense understanding about how the economy works and should work. For this we need to disseminate new ideas, train the new generation of scholars and public intellectuals, and advance new research agenda." Clearly, Doorman is not alone, and seems even to have some economists on his side.

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