Economics after the crisis, and the crisis in economics.

Author:O'Neill, Martin
Position::Review essay
 
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Economics After the Crisis: Objectives and Means

Adair Turner MIT PRESS, 2012

Adair Turner, in his intriguing short book, Economics After the Crisis, based on his 2010 Lionel Robbins memorial lectures at the LSE, comes to bury the curiously undying ideology of market fundamentalism that has had such a profound presence in our recent history. Turner, a technocratic insider with a curriculum vitae that includes stints as a director at McKinsey, as an economist at Chase Manhattan, and as Director-General of the CBI, before his most recent incarnation as Chairman of the Financial Services Authority (FSA) until its abolition by the Coalition government earlier this year, sets himself up as an anti-neo-liberal Van Helsing, determined to hunt down, and then put down, the vampyric conventional wisdom in economics and finance. Specifically, Turner takes aim at these three central claims:

(1) Societies have an overwhelming imperative to pursue the maximisation of economic growth in terms of measured GDP, as this will ensure a maximum return of whatever it is that we all have most reason to care about.

(2) Deregulated markets, maximally privatised and liberalised, are the most efficient way of organizing our economic life, and will deliver the objective identified in (1).

(3) It is irrational (and perhaps, indeed, in Martin Feldstein's words 'spiteful': Feldstein, 2005, 12) to think that we have any reason at all to care about inequality.

Of these three claims, the first two are empirical, concerning relations between institutions and their consequences, while the third is normative, concerning values. To show that the first claim is false, one need only consider that, holding other things equal, a summer Sunday where you and I spend the day playing football in the park with our children contributes much, much less to GDP than a summer Sunday where I buy a tank of petrol, set fire to it in your garden, and you then employ a team of workers to engage in an intensive process of environmental clean-up. Or, as Paul Samuelson famously put it in his canonical textbook, Economics, with a dated but telling example, we know that there is something wrong with GDP measures given that, all else being equal, if a man marries his maid, GDP will fall.

For opposition to the second claim, consider the fact that the US spends significantly more proportionally of its income on healthcare than any other country (17.9 per cent of GDP according to WHO statistics, compared with 10-12 per cent in the larger EU countries), and yet achieves decidedly mediocre health outcomes, with infant mortality rates higher than any other comparably rich country, and life-expectancy levels setting the country in 34th place worldwide (by the CIA's own figures), significantly behind the other G7 countries. Such statistics might well cause one to greet with an incredulous stare the outlandish assertion that market mechanisms always deliver outcomes more efficiently than state-based solutions. In any case, Turner's point that we have good reason to reject (1) and (2) should not strike us as surprising or unexpected.

The third claim is, in one way, more difficult to undermine, resting as it does on a claim about values rather than facts. But it would be a result of arresting improbability if we really thought it appropriate to believe that the political value of equality, which has over the centuries inspired men and women into political action in every inhabited continent, and which is central to the moral vision of philosophers as various as Rousseau, Paine, Tawney, Dworkin and Rawls, could really be dismissed as irrelevant with a single stroke of an economist's pen (see Johnston, 2000; White, 2007; O'Neill, 2008). And so, I'd suggest, Turner's quest does not involve arriving at a destination that anyone should find surprising or implausible. Rather, he sets himself the task of giving us reason to reject a bundle of views that nobody who was not already in the grip of a distorted ideological picture would ever have seriously entertained.

At the risk of ruining the ending, I can reveal that his quest is, indeed, in many ways a notable success. But it is difficult to know what one's reaction to the success of Turner's quest should be. One plausible reaction is endorsement of the project, joined to a certain relief that the man who was in charge of the FSA should have a clear view of what is so wrong with the further reaches of neo-liberal fantasy. But it is inevitable that one's response to Turner's book has to be tempered by at least a degree of incredulity that such an undertaking should still be necessary. The bankruptcy of market fundamentalism is not difficult to diagnose; the evidence in favour of rejecting this discredited picture is all around us. Indeed, were Turner not such an impeccably establishmentarian figure, his project would seem decidedly unremarkable. But, as things stand, and as writers such as Colin Crouch and John Quiggin have pointed out, in The Strange Non-Death of Neo-Liberalism (Crouch, 2011) and Zombie Economics (Quiggin, 2012) respectively, there is a strangely vampyric quality to the discredited doctrines of market-fundamentalist neo-liberalism. We may be surprised at the on-going need to keep on attacking undead doctrines, but it is, on reflection, all to the good that Turner is committed to impaling his own distinguished stake in their heart.

Turner's book divides into three parts, the first concerned with economic objectives, the second with economic means, and the third with the future of the discipline of economics itself. I'll say something about each in turn.

Objectives: growth, well-being and inequality

Following writers such as Layard (Layard, 2011), and Wilkinson and Pickett (Wilkinson and Pickett, 2010; see also O'Neill, 2010), Turner is struck by empirical research that shows both that there are no robust international correlations between GDP per capita and levels of apparent utility or self-reported life satisfaction, and nor is there a reliable inter-temporal relationship between GDP per capita and life-satisfaction levels within particular countries. Surveying the empirical field, Turner tells us that 'we do not have good reason for believing that further growth in measured per capita GDP will necessarily deliver further significant increases in human contentment' (p. 11) (emphasis in the original). This claim has the virtue of being true, but the vice of being jarringly obvious. It could hardly surprise us that there is no necessary connection between per capita GDP levels and individuals' self-reported levels of well-being. For consider what the world would have to be like in order for that relationship to hold of necessity: individual well-being would have to be inexorably indexed to national income, with no other factor playing a significant role. Any economist who might be surprised by the empirical facts here puts one in mind of a hammer, amazed to have discovered that not every other object in the world is a nail.

Turner's marshalling of the empirical data on the 'experiential returns' to consumption is interesting and valuable. It is a commonplace assumption that there are diminishing marginal returns of utility to economic goods, but Turner does a good job of showing how the falling-off of utility curves may be quicker and more marked than we would initially imagine, given the redirection of income above a certain level towards status-based consumption and the purchase of positional goods, where access to such goods is determined not by absolute income levels but by relative income levels. Turner is also alive to the existence of various kinds of externalities to consumption, including various kinds of environmental effects. Following Roger Bootle's distinction (Bootle, 2012) between 'creative' and 'distributive' economic activities (and echoing William Baumol's distinction (Baumol, 1990) between 'productive' and 'unproductive' entrepreneurship or, indeed, Ed Miliband's distinction (Miliband, 2011) between 'productive' and 'predatory' economic activity),...

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