Macro-economic crisis and policy revolution.
| Author | Pemberton, Hugh |
| Position | Essay |
The financial crisis triggered (though not caused by) the collapse of Lehman Brothers in September 2008 was frightening in its intensity. Indeed, at its nadir the very survival of modern capitalism appeared to be in question. That crisis, widely seen to have been essentially the product of lax regulation coupled with the growing interconnectedness of the global financial system, triggered the first worldwide recession since the end of the Second World War, the length and depth of which is not yet certain.
The response of governments, not least the response of the UK government, to both these crises was rapid and intense (much more so than most critics acknowledge), and in many ways it was surprising. Suddenly Keynesianism re-entered the vocabulary of policymakers. Gone was the reification of the market. Now the talk was of market imperfections, low output equilibriums, and the need for action by the state to raise aggregate demand.
Does this rapid change in the language of international political economy presage a major change in the framework of macro-economic policymaking? In the UK context, are we looking at change of a similar order to the Keynesian revolution that flowed from the experience of the 1930s, or of the replacement of that framework in the 1970s by the neo-liberal model with which we are so familiar? In short, are we looking at a 'paradigm shift' in economic policymaking?
In this article, I begin by mapping out a model of policy change that seeks to integrate changes in economic ideas and the role of administrative and political institutions in responding to economic performance problems in explaining why economic policy revolutions sometimes occur but also why they sometimes don't: why evolution rather than revolution may sometimes be the order of the day. I then go on to examine successively the 'Keynesian' and the 'monetarist' revolutions in the context of this model. I end by examining developments over the past year and arguing that, though some of the conditions necessary for a 'paradigm shift' are in place, as things stand at the moment that shift is unlikely to occur.
Policy learning
The relationship between ideas and policy change is complex and much debated (e.g. Blyth, 1997; Berman, 1998; Hall, 1989 and 1993; Hay, 2001). New ideas are not normally seen as leading ineluctably to new policies (Goldstein and Keohane, 1993). Instead, policy change appears to flow from a process in which there is a complex interrelationship between ideas, interests and institutions (Berman, 1998; Hall, 1997; Walsh, 2000), though the means by which ideas enter the policy process remains surprisingly obscure (Blyth, 1997).
Peter Hall proposed that policy change flowed from a process that he dubbed 'social learning' (Hall, 1993). That process could, he argued, give rise to three orders of change, each more substantive than the last: first order change involved changes to the settings of existing instruments; second order change saw new instruments adopted, albeit within the context of unchanged policy goals; and, finally, third order change saw alterations to the very goals of policy. Whereas first and second order change amounted to what Thomas Kuhn called 'normal science' in his discussion of scientific revolutions (Kuhn, 1996), third order change represented a marked shift in the intellectual framework within which policy was made. Such a framework, Hall suggested, should be thought of in terms of a gestalt governing not just policymakers' goals, and the choice of instruments and settings made by them to achieve those goals, but their perception of the very problems they sought to correct (1993, 279).
In explaining why a prevailing policy paradigm might break down, Hall argued that policymakers constantly seek to correct problems via first and second order changes--rather like a pilot making constant corrections in order to keep a plane stable and heading in the right direction--but that instability would occur if the problem (and thus its solution) lay beyond the scope of the existing paradigm. In this case, growing evidence of failure would call the authority of policymakers into question.
This in turn would lead to the creation of what Hall termed a 'marketplace for ideas' in which actors outside the policy elite would advance alternative ideas about how to conduct policy. These ideas would be taken up by politicians and a political battle about which of these ideas should be adopted would take place (Hall, 1993, 289). Ideas, interests and institutions were thus all at work in a process that would lead ultimately to a paradigm shift with the institutionalisation of a new idea at the heart of economic policymaking.
For Hall, once a solution to a policy problem lay outside the scope of the prevailing policy paradigm the question was not whether a paradigm shift would take place, rather the question was what form the change would take. However, with Michael Oliver I have argued that Hall's conception of learning and policy change was too simplistic (Oliver and Pemberton, 2004). We postulated the more complex and contingent model of paradigm evolution and revolution encapsulated in Figure 1 (overleaf). In this model, we distinguished between third order learning (the adoption of new ideas) and third order change (their installation as a new policy framework).
[FIGURE 1 OMITTED]
Third order change here requires the availability of a set of alternative economic ideas; a battle over the degree to which it will condition economic policy; and its ultimate wholesale adoption by the institutions of economic policymaking. We thus open up scope for paradigm evolution even where first and second order policy experimentation has failed, via the partial incorporation of the alternative ideas, and a potential return to stability.
What might determine an outcome in which one ended up in box 7 of Figure 1? An exogenous shock might play an important part in such an outcome. However, we also postulated cases where the adoption of a new policy paradigm might not occur--because that paradigm had been rejected in an institutional battle of ideas.
In this case, the rejection of the new policy framework in box 6 would result in a return to box 3 (via loop 'B'). The rejection might or might not be wholesale. Were it to be the latter, the subsequent path would probably be an immediate return to the sequence of 4, 5 and 6, for a solution to the policy problem would still be outside the prevailing framework of ideas. However, we envisaged a situation in which sufficient of the new idea set might be incorporated into policymaking to allow, via further experimentation with new instruments and/or changed instrument settings, the prevailing (though amended) paradigm to be stabilised (via loop 'A').
Both the 'A' and 'B' loops might therefore iterate. Either could produce an evolution of the prevailing paradigm. Only success in the battle to institutionalise a new set of policy ideas would result in a wholesale paradigm replacement or 'policy revolution'.
The Keynesian revolution
In this section I consider the 'Keynesian revolution' in the context of our model. To talk in terms of such a revolution is simplistic, however, for in fact there were two revolutions--one in ideas and one in administration--each the result of an exogenous shock. The first shock was the financial crisis of 1929 and the worldwide depression that flowed from it. The slump called into question the very foundations of the prevailing neo-classical policy framework: balanced budgets, free trade and the gold standard (Booth, 2001a). As Hall predicts, there was a gradual accumulation of anomalies that the neo-classical policy framework could neither explain nor solve: the unexpected stickiness of wages and prices; the consequent failure of the former to solve the problem of mounting unemployment; and the obvious...
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