by Avner Offer, October 10, 2016, via Project Syndicate
Of the elites who manage modern society, only economists have a Nobel Prize, whose latest recipients, Oliver Hart and Bengt Holmström, have just been announced. Whatever the reason for economists’ unique status, the halo conferred by the prize can – and often has – lend credibility to policies that harm the public interest, for example by driving inequality and making financial crises more likely.
But economics does not have the field entirely to itself. A different view of the world guides the allocation of about 30% of GDP – for employment, health care, education, and pensions – in most developed countries. This view about how society should be managed – social democracy – is not only a political orientation; it is also a method of government.
Standard economics assumes that society is driven by self-seeking individuals trading in markets, whose choices scale up to an efficient state via the “invisible hand.” But this doctrine is not well founded in either theory or practice: its premises are unrealistic, the models it supports are inconsistent, and the predictions it produces are often wrong.
The Nobel Prize in economics was endowed by Sweden’s central bank, the Riksbank, in 1968. The timing was not an accident. The new prize arose from a longstanding conflict between the interests of the better off in stable prices and the interests of everybody else in reducing insecurity by means of taxation, social investment, and transfers. The Royal Swedish Academy of Sciences awarded the prize, but Sweden was also an advanced social democracy.
During the 1950s and 1960s, the Riksbank clashed with Sweden’s government over the management of credit. Governments gave priority to employment and housing; the Riksbank, led by an assertive governor, Per Åsbrink, worried about inflation. As recompense for restrictions on its authority, the Riksbank was eventually allowed to endow a Nobel Prize in economics as a vanity project for its tercentenary.
Within the Academy of Sciences, a group of center-right economists captured the process of selecting prizewinners. The laureates comprised a high-quality sample of economics scholarship. An analysis of their influence, inclinations, and biases indicates that the Nobel committee kept up an appearance of fairness through a rigid balance between right and left, formalists and empiricists, Chicago School and Keynesian. But our research indicates that professional economists, on the whole, are more broadly inclined toward the left.
The prize kingmaker was Stockholm University economist Assar Lindbeck, who had turned away from social democracy. During the 1970s and 1980s, Lindbeck intervened in Swedish elections, invoked microeconomic theory against social democracy, and warned that high taxation and full employment led to disaster. His interventions diverted attention from the grave policy error being made at the time: deregulation of credit, which led to a deep financial crisis in the 1990s and anticipated the global crisis that erupted in 2008.
Lindbeck’s concerns were similar to those of the International Monetary Fund, the World Bank, and the US Treasury. These actors’ insistence on privatization, deregulation, and liberalization of capital markets and trade – the so-called Washington Consensus – enriched business and financial elites, led to acute crises, and undermined emerging economies’ growth.
In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated.
Social democracy is not as deeply theorized as economics. It constitutes a pragmatic set of policies that has been enormously successful in keeping economic insecurity at bay. Despite coming under relentless attack for decades, it remains indispensable for providing the public goods that markets cannot supply efficiently, equitably, or in sufficient quantity. But the lack of formal intellectual support means that even nominally social-democratic parties do not entirely understand how well social democracy works.
Unlike markets, which reward the wealthy and successful, social democracy is premised on the principle of civic equality. This creates a bias for “one-size-fits-all” entitlements; but there have long been ways to manage this constraint. Because economics appears to be compelling, and because social democracy is indispensable, the two doctrines have mutated to accommodate each other – which is not to say that their marriage is a happy one.
As with many unhappy marriages, divorce is not an option. Many economists have responded to the failure of their discipline’s core premises by retreating into empirical investigation. But the resulting validity comes at the cost of generality: randomized controlled trials in the form of local experiments cannot replace an overarching vision of the social good. A good way to begin acknowledging this would be to select Nobel Prize recipients accordingly.
Avner Offer, an emeritus professor of economic history at the University of Oxford, fellow of All Souls College, and member of the British Academy, is the co-author (with Gabriel Söderberg) of The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn (Princeton University Press, 2016).
For direct-transfer bank details click here.
There is a phenomenon of the mid-1970s that needs to be remembered, which is stagflation.
This phenomenon of stagnant economic growth and rising prices (inflation) [so, stag-flation] undermined the belief in social democracy and further undermined the belief in Keynesian economic remedies.
Following the 1973 Mid-East War, OPEC countries imposed restriction on oil production, which led to a quadrupling in the price of globally traded oil supplies. This sucked-out huge amounts of wealth from the developed nations, depressing effective demand in those economies and causing low or negative growth rates.
The effect on prices was such that in the UK monthly inflation in August 1975 reached 24.2 per cent.
As Nick Srnicek and Alex Williams (see below) point out, this crisis of confidence in social democracy and Keynesianism left an opening for neo-liberalism to be imposed through new more right-wing governments in the UK and USA at the end of the 1970s.
The international financial crisis of 2007-2008 may well also lead to a paradigm shift in economic theories such as the recent challenge to austerity by newly emerging politicians like Sanders in the US and Corbyn in the UK.
The heyday of social-democracy occurred during the post-WW2 period, the trente glorieuses (1945-1975) as the French call it, where, as has been pointed out elsewhere in the replies to this article, there was an historical accommodation reached between labour and capital. Why this accommodation (?) because labour was on the offensive and had high political expectations from the post-war order. When the class balances are in equilibrium concessions must be made and were made. In fact, the process had already started in the United States during the Roosevelt ascendency with the New Deal, which saw active fiscal policy as well as social policies enacted such as old age pensions and unemployment compensation. And the reason was quite simple, the ruling elites were frightened of revolution. The existence of a militant increasingly organized labour movement, armed partisans in Greece, Italy, France and the existence of the Soviet Union, put the fear of God into the ruling and monied stratum.
In addition, the great depression and the war had involved a massive devaluation of capital assets, and, as should be well known, sustained upturns in the economy and the creation of new values is always predicated on the destruction of existing values. Economic crises provide the essential restructuring mechanism of the system as debts are written down, zombie enterprises go bankrupt and existing enterprises can buy perfectly good assets at fire-sale prices. This view, which I think is correct, is common to both Marxist and Austrian schools.
Social -democracy was essentially a one-off, a set of conditions, political and economic came together providing the matrix for such a policy. In present conditions of a ruling class offensive, globalization, rampant imperialism (which, by the way, social-democracy never had any problems accommodating to) and a politically disarmed working class and a decimated labour movement in the capitalist heartlands, those conditions no longer prevail. Every nominally social-democratic party in Europe, PASOK, PSOE, SPD, PS and the Blairite Labour party has thrown in the towel, made their peace with imperialism, and are now indistinguishable from other bourgeois parties.
The social-democratic option is now off the agenda; its historical window of opportunity has effectively closed. This doesn’t mean, however, that piecemeal reforms are off the agenda since the struggle for such changes act as educational and organizational functions which hopefully raise the level of the subaltern classes in the ongoing struggle against the ancien regime.
Apologies if I read this too quickly, you might have touched on this, but it’s not a real Nobel Prize. It has nothing to do with Nobel, and was instituted by the Swedish Riksbank after their (successful) machinations to rip off the name of the Nobel Prize.
For whatever reasons, Nobel did not endow a prize for the voodoo that is modern economics.
Why not have a Nobel prize for the field of “democracy”? By definition, democracy is “social” but capitalism has hijacked the term so that we tend to equate capitalism with democracy when it clearly is not: there are 60 people in the world possessing the same wealth as the poorest half (3.5 billion) – absolutely mind-blowing. I think we need to have a new narrative where capitalism and democracy are not thought of as one and the same and democracy means what it really does mean. In the capitalist system we’re in now, we are ruled by the <0.1% corporate media/global corporation/deep state triumvirate, not by the people.
Article by Kevin Barrett on the history of “democratic” elections in the US.
Also in OffGuardian
An excellent article – where are FDR & Keynes when you need them?
For those interested in macro-economics I recommend a visit to Professor Bill Mitchel’s site (bilbo.economicoutlook.net) entitled ‘Bill Mitchell – Billy Blog. Modern Monetary Theory … macroeconomic reality’ (bilbo.economicoutlook.net).
As a bonus, visit specifically http://bilbo.economicoutlook.net/blog/?p=34531. When he lived in Manchester in the 1980s (as a PhD student) Professor Mitchell did some ‘archive digging’ into past issues of local working class newspapers. Fascinating info about the Guardian which I as an ex-Mancunian was not aware.
Avner Offer writes well and John’s comment is also pertinent. Avner Offer is right – and to invest the recipient of the Nobel Prize in economics with omnipotence is either the response of the desperate or the cunning. Economics was vilified immediately after the credit crunch while others, keen to make their name, maybe to join the shortlist for a Nobel, popped up to claim they saw it coming. Economics Professors feared for their jobs and began murmuring about ‘new ways of thinking’. But, it seems to me it is all settling back into the way it was before. Picketty’s book is now literally used as a doorstop. Few imagined the scale or extent of the crunch’s impact, yet not one investment banker jailed. Bonus culture has long since returned, and bankers are again using their privileged clout with PMs and Chancellors, threatening to take their gherkins and bonuses abroad. Indeed, we are still experiencing the effects of the crunch – who thinks Brexit is not enjoined with credit default swaps, housing bubbles and the world of Wonga? Hints of Weimar in the 20s are all around. Rosie Brocklehurst
Excellent contribution. Offer is also the author of The First World War: an Agrarian interpretation and Property and Politics, two books well worth acquiring.
This site goes from strength to strength.
Reblogged this on EU: Ramshackle Empire.
The new updated (2016) edition of “Inventing the Future – Postcapitalism and a World Without Work” by Nick Srnicek and Alex Williams explains the real thinking behind social democracy, which was the accommodation between labour and capital, at a time when labour held great negotiating strength and capital – to some extent – had to accommodate to a situation of placating labour through good pay and secure jobs.
The advent and growth of neo-liberalism due to the decline of Keynesianist social democracy has seen many of the gains of labour from the 1950s through to the mid-1970s reversed such that more of the surplus created now goes to capital in the form of a grossly unequal distribution of monetary rewards to senior directors and managers in the form of obscene-level bonus payments for what are often barely worthwhile performances.
The end result of this new “rip-off” economy is a growth in low paid insecure employment and a massive growth in food banks even for those in regular but low paid employment. Neo-liberalism has simply provided an ideological framework for plundering the lives and futures of working people all around the world.
Automation, robotisation and artificial intelligence are coalescing together to bring about a new world in which much human labour will be surplus to requirements.
New ideological and economic thinking for this emerging new world has yet to appear, though people like Nick Srnicek and Alex Williams – as well as others like Paul Mason – are trying to get there.
Graef S. Crystal wrote “In Search Of Excess: The Overcompensation Of The American Executive.” It was a good read. It’s accessible and blunt. The beauty of Crystal’s book is that he was a top compensation consultant himself. He knows what he’s talking about. If you think that the way CEO’s arrive at their compensation is not on the up and up, then you’re right and Crystal can give you some details and anecdotal to support your common sense belief.