by Ideology and the politics of economic method Political economy has long taken a keen interest in the politics of economic ideas, but considerably less attention has been paid to the politics of economic method. Method gets neglected as the technical realm within which, it is assumed economic ideas, once established, are implemented in straightforward fashion. In fact, economic method and technique are in fact key sites in the battle of economic ideas … Independent fiscal councils and Central Banks have been introduced in many countries in recent decades. Technocratic economic governance, involving expert oversight of and input into often rules-based economic policy, has become pervasive in advanced democracies. Governments introduced economic policy
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Lars Pålsson Syll considers the following as important: Economics
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Ideology and the politics of economic method
Political economy has long taken a keen interest in the politics of economic ideas, but considerably less attention has been paid to the politics of economic method. Method gets neglected as the technical realm within which, it is assumed economic ideas, once established, are implemented in straightforward fashion. In fact, economic method and technique are in fact key sites in the battle of economic ideas …
Independent fiscal councils and Central Banks have been introduced in many countries in recent decades. Technocratic economic governance, involving expert oversight of and input into often rules-based economic policy, has become pervasive in advanced democracies. Governments introduced economic policy rules, and independent oversight bodies, in an effort to reassure electorates and financial markets that they were sound custodians of the economy and the public finances.
This was, according to Public Choice theory at least, designed to take some of the politics out of economic policy-making, turning it into a mechanistic administrative process. However, this technocratic vision comes up against a central reality of political economy: economic knowledge and narratives are political and social constructs.
The operations of the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, draw our attention to the often under-appreciated politics of technocratic economic governance. Although the OBR sees itself as apolitical institution, and involved in technical work, on closer inspection – the OBR is nevertheless inextricably involved in the politics of economic policy-making.
Indeed, there is always a politics of technocratic economic governance because economic analysis and policy evaluation rest on political economic assumptions that are always contestable. Bodies like the OBR and the IMF, in their operational work, deal in contrasting normatively informed accounts of how the economy and policy work – built in via the assumptive foundations of the various models they operate with …
We can take research on the politics of economic ideas forward by highlighting the importance of economic method, and modelling assumptions, as sites of contestation within economic governance and economic policy-making. Economic concepts used to gauge growth trajectories and frame and pilot economic policy, even when operationalised and deployed by technocratic bodies like the OBR or IMF, are always founded upon contestable normative assumptions.
Since the global financial crisis, we increasingly lack a single agreed fiscal policy script or settled expert view. Rather, understandings on fiscal policy efficacy, the properties of markets, and the impacts of macroeconomic policy on long-term growth differ. There is a spectrum of respectable opinion – drawn from different economic theoretical homes. This makes deliberation and contestation over economic methods and modelling assumptions even more significant, and consequential for policy.
A politics of economic method lens helps appreciate how apparently technocratic economic governance, carried out by bodies like the OBR and the IMF, is saturated with the politics of economic ideas.
Even though some economists seem to think that facts are bound to win in the end, yours truly begs to differ.
Take the rational expectations assumption. Rational expectations in the mainstream economists’ world imply that relevant distributions have to be time-independent. This amounts to assuming that an economy is like a closed system with known stochastic probability distributions for all different events. In reality, it is straining one’s beliefs to try to represent economies as outcomes of stochastic processes. An existing economy is a single realization tout court, and hardly conceivable as one realisation out of an ensemble of economy-worlds since an economy can hardly be conceived as being completely replicated over time. It is — to say the least — very difficult to see any similarity between these modelling assumptions and the expectations of real persons. In the world of the rational expectations hypothesis, we are never disappointed in any other way than when we lose at the roulette wheels. But real life is not an urn or a roulette wheel. And that’s also the reason why allowing for cases where agents make ‘predictable errors’ in DSGE models doesn’t take us any closer to a relevant and realist depiction of actual economic decisions and behaviours.
‘Rigorous’ and ‘precise’ DSGE models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge no in any way decisive empirical evidence has been presented.
So, given this lack of empirical evidence, why do mainstream economists still stick to using these kinds of theories and models building on blatantly ridiculous assumptions? Well, one reason, as argued by Ben Clift, is of an ideological nature. Those models and the assumptions they build on standardly have a neoliberal or market-friendly bias. I guess that is also one of the — ideological — reasons those models and theories are so dear to many Chicago and ‘New Keynesian’ economists …