Time for a paradigm shift?

As you would hope, there was a lot of new economic thinking at the recent (21-23 October) Institute for New Economic Thinking (INET) conference in Edinburgh. Economists from across the world presented stimulating papers on issues ranging from secular stagnation to imperfect knowledge, the dual economy to macroeconomics and gender. There were evolutionary and behavioural economists, post-Keynesians and complexity theorists. But after all was said and done, did it add up to anything more than the sum of its fascinating parts? Is there a coherent new economics emerging out of this ferment? 

This is not an academic question - though it should also be that. Since the financial crisis we have been living in a historical moment when the dominant approach to economic analysis has patently failed. The neoclassical consensus has been revealed as unable to provide an evidence-based framework for understanding the way the economic system works - and why in recent decades it has not been working well. And the orthodox approach has not prescribed economic policies which have been able to deal with the multiple problems we now face, such as stagnant living standards, static productivity, falling investment, demand deficiency and environmental crisis. We desperately need a new approach - both to economic analysis and to policy. You could say, indeed, that we need a new paradigm.

This is the conclusion reached by the Interim Report of the IPPR Commission on Economic Justice, published last month. ‘Time for Change: A New Vision for the British Economy’ argues that the structural problems of the UK economy are so deep that ‘fundamental reform’ of economic thinking and policy is needed. Such reform needs to be of the magnitude of the two economic paradigm shifts of the 20th century. Those were the shifts from classical laissez faire to the Keynesian postwar consensus in the 1930s-40s, and from that to free market neoliberalism in the 1970s-80s. The report makes the explicit case that the 2008 financial crisis and the failure of economic policy in the decade since marks a comparable moment - of breakdown in the old paradigm and the beginning of epochal change.

The report does not set out what such a new paradigm would look like - that will have to wait till its final report next year. But it does set out the key goals of a new approach (reducing inequality, achieving environmental sustainability and a redefined prosperity), key policy approaches that will be needed, and some of the new economics which will need to underpin it. And in this it shows how it is already drawing on many of the ideas being developed under the auspices of INET. 

But the Commission’s report is also clear that there is nothing inevitable about paradigm shifts. As the experience of the last shift demonstrates - neoliberalism was the product of an organised intellectual movement orchestrated by Hayek, Friedman and the Mont Pelerin Society -  it requires both active political change and serious economic thought. 

Which is why it matters that the fertile creativity of the INET network is harnessed and organised into something more like a coherent economic programme. We won’t have, and don’t need, a single new economic school on Keynesian or neoclassical lines. But we do need to connect up the dots of the new theoretical pluralism to generate a new narrative of change. As we contemplate the political context - Brexit, Trump, Le Pen and the AfD - it is clear that the time to do this is now. 

Michael Jacobs is Director of the IPPR Commission on Economic Justice