On the occasion of the 500th anniversary of Martin Luther’s Reformation, 33 Theses for an Economics Reformation were formulated by Rethinking Economics and the New Weather Institute. The document was symbolically nailed to the door of the London School of Economics In December 2017 and endorsed in The Guardian, and was supported by an impressive list of over 60 leading academics and policy experts. The initiative offers a rare and most welcome refreshing message from the House of Economics.
Several elements in the theses are long overdue – for example, the existence of planetary limits, the superiority of political deliberation over economic logic, the appreciation of the role of uncertainty in economic predictions, the non-independence of facts and values when economic thoughts are formulated, the warning against over-reliance on modelling, econometrics and formal methods. Also important is the indication that both growth and innovation need to be conceived with a desirable end in sight, one which can be associated with material and spiritual progress – rather than with misery, inequity and inequality. It is finally all important that in the teaching of economics itself the history and philosophy of economics should be taught, together with all economic theories: not just the family tree of mainstream economics.
Three omissions
While the “33 Theses” are a much needed initiative, three absences are nevertheless noticeable:
While the problems of financialisation are discussed, by going back to Martin Luther himself, in his 1524 book On Trade and Usury, we find an older tradition that more clearly separates unproductive hoarding from productive finance. In his 1355 De Moneta, Nicolas Oresme contrasts the negative effects of hoarding with the positive effect of investments in the real economy:
“It was this consideration that led Theodoric, King of Italy (493-526), to order the gold and silver deposited according to pagan custom in the tombs to be removed and used for coining for the public profit, saying: ‘It was a crime to leave hidden among the dead, and useless, what would keep the living alive’.”
The religious term for unproductive money is mammon. If we combine Oresme’s insight with Schumpeter’s understanding of financial crises as an occasion to clean out failed investments from the global portfolio, we find that in the name of “saving” investments we have made the mistake of saving bad projects and poor nations that should have been allowed to go bankrupt. We have helped accumulating mammon at the expense of real investments and consumption that would have “served the purpose of life” as Luther would have put it. Seeing the present world through the eyes of King Theodoric, we have printed mammon – unproductive capital – which is useless to keep the living alive, but which promotes speculative bubbles. By doing this we have made the perfect conditions for vulture funds, but failed the poor.
The second is the absence from the list of theories to be taught of Erfahrungswissenschaft, economics as a science of experience. This is in essence what most economics has been about until fairly recently. How influential this experience-based historical school was can be seen in a working paper, “80 Economic Bestsellers before 1850: A Fresh Look at the History of Economic Thought”. On the list is Adam Smith’s Wealth of Nations, chronologically No. 53 of 80 bestsellers before 1850, reflecting the fact that capitalism and industrialization were already long in existence when Smith wrote what today’s students are misled to think was the beginning of economics.
The third missing element is the word trade. Neoclassical trade theory – based on the theories of David Ricardo (1817) – presents trade as a harmony-producing mechanism. Ricardo achieved this by basing his model of international trade on the barter of qualitatively identical labour hours.
How Ricardo saw it
Ricardo’s trick of making every labour hour qualitatively identical is at the core of the problems of globalisation. At the intuitive level, economists understand this: no economist would ever advise his or her children to specialize in an apparent comparative advantage in washing dishes in restaurants. Intuitively, we all understand that there is a hierarchy of skills out there, and from that follows that it is entirely possible for a nation to specialise in a comparative advantage in being poor.
During the decades after Ricardo published his theory, US economists specifically referred to skill differences using a quote from the Bible that describes the cursed tribe that cuts wood and carries water for other tribes (Joshua 9:23). The United States did not want to specialize at the bottom of the skills ladder, and only wanted free trade when it had become an industrial power. Now, when the United States is no longer the world leader, US politicians from Trump to Sanders intuitively wish to go back to their own country’s long-forgotten theories.
Ricardo’s illusion is a main mechanism of today’s centripetal economic forces. This illusion has collapsed several times before, most notably in 1848, when the Ricardian economic paradigm was brought down through attacks from Marx and Engels on the left and the “great liberalist” John Stuart Mill on the right. Mill recognized that poor countries needed “infant industry protection” before they could graduate into free trade.
Historically, every rich country – starting with England from 1485 to the US and South Korea – for a time has protected manufacturing industries. At present, manufacturing, due both to its high productivity increases and to demand factors, tends to shrink as a percentage of GDP. However, the poor countries in the world periphery still have a huge potential national market for wealth-creating manufacturing.
We still see the destructive forces of the prevailing paradigm keeping poor countries poor, while leading to poverty and mass emigration from many former Soviet Republics. Cascading migration moves Polish construction workers to the UK and Scandinavia, Eastern Ukrainians to Poland to replace construction workers there, and Moldovans to the Ukraine to replace those who left for Poland, in the end creating lower wages in the West and a periphery without jobs and manpower. The backlash against the market utopia foreseen by Karl Polanyi is happening.
Back to the future
The 1947 Marshall Plan and the 1948 Havana Charter represent the last time Ricardo’s illusion collapsed. The Havana Charter wisely describes under what conditions a country could protect its industries, as well as suggesting an international tax on trade surpluses. While it was blocked by the United States at the time, were such a rule in force today it would have been possible for the US to protect itself against deficits with China, and the Southern European countries of Portugal, Italy, Greece and Spain (often referred to by the acronym PIGS) against similar deficits with Germany, while allowing the poor unindustrialised periphery of the world to use the same mechanisms that produced the 30 glorious years of development of the West after World War II.