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Seumas and economics, will the two ever meet?

From any rational point of view, orthodox economics is in serious trouble. Its champions not only failed to foresee the greatest crash for 80 years, but insisted such crises were a thing of the past. More than that, some of its leading lights played a key role in designing the disastrous financial derivatives that helped trigger the meltdown in the first place.

What derivatives that caused the crash?

No futures or options caused anything at all. No, the crash was from housing finance: straight old plain securitised mortgages. And no, a CDO is not a derivative: it is a securitised mortgage. A CDS is not a derivative either: it is an insurance contract.

Others, such as the Nobel prizewinner Robert Lucas, insisted that economics had solved the “central problem of depression prevention”.

Have we just had a depression? In the US/UK etc, no we haven’t. Because we do indeed know how to stop one. We can argue about whether it’s been the budget deficits (Keynesian stimulus) or monetary policy (as Friedman pointed out, that’s what caused the last one, and we’ve done the QE etc to prevent it) but we haven’t had a depression so we could indeed say we know how to stop one.

Except in Latin Europe of course, where they have indeed had a depression and where they’ve not been allowed to do either the fiscal or the monetary stuff. Which would be good evidence again that we do know what to do.

Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace. You might even imagine the free-market economists who dominate our universities and advise governments and banks would be rethinking their theories and considering alternatives.

Given that we’ve just proved the theories right then why would anyone need to rethink them?

After all, the large majority of economists who predicted the crisis rejected the dominant neoclassical thinking: from Dean Baker and Steve Keen to Ann Pettifor, Paul Krugman and David Harvey. Whether Keynesians, post-Keynesians or Marxists, none accepted the neoliberal ideology that had held sway for 30 years; and all understood that, contrary to orthodoxy, deregulated markets don’t tend towards equilibrium but deepen the economy’s tendency to systemic crisis.

Both Dean Baker and Paul Krugman would insist that they operate entirely within the neo-classical paradigm. As an aside it’s Dean Baker who keeps insisting that it really was all about housing finance, nothing else. And to argue that Keynesians or post-Keynesians are not neoclassical is an abuse of categorisation. As is the equation of neoclassical with neoliberal.

And seriously, you want to argue that Krugman, an expert on international trade, argues that markets don’t tend toward equilibrium? Seriously?

Eugene Fama, architect of the “efficient markets hypothesis” underpinning financial deregulation,

No, the EMH does not underpin deregulation. It only insists that markets are efficient at processing the information that determine prices. And just about every economist would agree with the weak version and even Fama doesn’t agree with the strong.

Many of their students, though, have had enough. A revolt against the orthodoxy has been smouldering for years and now seems to have gone critical. Fed up with parallel universe theories that have little to say about the world they’re interested in, students at Manchester University have set up a post-crash economics society with 800 members, demanding an end to monolithic neoclassical courses and the introduction of a pluralist curriculum.

This is where the misclassification above comes in. If Keynes and post-Keynes are not neoclassical, and also that economics courses are rigidly neoclassical, then how come every economics course in the country includes both Keynes and post-Keynes?

You’re spouting drivel Milne, pure drivel.

They want other schools of economic thought taught in parallel, from Keynesian

Seriously, please, can anyone at all come up with any evidence of any kind that undergraduate students in economics in the UK are not taught Keynes? Please? Shit, the last time I looked at the GCSE syllabus it was there.

So, for example, here is part of Manchester University’s introductory Macroeconomics class, something compulsory for all Econ students.


The aims of this course are:

(i) To provide a self contained introduction to macroeconomics for
general social scientists.

(ii) To cover the preparatory material for more specialist courses in
economics in the second and third years.
Objectives (Learning Outcomes)

On completion of this unit successful students will be able to:

(i) Demonstrate their knowledge of the major macroeconomic
issues, policy objectives and national accounts.

(ii) Demonstrate their understanding of the extended Keynesian
income-expenditure model algebraically and diagrammatically.

(iii) Understand the creation and role of the Money in the economy.

(iv) Use the model to analyze a variety of fiscal and monetary policy

(v) Demonstrate their critical awareness of the exchange rate
mechanism for macroeconomic policy.

What the fuck is Milne talking about?

Is he simply entirely ignorant or is there something else afoot?

27 thoughts on “Seumas and economics, will the two ever meet?”

  1. “deregulated markets don’t tend towards equilibrium but deepen the economy’s tendency to systemic crisis.”

    the trouble I always find with lefties is that whenever they argue this, the examples they come up with are nearly always where there isn’t a deregulated market, like banking or energy.

  2. The Manchester students’ gripe is that the econ syllabus there does not cover either Keynes or Marx. Which (if true) is a shocking indictment of my alma. Entirely possible that they simply didn’t get out of bed for those lectures.

  3. There were an awful lot of lefties saying ‘No more boom and bust’ before the crash. In fact, most of the people who had for years predicted trouble had been Austrian-school types, but they are deliberately ignored by the likes of Seamus.

  4. I like this idea that if economists lived by their own free market principles, they’d be changing what they do because that’s what their customers want.

    applications to take economics courses are booming. People selling a product do not change that product because a subset of potential customers don’t like it.

  5. “Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace”

    This from a Communist who nevertheless still manages to earn a huge wage as a commenter. Splutter.

  6. The Guardian really need to issue strict guidelines that nobody apart from Larry Elliott should be allowed to write on matters economic… seriously…

  7. To pick Tim up on some definitions:
    A CDO is a collateralised debt obligation. The debt is question is usually that of smaller companies, not mortgages. If the underlying were mortgages, they would be referred to as RMBS (residential mortgage backed securities) or CMBS (commercial mortgage backed).
    A CDS (credit default swap) is absolutely a derivative. Whilst they are economically similar to insurance against a company defaulting, it is not the same. For one, they can be traded (so profits can be made from a perceived increase in default risk, even if the event does not happen). Secondly, you cannot buy insurance on something you do not own – but you can bet against the credit quality of a company’s debt regardless of whether you own it or not.
    Not that this changes Tim’s argument. Derivatives did not cause the crisis – housing finance did. More specifically, housing finance extended to those who couldn’t pay.

  8. Perhaps the courses might also incorporate some Economic History, most specifically on the History of Communist Economics which proved such a riproaring success over 7 decades. Students might also look at countries where the state is dominant, like Cuba, Zimbabwe or North Korea, where the ideas Milne expounds, generated on the back of financial considerations received back in the 1980s from one of the Eastern bloc intelligence services, are still in operation as to how the alternative he outlines works.

  9. From the comments ~ lunatics:

    There will never again be the levels of economic activity and employment that we had a decade ago in the industrialised regions, simply because there is no longer the availability of resources to support them; so another glaring omission from courses in Economics today is the consideration of de-growth and how it can possibly be managed equitably.

    We should have started de-growth forty years ago. We expected a move to a 4-day week and then to 3-day week and then to a 2-day by the end of the twentieth century—-but we didn’t foresee the peddling of ‘Greed is Good’.

    Fortunately, it is only a minority (one-sixth?) of the world’s population who are inextricably embroiled in industrialism and its concomitant consumerism with its handmaiden of capitalism”

  10. I think it is a fair estimate that 90% of these lunatics who want us to “de-growth” rely for their income on the surplus this growth generates, I.e. they are on some sort of welfare, or are “non-profit”, or work for the State in some completely non-essential service, or are academics or students. These are the Golgafrinchams of the modern West – have they any idea what will happen to them in the subsistence-level, feudal society they long for?

  11. De-growth? I hadn’t heard that one before. But from the quotes it sound like a standard trope, and an uncommonly chilling one at that (not just metaphorically, either). Sounds like a good candidate for the replacement vehicle for greenism, when greenism has run its course.

    These people are happiest taking things away from other people.

  12. CDS ARE derivatives. They have a value which is derived from the value of something else – namely the debt of the reference entity. Sure, this is like insurance. But CDS are still derivatives and unlike insurance they are tradeable and also have to be marked to market.

  13. These people are happiest taking things away from other people. ~

    A lot of it is caused by mental illness & complexes yet these individuals are never called out on the main stage for what they are…

  14. Why don’t they just work for a living and live in the real economic world and not their virtual EUtopia. prats all of them.

  15. is there a rule that when someone writes:

    “There will never again be the levels of economic activity and employment that we had a decade ago in the industrialised regions, simply because there is no longer the availability of resources to support them”

    we can call out some standard term of abuse?

  16. “Theory and practice prove that the market is the most efficient way to allocate resources” – this sentence from the Third Plenum’s decision document could augur and encapsulate the next several decades of China’s development.

    Thus spake China’s current rulers.

  17. Edward Lud

    “De-growth? I hadn’t heard that one before.”

    I think Pol Pot gave it a go back in the 70’s. Hugely successful from a carbon footprint point of view, if you gave the macro stats of before and after the Greens would be thrilled.

  18. Ho Chi Milne is an adherent of an ideology that leads ineluctably to famine, poverty and death camps. That cannot be stressed often or forcefully enough. There comes a point when politeness should give way to candour. He is, of course, at liberty to spout his vileness. One has to wonder if in his more contemplative moments he perceives the irony in this.

  19. Diogenes-

    This is unfortunately the consequence of the widely held belief that the economy is a “division of resources” rather than a production paradigm. As such, most people believe that economic growth is synonymous with greater use of resources, rather than being the improved utilisation of them.

  20. Do people actually read the Guardian as if it contains serious think pieces and news? The content usually makes me want to either laugh or cry, not sure which in this case.

  21. Others, such as the Nobel prizewinner Robert Lucas, insisted that economics had solved the “central problem of depression prevention”.

    With Keynesian stimulus and/or monetary policy, we know how to create the next bubble, just as these policies (advocated by the likes of Paul Krugman) helped create the bubbles that burst in ~2008.

  22. “A CDS is not a derivative either: it is an insurance contract.”

    Afraid that is wrong. It is in the name “Credit Default Swap”. One counterparty pays a fixed amount periodically while the other party pays an amount based on whether a third party has defaulted. It pays out a little like an insurance contract,l but neither party is an insurer, neither has an insurable interest, the contract is not governed by insurance law and it can be traded between parties who have no interest in the underlying instruments. Sounds pretty derivative to me.

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