speri.comment: the political economy blog

The Great Uncertainty: thinking through financial crisis

Economic dynamics must always be understood as profoundly political, open to alternatives and inherently uncertain

Professors Colin Hay & Tony Payne, Directors of SPERI

Colin Hay and Tony Payne

In this, the second in a series of linked posts on what we have termed the Great Uncertainty, we turn our attention to the nature of the current financial crisis.  We explore the implications, in particular, for how we think (or should think) about the economic dynamics of both crisis and recovery in the uncertain circumstances in which we now find ourselves.

What, in brief, is this financial crisis? It is a largely Western crisis brought about by neoliberal excess and lack of proper political control.  It has prompted a widespread politics of austerity and now renders the resumption of economic growth a severe conundrum for the US, Japan and nearly all major European economies, including Britain.  For the rest of the world the financial crisis has undoubtedly been challenging, chiefly because of its impact on Western demand and levels of business activity. But it has manifestly not stopped growth in China, India, Brazil and many other parts of Asia, Latin America and indeed Africa.

All of this is obviously well enough known by now.  But we maintain that it is still not well enough understood. We want here to make three points about how we should go about making up for the paucity of our current understanding of the financial crisis precisely by relating it to the condition of the Great Uncertainty in which we find ourselves.

The first point – made very much in the spirit of SPERI and the kind of analysis it has sought to provide since its launch just over a year ago – is that such dynamics are always profoundly political.  We need an analysis of economic processes that acknowledges this – a political economy as distinct from an apolitical economy. There is no economics without politics, just as there is certainly no modern politics without economics (in the sense that any contemporary politics has economic conditions of existence).

This is why it is such a shame that the disciplinary division of labour between professional economics and political science has produced a cavernous gap where once there was a pre-disciplinary political economy (of Adam Smith, David Ricardo and Karl Marx).  Disciplinary parochialism, and the disciplinary professionalisation with which it is so often associated, prepares us poorly for the analysis of the politics in our economics and the economics in our politics.

But, if we are right and the economic has always been political, just as the political has tended to be economic (in the sense that any contemporary politics has economic conditions of existence), then why is this any more important today in times of acknowledged crisis?  The answer lies in uncertainty – something else for which the disciplinary fault-lines between economics and political science does not prepare us well.

The point, our second point, is a very simple one.  Uncertainty is news for economics.  This is certainly the case for modern mainstream professionalised neoclassical economic theory, which is the basis of the economics in and through which we have been governed for far too long.  By contrast, uncertainty is not news at all for political economists.  Indeed, it is, in a sense, the founding premise of any genuinely political economy.

For to acknowledge that economic dynamics are necessarily and profoundly political is to acknowledge that there are no politically unmediated logics of economic compulsion – that economics is not a source of logics (as distinct from rhetorics) of no alternative.  ‘There is no alternative’ is never the description of an economic reality:  it is a (typically mendacious) strategy of political legitimation.

But why is this important and why it is important today?  This is our third point.  It is about modern economic theory, the crisis and (un)certainty.  Modern economic theory is formal theory, constructed from a series of abstract premises about the rationality, self-interest and narcissism of homo economicus – economic ‘man’ (sic).  It paints a picture of the world and builds models of it on the basis of such assumptions.

However, these assumptions are not chosen for their accuracy or their credibility, but precisely because they make possible the kind of abstract formal algebraic model building which is modern economic theory’s raison d’être.  Modern economics is about making economic systems amenable to this kind of modelling – and that entails a commitment to analytical assumptions which are, at best, crassly distorting simplifications and at worst demonstrably false.

In fact, it is precisely this that makes mainstream economics so attractive to policy-makers.  It both claims to be and ‘looks’ very scientific.  It is neat and reproducible and its models lead typically to clear policy inferences.  It does what policy-makers want and it has the added attraction of doing so in a way that is largely immune to critique from those not fluent in the private language in which it is conducted.  In short, it ‘depoliticises’ and ‘technicises’ economics – and that is precisely what makes it attractive (and hence relevant) to political elites.

But this comes at a massive price – as we are now all too well aware.  For, crucially for us (for all of us), the assumptions which make mainstream economics so attractive to political elites are equilibrium assumptions.  Modern economics, in other words, offers us a spurious science of equilibrium – a science of certainty in an age of uncertainty.  Its models informed the thinking and the conduct of those who inflated the bubble whose bursting precipitated the crisis.  As such, it is deeply and profoundly implicated in the crisis.  This is their crisis.

The conclusion we reach is that we cannot allow the economics of certainty to govern again the world of Great Uncertainty in which we live.  Acknowledging uncertainty in a moment of great uncertainty should be the starting-point for all economic thought. That, we contend, entails a political economy, the kind of political economy that SPERI espouses and seeks to promote.

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