Session 1 – Festival of Economics in Bristol 23rd November

The breadth of titles on sale at the back of the room indicated that this weekend was going to be more than they teach you in Macro101 or even in the whole of graduate economics studies. Young faces filled the back of the room in anticipation for new answers to old questions. The online discussion commenced with a revolutionary socialist calling the event a sell-out, “we come to bury capitalism, not to praise it”. It was a sell-out, 475 packed into the @Bristol centre on a Friday Evening to hear from John Kay, Larry Elliot, Rachel Lomax and Daniel Stedman Jones chaired by David Smith.

Rachel Lomax was the only one on the panel without a book out at the moment with her take on the crisis. She was the deputy governor of the BoE from 2003-2008. She compared the current crisis to 1976 when the IMF walked in to the treasury and took over as a result of massive inflation and unemployment previously thought to be impossible. She characterised the changes of the 1970’s as a dismantling of the capitalism of the post-war international system of fixed-exchange rates, trade barriers, nationalised industries and controls over everything that moved. People would no longer stand for stagnant living standards and there was a crisis of confidence in the existing model, which led to an intense academic debate. She believes that this debate is not going on post-crisis this time round and asks the other panellists to explain why?

Daniel Stedman Jones, a historian, barrister and author of “Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics” began in a similar vein staking his position as guided by economic history, “the only sure thing that can guide policy”. In an all too familiar manner, Jones discussed his book and its hypothesis rather than answering the question. As the title indicates, the hypothesis traces the influence of neo-liberalism on the modern state. He explained neoliberal ideas as a middle way between Laissez-faire and English liberalism (activist liberalism represented by Lloyd George and the American New Deal). He picked post-war Germany as an economy that typified early neo-liberal policies. 1970’s America in contrast gave more simple support to the market mechanism. He opines that this new model, characterised by monetarism and deregulation, lost compatibility with the welfare state and the anti-monopoly sentiments previously promoted. The neo-liberal paradigm was extended in a way that still captures modern politics. The crisis in confidence mentioned by Rachel Lomax was met with the existing neo-liberal ideas that were ready to be picked up and tried. Jones does not see any such ideas emerging from the current crisis and does not see a clear way forward.

John Kay, as the oldest on the panel assumed the role of the wise old man and employed two parables to allude to where his thoughts are. The old story of economics (and other social sciences) is that we seek to be scientists but are unable to conduct controlled experiments in order to test out our hypotheses. Kay claimed that post-war Germany was one example in history of a controlled experiment. In search of the first laughs of the evening, he added that after 15 years they had to erect a wall to keep the experiment and even that didn’t make it last after May 9th 1989. The story leapt back to 1953, the death of Stalin let Kruschev start to liberalise in Russia. On a visit to the US he went into supermarket and saw goods on the shelves but Kruschev thought that this might just be a front and actually the goods were removed with his presence. In Iowa however, he saw fields upon fields of maize (much harder to fake). Upon his return to Russia, one of Krushchev’s aids rolled out a program based on the idea that maize could be grown anywhere. This eventually led to Krushcev’s downfall in 1963. John Kay concluded that it was not bad to try and grow maize but the experiment was on too large a scale and there was no honest feedback. The rise of the personal computer provided John Kay with ample evidence of the dynamism and features of an innovative capitalist economy. Showing his age he outdid the audience with his knowledge of the first PCs he ever used. IBM was a dominant computer company but did not make the personal computers. It was not for lack of trying but the many projects attempted were all lost in the bureaucracy of the computer giant. In the end, the CEO got so fed up that he set up an off-site project and they managed to build a PC using Microsoft software and Intel chips. Despite their hegemony, IBM no longer produces PCs and Apple has succeeded in becoming the biggest company in the world. Nobody knew how this market was going to pan out. The computer market was a process of experiments where there was the potential for 1000 flowers to bloom but most don’t. He concludes that we misunderstood the collapse of central planning in 1989 – it is experiments, not greed that makes capitalism work and should be the priority for our economies moving forward.

Larry Elliot felt that going last had much to do with his rival at the Sunday Times chairing the panel. His recent book predicts that the UK will have a developing world economy by the end of 2014. He seemed unfazed going last as he split successful capitalism into 5 pillars. Profitability, the first pillar marks the difference between capitalism and any other economic order. The rule of law and property rights that have defined our society for centuries have allowed capitalism to operate with a certain amount of stability in the system. During the “Great Moderation” the doctrine of stability has also spread to inflation and unemployment. As John Kay had exhausted his time on innovation in the capitalist economy, Elliot only briefly mentioned creativity playing a role in his capitalist society. The two more interesting pillars were sustainability (1st mention of the evening) and legitimacy. In economists’ terms, Elliot asks the question: “Is capitalism putting enough capital back into the earth or are we just eating up our capital stock?” On legitimacy, he gave a broader definition that did not just encompass fairness and equality but a general sense of confidence in the current system in order for it to function properly. He described the early 1970’s as a golden age in which profits were high, economic growth and other economic indicators looked good, balance of payments and consumption were done out of rising incomes and worries were about the labour unions and the welfare state. He concludes with the diagnosis that the current system is not legitimate, stable nor sustainable but still there is no new thought and dynamism.

The typical Bristol question-masters lined up to ask questions on the Banks which were palmed off onto the recent Vickers report. There was unanimous consensus that we did not have the regulatory infrastructure to carry out what are now touted as feasible choices in light of the ring fencing. However towards the end of the talk, John Kay thought that 100% reserve banking for retail deposits is possible. The young audience managed to squeeze in a question on inter-generational transfer, to which Larry Elliot responded with the bleak vision that this generation will be the first to not be better off than their parents. He opined that real wages have been stagnant for 25 years but we have deluded ourselves that we can grow the economy faster than the underlying growth rate. This delusion was created by spending the North Sea oil revenue on current spending, unemployment benefit and tax cuts. Unless we are able to grow the economy at the same rate we will experience the burden of borrowed future growth by previous generations. In order to prevent this indebtedness he said that we should rip up tuition fees and replace them with a graduate tax. Furthermore, he said we should not continue to fund wealthy pensioners’ fuel bills. Rachel Lomax piped up quickly with two rebuttals, firstly pensioners with large savings are now receiving 0% on their pensions and secondly, women continue to be in a better situation than previous generations.

If you have managed to read until the end of this post you might feel like I did when I walked out of the room. Why do I have no better idea of what the direction of travel is? The takeaway seems clear however; the people involved in the public debate are too caught up in the diagnosis that they do not have the public debate when they have the opportunity. No policy ideas were explored, no vision for a new sustainable economy and no ideas of how to correct the structural challenges that all of our societies face. I came in expecting a vital historical emphasis which is so absent from contemporary economics but found myself wishing that the panel had spent more time on their vision for future models. The cliché of “Where is the public debate?” was mentioned several times without realising that there were almost 500 people in the audience engaged for over 2 hours on a Friday night in one of the greenest and innovative cities in Great Britain.