Beware of economists with a policy paradigm

Neoliberalism is dead, or it is still very dynamic. During this period of time, experts have been using these two terms to describe it, but no matter which version is used, it cannot be denied that something new is emerging in the field of economic policy.

US President Biden called for a substantial expansion of government spending on social projects, infrastructure and the transition to a green economy, hoping to use “government procurement” to rebuild the domestic supply chain and bring manufacturing jobs back to the United States. His Secretary of the Treasury, Janet Yellen, is pushing for a coordinated global increase in corporate taxes, while Jerome Powell, the chairman of the Federal Reserve, the government department that traditionally has the most hawkish stance on price stability, is playing down inflation concerns and expressing his stance. Support fiscal expansion.

All these policy changes represent a huge departure from Washington’s conventional wisdom. So, do they also herald a new economic policy paradigm?

The ideas that have dominated since the 1980s—some call it the Washington Consensus, others call it market fundamentalism or neoliberalism—begin to gain momentum because Keynesianism and excessive government regulation were deemed ineffective. But they subsequently deviated from the original intention of the designers and gave birth to a group of highly financialized, unequal and unstable economies, but these economies are not able to deal with the most important challenges of the present: climate change, social inclusion and Destructive new technology.

A useful means of achieving the required paradigm changes may start with how we teach economics. Economists are often obsessed with the power of the market to drive overall economic prosperity. The “invisible hand” described by Adam Smith is one of the jewels in the crown of the economics profession. And it is still extremely counter-intuitive, which may be why economists spend a lot of time to promote the magic of the market.

But economics is not a hymn to the free market. In fact, most economic teachings focus on how the market generates excessive inequality and how to effectively allocate resources and other aspects. A perfectly competitive market that can harmoniously produce a stable equilibrium state is just one of many possibilities. The Smith model is not the only one. However, the instinctive reaction of many economists is to use a well-functioning competitive market as a relevant benchmark for any proposed deviation from laissez faire.

Fortunately, there is indeed a new economics teaching paradigm. The CORE project is an online teaching tool and free open textbook, which has been applied to the economics departments of most universities in the UK. One of its key advantages is that it can directly face issues such as inequality and climate change. But the more interesting step in teaching is that it replaces multiple economic standard benchmarks with a variety of more realistic and useful alternative benchmarks. For example, compared with traditional economics, CORE assumes that individuals are crowded and short-sighted, competition is imperfect, and power always exists in the form of a principal-agent relationship in the labor and credit markets.

Such a new economics teaching and practice paradigm will produce a better understanding of social outcomes. But we should realize that it will not produce a new economic policy paradigm-and this is justified.

All of our previous policy paradigms—whether they were mercantilism, classical liberalism, Keynesianism, social democracy, ordinary liberalism, or neoliberalism—have their own important blind spots, because they are seen as something that can be applied to any Universal solutions in time and place. And the blind spots of each paradigm inevitably conceal the innovation it brings to our thinking about economic governance. The result is excessive extension, and either excessively optimistic about the role of the government in the economy or excessively pessimistic.

Our society is facing some major challenges that require new economic means and important policy experiments to deal with. The Biden administration has initiated a bold and long-overdue economic transformation. However, those who are pursuing a new economic paradigm should carefully grasp what they hope to achieve. Our goal should not be to create the next rigid orthodoxy, but to learn how to adapt our policies and institutions to changing emergencies.