Bellerbys Economics - Mr Stephenson

Tuesday, February 05, 2008

Heterodox Economics

The title sounds like a magical curse or something - but in fact, it's the latest fashion in Economics.

For much of the 1980s, economics was dominated by the Washington Consensus - a broad swathe of what might be described as libertarian or monetarist economics which believed that small government was best, free trade was paramount, businesse knew best. Based on the Chicago school of economics, this had a strong theoretical basis and was related to the earlier works of economists such as Hayek in the 1930s where economics and politics were closely linked and Hayek saw the more libertarian economics he was proposing as a way of combating the destructive nationalist forces sweeping Europe at the time.

This facade began to crack in the early 1990s when it became clear that purely monetarist interpretations of the economy were making the boom-bust of the economic cycle worse, causing immense damage and social conflict during the downturn - and when the free trade policies of the IMF and World Bank were discovered to be destructive to developing countries with weak governance and capacity, the consensus began to crack further.

This led to the pre-eminence of supply-side policies as a way forward and in the last couple of years to the development of a view that different countries should develop in different ways, building on the best of their traditions and resources - so China has developed by following through on government-led strategies (the Beijing Consensus); Russia and Kazakhstan by building their economies around their energy resources; India through a form of chaotic creativity and so on. This is the heterodox view of econmic development.

Leading proponents of this view centre around Harvard and MIT and include the late Robert Heilbronner, Paul Krugman, Dani Rodrik and Thomas Palley and Joseph Stiglitz, the former head of the World Bank, and Larry Summers

But these views are not necessarily new - as always in Economics, ideas often resurface after decades - much of what is currently being said echoes the views of earlier economists such as Thorsten Veblen and Joseph Schumpeter.

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