At a recent workshop in the Renner Institute in Vienna on “Why the Market Needs Closer Supervision” I sat on a panel with the above title. In what follows I give an outline of my presentation.
There is widespread consensus among economic policy makers that the lesson from the deepest crisis in 60 years is closer supervision of the whole financial sector; there is less consensus on whether the “neo-liberal” paradigm which extols the virtues of perfect markets and sees government intervention as impeding the optimization processes of the market needs to be relegated to the “history of economic thought” category. While a year ago, there was much soul-searching and self-incrimination, most of this impetus seems to have petered out, especially since some “green shoots” of economic recovery have been seen breaking through the perma-frost of the crisis.
But there are a number of economists whose assessment of the crisis is that it is connected to the previous paradigm. Thus, a post-crisis economic policy regime needs to develop a new, dominant economic model.
It is my contention that such a model is not around yet, but that there are a number of parts and parcels of theory strands around which provide large parts of a usable, more pragmatic new paradigm, on which economists (who are once more reviled as “dismal scientists”) could build. To develop a new paradigm – given that we have some idea where to go – would require a number of implementation paths:
a) A new curriculum of economics studies: Krugman, Hodgson, and others have been pleading to change the existing curricula which are based on teaching computable general equilibrium economics and highly abstract, very “elegant” mathematical models which rely on far-from-realistic assumption about rationality, self-correcting market forces, efficient market hypotheses, and the like, to include more Keynesian thinking, more behavioural economics, institutional economics (viz. the recent Economics Nobel Prize winners) and be directed towards a more pragmatic, closer-to-reality view of economic processes. But, as Karl Marx already stated: “It is not enough that ideas push towards realization, reality itself must push itself towards thinking” (my own translation, KB). I interpret this to mean that both economists must concern themselves with “real” problems, but real life must also find its way into economic thinking. No more ivory tower for economists.
b) A new selection process for Economics Journals: Mainstream economics journals have become unintelligible for non-mathematical economists. While a number of journal exist which deal with real-life-problems, incentive mechanisms for promotions in universities still favour abstract mathematical elegant models.
c) Economic policy makers in ministries of finance, national banks and international organisations need to be able to familiarize themselves with the “new” models, understand the feedback mechanisms between financial markets and the real economy, etc. They need to have – or at least understand – macroeconomics.
d) Media Policy: The focus on stock market reporting as representing “the economy” must cease. Today, electronic media daily report in the news features on stock market developments, as if these were the pinnacles of underlying economic conditions. Print media have pages after pages of stock market price data, but very little reporting on global or national macroeconomic developments. Since media are the major transmitters of news, their reporting on economic developments shapes citizens views. There must be more reporting on wage developments, on global imbalances and their impacts, on the background of macro developments, on the importance of individual firm behaviour on citizens’ life, on underlying trends (instead of reporting every day on diverging forecasts), etc. Training of journalists, teaching in schools, etc. is in order.
e) Capture of policy makers by financial market actors. The influence of financial market actors on economic policy makers has been enormous: financing of US election campaigns by Wall Street, the revolving doors of Wall Street “tsars” towards the US treasury department; the idolization of financial market actors by UK policy makers who pushed the London financial center to the world peak; the political influence of German “Landesbanken” on policymakers; the battle between the Italian government and the largest banks; the old Austrian division of “Conservative” (OVP) and “Socialist” (SPO) banks, the party-political offices of Austrian bankers – and so on, and so on: all these show that before the crisis economic policy making was very strongly influenced by financial market interests. The most recent lobbying efforts by both Wall Street and London bankers against centralized EU legislation or unified global supervision, against hedge fund supervision, etc. go into the same direction.
Is it realistic to expect government to control and supervise financial markets in the future under such circumstances? Did we not have enough supervision by the to-be-supervised before the crisis? Effective supervision requires arms-length distance between the supervisors and the banks.
If the state and the governing political parties have been captured by financial market interests, we have to rely more strongly on extra-parliamentary institutions to control the supervisors. We need to involve civil society, whose interests and incomes have been imperilled by the crisis, more closely into the process.
I can think of two paths to go, which are not exclusive: One is to include more directly NGO like Attac into the process, i.e. give it a role in the advisory institutions which are mandated to set up new regulatory regimes, as well as in the monitoring and implementation processes. The second one is to make use of the newly formed class-action suits against imprudent and fraudulent behaviour of financial market actors and “develop” from the victims new NGO to be included into the above processes. Only if consumers, citizens and society representatives – also outside the legitimate parliamentary processes – can have their say, can the capturing of the supervisory authorities be held at bay.