Rethinking Economics Where do we want to be?
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Rethinking Economics | TEF & The University Times
Contents Page 3 Rethinking starts here Page 4 TEF ‘13 keynote speaker profiles Page 5 Ireland’s lost generation? Page 6 Property taxes: Striking the right balance
Page 8 Rethinking education: How can we build a fair meritocracy? Page 9 Rethinking sustainable development Page 10 Reflections on the dismal science
Tickets Emily Meade Brian Stanley Séan Healy
The University Times Design Caelan Rush Owen Bennett
Coordinators Seán Gill Gary Finnerty Communications Owen Bennett Marc Morgan Howard Helen
Page 7 Redefining the Welfare State
Magazine Editors Owen Bennett Marc Morgan
TEF Commitee
This magazine was produced on behalf of the Trinity Economic Forum by The University Times. The University Times is produced with the financial support of Trinity College Students’ Union. It is editorially independent and claims no special rights or privileges.
Logistics Chris O’Connor Lorna McGinley Pierce Healy Workshops Tony O Connor Debbie Blair
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Rethinking Economics | TEF & The University Times
Rethinking starts here Trinity Economic Forum co-founders Seán Gill and Gary Finnerty explain the vision behind TEF’ 13’ and the neccessity of student-led thinking as we seek to restore economic prosperity to our country.
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EF 2013, due to be held on the 8th & 9th of February, will become Europe’s largest student economics forum. It will bring together over 400 students from across the country and further afield, to discuss, debate and participate in shaping the future of Irish economic policy. The aim is simple: to engage students in the policy making process. And why is this endeavour important? Because the “science” of economics is in crisis, as is most of the developed world and new thinking is required. It’s as simple as that. If not, the paradigm won’t change and we will be destined to repeat the same mistakes over and over again.
“The aim of TEF is simple: to engage students in the policymaking process” Rather than discuss what we can do and how we can change, we still revert to talking about what should have been done, what needed to be done, how it simply
shouldn’t have happened. It did happen though and as hard as it is, it’s time to get over it. “Such is life”, as they say. The conversation in Ireland today seems to be dominated by three different (often competing) voices: the economist who offers us the theoretically correct (but often impractical) answer, the business person who talks to us about the “bottom line” (but tends to dismiss the academic), and the politician who speaks to us about being in this together (while being somewhat removed from the “real economy”). Sadly there doesn’t seem to be an awful lot of productive conversation between them. TEF wants to change this conversation. By bringing together some of the people who could be sitting around the economic policy table in 10 years’ time, the forum will facilitate a constructive and open conversation, bridging the ideas gap between the varying perspectives and helping to develop a new generation of leaders. We want TEF to drive change, inspiring students and professionals alike to apply entrepreneurial flair to economic thinking and offer decisive, forward thinking leadership on economic policy. This will ensure a more informed Irish policy debate in the future. Last year, we were delighted to have the inaugural forum officially opened by Uachtarán na hÉireann Michael D. Higgins, who forcefully spoke about the need to “challenge the failed assumptions of the past”. His inspiring call-to-action of the 2012 delegates set the tone for the forum and helped us to develop the 2013 programme. This year we are addressing three key issues: Re-Thinking Economics, Generation Emigration and the proposed EU Banking Union. Attending keynote addresses and panel discussions, delegates will spend time with some of Ireland & the UK’s top Economic, Business and Political leaders.
Some of the highlights include an address by Lord Adair Turner (Chairman of the Financial Services Authority in the UK) on what lessons have been learnt from the great recession, a discussion with John Moran (Head of the Irish Department of Finance) about how Irish students can rebuild a prosperous Ireland and the inaugural Global Irish Leadership address by Willie Walsh (CEO of the International Airline Group). Two-day delegates will also have time to work on current policy issues: What an optimal property tax would look like? , How
“The real question posed by TEF is where do we want to be?” we can improve the social welfare system? and whether the Irish healthcare insurance market should be changed? And if your mind is on the jobs market, you’ll be glad to know that representatives from our two partnering firms (Citi & PwC) will be there to answer any questions you might have about their graduate and internship programmes (as well as any tips). We hope this magazine provides readers with an introduction to what TEF 2013 is all about and that you will join us for the twodays in February. As the oft-quoted saying goes - “we are where we are.” The real question posed by TEF, however, is where we want to be?
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Rethinking Economics | TEF & The University Times
TEF Keynote Speakers Lord Adair Turner FSA Chairman In September 2008 Lord Turner became Chairman of the FSA, and earlier the same year he was appointed Chairman of the Climate Change Committee, stepping down in spring 2012. Prior to September 2008 Lord Turner was a non-executive Director at Standard Chartered Bank, United British Media and Siemens; from 2000-2006 he was ViceChairman of Merrill Lynch Europe, and from 1995-99, Director General of the Confederation of British Industry. He was with McKinsey & Co. from 1982 to 1995, building McKinsey’s practice in Eastern Europe and Russia as a Director. He was previously Chair of the Overseas Development Institute (2007-10).
John Moran
Secretary General, Dept. of Finance As head of Ireland’s Department of Finance, having previously been head of Banking at the Department, he is responsible for economic, budgetary and fiscal, banking and financial service policy matters and the oversight of Ireland’s investments in and support for covered banks. Prior to his position at the Department of Finance, Moran was head of Wholesale Bank Supervision at the Central Bank of Ireland from 2010-2011. For eight years from 1997, Moran was CEO and Board member of Zurich Bank.
Andy Haldane
Executive Director, Bank of England
Andy Haldane has responsibility for developing the Bank of England’s policy on financial stability issues and the management of the Financial Stability Area. He is a member of the newly established Financial Policy Committee as well as several senior management committees of the Bank. He is also a member of the Basel Committee. In previous roles in the Bank, he has led work on risk assessment, market infrastructure and on international finance.
Willie Walsh CEO, International Airline Group Willie Walsh became chief executive of International Airlines Group (IAG) in January 2011, joining from British Airways where he was chief executive from October 2005. IAG is the holding company of British Airways and Iberia. It is one of the world’s largest airline groups with more than 400 aircraft flying to 200 destinations and carrying more than 55 million passengers each year. Walsh has previously held the role of CEO of Aer Lingus.
Tickets
One Day €10
Two Day €20
One day (Friday-only) tickets include: • Keynote Addresses & Panel Discussions. • TEF packs (TEF bag, pen, notepad & coffee cups.) • Networking with PwC and Citi. • Complementary food and drinks.
Two day tickets include:
Tickets can be bought online at trinityeconomicforum.ie
• Keynote Addresses & Panel Discussions. • Workshop sessions on policy issues. • TEF pack (TEF portfolio, pen, notepad, coffee cups & FT Weekend). • Networking with Citi and PwC. • Complementary food and drinks.
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Rethinking Economics | TEF & The University Times
Ireland’s lost generation?
Ciara Kenny, Editor of the Irish Times’ Generation Emigration series, outlines the dilemmas facing young Irish graduates.
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he most recent migration figures published by the Central Statistics Office (CSO) show that 35,800 people aged between 15 and 24 moved overseas in the year to April 2012, an increase of 1,300 on the previous year and more than twice the 2006 amount. With no sign of the outflow abating, there is no doubt that youth emigration has become a defining theme of our times. Of course, thousands of young people chose to move abroad during the boom when there were plenty of opportunities for them here, and these voluntary emigrants still make up a significant percentage of those who are leaving our shores today. But the doubling of the number of young people leaving since the height of the boom proves that emigration is not a “lifestyle choice” for everyone, despite what Minister for Finance Michael Noonan may like to think.
“The vast majority are hopeful their emigration is only temporary” Just one in four people between 15 and 24 is now at work in Ireland. Data from the Organisation for Economic Co-operation and Development shows that 34 per cent of those who had a job in 2011 were employed on a temporary rather than permanent basis, a three-fold increase on 2005 figures. The diminishing prospect of permanent work and lower salary expectations are breeding deep uncertainty among young people about their long-term prospects in Ireland. A survey carried out by the National Youth Council of Ireland in 2011 found
young people could cope with having no money in the short term, but not knowing whether they would have a secure income next year or the year after made it impossible to plan for the future. It is no wonder that so many young people are looking to places like Canada, Australia and New Zealand where their skills and qualifications will be better remunerated. For the majority, the opportunity to live and work abroad, even if it is thrust upon them through a lack of prospects in Ireland, is a welcome opportunity for adventure and new experiences. Most young people who have contributed to Generation Emigration, the ongoing Irish Times forum for the Irish abroad, are happy to be away from Ireland at the moment. While some express anger at being “forced” out of the country because of unemployment or poor prospects, most are at least glad that the option is there to travel or work elsewhere. The majority of emigrants in the under-25 age group surveyed by Ipsos/MRBI for The Irish Times last March reported being happier than they were in Ireland, with better jobs, a healthier lifestyle and an ability to save money every month. One in three were unemployed before they left, but nine out of ten were working abroad when the survey was conducted. Some 86 per cent of those who had found a job said it was on par or better than the one they had in Ireland. While nothing can replace seeing and touching the ones they love most in person, modern technology keeps them better connected to Ireland than any other generation of emigrants before them. They can Skype their mammies, monitor Irish news online, and share momentous events and frivolous thoughts on Facebook and Twitter. Through webcams and news feeds, they comment on nights out they miss, watch friends getting married and nieces or nephews take first steps. Ireland goes on without them, but they are kept well informed of everything they are missing.
The big question most of them have now is whether they will be able to come back. While some contributors to the Generation Emigration series have said they are disillusioned with Ireland and can’t see themselves ever returning to live here, the vast majority are hopeful that their emigration
“The big question this generation have now is whether they will be able to come back” is only temporary, with seven out of 10 people surveyed by the Irish Times saying they hope to be back permanently in the future. Being close to friends and family, wanting to raise their children in Ireland, the Irish way of life, the culture, the GAA and the craic are commonly cited factors which many recent leavers expect will lure them home when circumstances permit. Research carried out in University College Cork has shown that about half of the 500,000 people who emigrated during the 1980s and early 1990s came back to live in Ireland during the Celtic Tiger years. Significant “life stage” events such as buying a home and having children had a significant impact on their decision to move back, which was facilitated by good job prospects here when the economy was booming. But the UCC research also found that the longer people stayed away from the country they grew up in, the less likely they were to return to live permanently. Only time will tell whether or not Ireland will be able to rebuild its economy in time to offer this generation of young emigrants attractive enough opportunities to return permanently before they have rooted themselves elsewhere.
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Rethinking Economics | TEF & The University Times
Striking the right balance
The introduction of property taxes has become a political nightmare for the coalition government. Here, Emmet Kiberd focuses on the issues at stake.
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n June 1977, the Irish electorate handed Fianna Fáil a resounding, yet unexpected victory in the election of the 21st Dáil. The expectation of a Fine Gael-Labour government was to prove important, prompting Jack Lynch’s opposition party to insert multiple sweeteners into its campaign manifesto, among them the promise of “rates abolished on all dwellings from next January”. The return of the property tax has been inevitable ever since, not least with government finances becoming increasingly precarious in recent years. There are multiple reasons for the reintroduction of a property tax in Ireland. Irrespective of the recent crisis, many have argued that it is inherently unsustainable to provide local government services without an explicit way of funding them. A property tax (like water charges, similarly abolished and soon to return) is a way of locally funding local expenditure on services such as fire brigades, sewerage, parks and public libraries. Without local taxes, local authorities rely on central funding, which is highly procyclical: we saw this during the boom years of the 2000s, when a significant part of government revenue came from stamp duty and property-related income taxes. A further argument in favour of property tax is that it broadens the tax base, allowing taxation to be spread more evenly across multiple sources. The need for a broader base can be seen in the elevated level of rates paid by businesses, who have not been exempt since 1977. Elimination of property tax, motor tax and water charges in the past has contributed to higher income taxes, which have the effect of discouraging people from working.
Nonetheless, the decision to reimpose the property tax in Ireland has been motivated primarily by the need to arrest the rapid expansion in sovereign debt (greatly exacerbated by the banking crisis) seen since 2008. Regardless of differing views on austerity and fiscal stimulus, it seems imperative that the Irish government return to a structural surplus, i.e. a situation where the government’s revenues ex-
“Without local taxes, local authorities rely on central funding, which is highly procyclical” ceed its spending. For the moment, the gap in government finances has been filled by financial assistance from the EU and IMF, but this is conditional on reforms such as the property tax that bring government revenues into line with spending. In designing an optimal property tax, as with any taxation system, it is important to consider efficiency, equity and ease of implementation and collection. The system proposed by the Irish government would levy a tax based on the assessed market value of a house: a house is placed into a price band (e.g. €150,000200,000), valued at the midpoint of that band (in this case €175,000) and taxed at 0.18% of that value (in this example €315). There are several problems with a system based on market value such as this one. In terms of efficiency, many economists
would take issue with the incentives offered by the system: the more you improve your house, the more valuable it becomes, and the more you are ‘punished’ on your tax returns. This could discourage development of sites for commercial purposes or for home improvement. There is also an argument to be made that such a tax can be inequitable, not overall, but for certain vulnerable individuals. Although the system takes into account the value of the property, it fails to account for individuals with both low incomes and highly valued property. There are likely many cases of this, including farmers and elderly people in rural areas whose houses are valued far above their original cost of construction. Some commentators have suggested this issue be solved by deferring property tax payments until the properties are sold. An alternative to the proposed system is one based on the value of the site, rather than the buildings therein. This would deal with the perverse incentives offered by a market-value-based system: in fact, holding a derelict site without developing it would be costly, as you would not be earning enough revenue to offset your property tax bill. In this way, a site-value system encourages property owners to get the maximum possible return from their land, which should result in economically beneficial outcomes. One frequently cited problem with a sitevalue system is the lack of a database of site values. Although an official site database has not yet been compiled, Ronan Lyons of Daft.ie argues that there are fewer factors that influence the value of a site (mostly the site’s area and the proximity of amenities) than those that determine house prices (including factors that are difficult to value precisely, such as double glazing or a converted attic). Finally, the implementation and collection of the property tax may prove problematic in coming months. The introduction of a household charge (albeit a much more regressive tax than the incipient property tax) was met with anger around the country, even culminating in opposition politicians telling their constituents not to pay the tax. It is possible that Irish taxpayers are nearing the limits of their ability to pay: for example, there is the generation of householders in negative equity who see their disposable income shrink as they are once again punished for buying at the wrong time.
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Rethinking Economics | TEF & The University Times
Redefining the Welfare State Tony O Connor TEF Workshop Co-ordinator
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n light of the ongoing crisis, and the rise of emerging economies, certain commentators have seen fit to question the sustainability of the European welfare state. The implicit assumption in these suppositions is that a welfare state saps economic growth. This isn’t strictly true. Indeed, a casual look at history shows that the welfare state might have helped contribute to growth, by preserving social stability. For example, in late nineteenth century Imperial Germany, Chancellor von Bismarck introduced accident and social insurance, as well as a form of socialised medicine. However, his motivation for doing so was not out of endearment for socialistic ideals, which he detested; rather, he wanted to bolster support for the conservative status-quo, and to sway workers away from political radicalism. Thus, one could say that Bismarck’s actions were growth-enhancing in consequence if not in intention, for by combating the socially corrosive effects of real poverty and perceived unfairness, they helped preserve the set of arrangements that permitted Germany to industrialise rapidly. A similar utilitarian outlook was prevalent around the time of the publishing of the Beveridge Report, in 1942. Here, the intention was to help individuals manage their affairs better; benefits in return for contributions, and a subsistence income, as opposed to concerns over equalising income. However, as John Kay highlighted in a recent Financial Times article, discourse around welfare came to be heavily influenced by ideas of human rights. For example, Article 25 of the UN Declaration on Human Rights states that “everyone has the right to a standard of living adequate for the health and well-being of himself and of his family.” Over time, rights have become something of a heuristic in policy-making; instead of justifying why a particular benefit contributes to the common good, it is not
rare for one to simply claim a right to the benefit, as if that should end the question. More formally, it is best to analyse the issue welfare through the concepts of equality of opportunity and equality of outcome. The distinction is not concrete. Recent academic research, such as by Miles Corak at the University of Ottowa, finds strong empirical evidence for the ‘Great Gatsby Curve’, which posits that greater inequality is associated with less generational mobility over time. Implicit here is a sort of diabolic loop, where high inequality today may reinforce higher inequality tomorrow, if wealth accumulates over time. Thus, wishing to equalise equality of opportunity, insofar as it is possible, warrants a cer-
tain degree of equality of outcome. Of course, choosing between the two warrants choosing between generations. For example, should we focus on providing pre-primary school education
and childcare support, which would require lower pensions and higher retirement ages? As research by Novel Laureate James Heckman finds, the former provides
“Issues of social justice relate not only to what kind of welfare is bestowed, but also how” much higher social returns than the latter, though the benefits accrue distantly in the future, when such children enter the workforce. Thus, there may be a conflict between the elderly, who claim a right to a decent retirement, and the young, who would claim a right to a decent education. However, the young don’t vote, so there will be a skew in electoral preferences towards providing for the old. Such issues of social justice relate not only to what kind of welfare is bestowed, but also how. For example, those in favour of equality of outcome would argue for mean-testing of benefits such as child benefit. However, as Chicago economist Casey Mulligan explains in a recent book, such benefits may disincentivise individuals from seeking a higher wage, as obtaining one would result in such benefits being withdrawn. In this manner, a welfare system that uses means-testing may be be perceived as fairer, but at the expense of growth. Policymakers in the future face two certain difficulties. Firstly, how to design welfare in such a way that we move toward the twin aims of equality of opportunity and outcome, while not putting the interests of one generation over another. However, a complicating factor is to maintain the current harmonious state of society. Bismarck had an easy task in comparison.
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Rethinking Economics | TEF & The University Times
Rethinking education: How can we build a fair meritocracy?
Babak Moussavi Editor, Social Justice First
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n a hypothetical meritocracy, a person’s success is dependent on his own actions. By working hard, a person shall be rewarded for his or her performance, usually in the form of financial remuneration. If he is smart too, however, he will similarly be able to rise higher than his less intelligent peers, while expending less effort than them. That seems to pose a fundamental problem about the fairness of meritocracy, by suggesting the platform does not need to be balanced to begin with. Conceiving of merit as merely the deployment of one’s ‘abilities’ seems to render hard work to be of secondary importance; the laid-back genius may be more likely to succeed than the hyperactive fool. If effort does not correspond with rewards, however, then the idea of meritocracy appears neither very illuminating, nor fair. Fairness is often – mistakenly – dismissed as a vague concept. John Rawls built a theory of justice upon it. Humans seem to have an innate sense of fairness, as they do about what is ‘good’. They may disagree at the margin, but the idea is grounded in a belief in desert – that one should be rewarded according to one’s efforts, and that this should hold true for everyone. Note that people have a natural dislike of
free riders, who benefit from others’ work, because of the instinctive belief that they act unfairly. Can we then conceive of a fair meritocratic society? Crucial to its creation appears to be the achievement of substantive equality of opportunity. This means more than everyone possessing political rights, but that arbitrary, ‘lucky’ factors about someone (such as gender, race, or even accent) are tempered as determinants of that person’s fate. Where there is equal opportunity, a person’s actions are the main determinant of his outcomes, regardless of who he (or she) is. Admittedly, we can never fully eliminate luck; we are neither genetically identical, nor rational homo economici. But assuming that fair meritocracy is desirable, which policies might help achieve it? There is insufficient space to consider all such methods, but here are a few basic, practical suggestions. First, taxation could be deployed to mitigate luck, combat the fundamentally unfair phenomenon of negative externalities (where a third party pays for the harm caused by someone else), and incentivise actions and behaviour that are good for both the individual and society overall. The most obvious way is by raising the inheritance tax to reduce social stratification: having the good fortune of being born into a rich family should not mean losing
all incentive to work hard for success. Society too should benefit from this good luck. Chance dictates whether a child is born into a rich family, or to a single mother in an urban slum. In order to mitigate such arbitrariness, some inherited good fortune can be taxed when passed between generations and used to fund universally beneficial public services. A carbon tax should also be levied, to incentivise innovation in cleaner technologies, and correct the obvious market failure of pollution – a blatant negative externality. A land or site value tax too, to prevent wealthy land owners from idling, could be raised. These increases could then be balanced with a comparable decrease in income tax. Though it should remain progressive, this tax is on work, which is something that we want to ensure is rewarding. Education policy is another crucial tool. Schools should provide the teaching and mentoring that allows pupils to fulfil their capabilities. Good schools need good teachers: high-achieving graduates could be incentivised to teach in low-achieving, state-run schools through higher starting salaries, which may also elevate the profession’s prestige, as in Finland – a leader in international education standards. But improved schooling is not sufficient. For example, Will Hutton points out in Them and Us, a British child born into an affluent, well-educated family hears an average of 2153 words per hour, whereas a child in a welfare home hears just 616. The effect on cognitive development is astounding; tackling child poverty is therefore also necessary. There is obviously no easy policy lever here: the state cannot simply enter a family’s (or single parent’s) home to give a child a ‘proper’ upbringing. Perhaps state funding for childcare would be wise though, as judged from the Scandinavian experience. Thirdly, the principles behind the welfare state must be rearticulated and reaffirmed. This is not about ‘scroungers’ and ‘strivers’. The foundations that William Beveridge believed should underpin a decent society were based on the view that a person who falls upon hard times, through little fault of his own, should be lent a helping hand to get back up. Only then can he aspire to greater heights. Only then can his merit be fairly rewarded.
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Rethinking Economics | TEF & The University Times
Rethinking sustainable development Antoine Cerisier, opens the debate on how best to reconcile sustainability with economic development.
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nvironmental issues have become more salient in recent decades due to greater awareness of ecological degradation and growing scientific research on climate change. A recent World Bank publication observed a 4°C degree rise in global temperatures by the end of the century would push some countries or regions “to the brink of collapse”. In 1972, The United Nations Conference on the Human Environment took place in Stockholm and is often considered as the first example of international cooperation on environmental matters. However, the link between environment and development was largely ignored until the late 1980s. Industrialisation and modernisation had severe environmental consequences in emerging economies, as the most rapidly growing industrial sectors were also the most polluting ones. A few years ago, China even surpassed the United States as the world’s largest emitter of carbon dioxide. However, under the principle of “common but differentiated responsibility”, rapidly industrialising countries like China and India have often refused to commit to strict emission targets. They rightly argue that Western states are historically responsible for CO2 emissions as greenhouse gasses are believed to stay in the atmosphere for more than 100
“Like democracy or human rights, it has become a principle which no one would dare question” years. A solution had to be found to break the development-environment deadlock. In 1983, Norwegian politician Gro Harlem Brundtland was appointed by the UN to chair a commission on development and environmental challenges. Their report was published under the title Our Common Future and officially adopted by the UN shortly thereafter. Its main contribution was the sustainable development concept – defined as “development that meets the
needs of the present without compromising the ability of future generations to meet their own needs”. The report highlights three main pillars: economic growth, environmental protection and social equality. While sustainable development has developed into a very mainstream concept, it has also been subject to growing criticism, for a number of reasons. Its focus on economic growth is highly questionable: if growth has no positive impact on environmental protection - but quite the opposite - it should not be an operational objective of sustainable development. De-growth scholars such as Serge Latouche argue that
earth. The trend towards sustainability has recently encouraged cosmetic environmentalism on the part of both governments and business. British Petroleum’s homepage has a “sustainability” subsection, despite the firm’s poor record in environmental preservation. The company also changed its name to Beyond Petroleum, even though fossil fuels make up 95% of their energy mix. This PR gimmick, known as green-washing, has been used extensively by oil corporations and other business sectors. In Greek mythology, Panacea was the
the very term “sustainable development” is an oxymoron since growth economics relies heavily on high output and thus environmental degradation. Furthermore, the concept may appear too simplistic and overly consensual. The relationship between development and the environment is a complex one and sustainable development often ignores major tradeoffs experienced by developing countries. For example, the Ugandan government had to make difficult policy choices regarding fish stocks in Lake Victoria: a large number of species have been fished to extinction by the local population whose income depends on it. Other developing countries – especially in Sub-Saharan Africa – face similar dilemmas with forest-related resources. Despite its flaws, the Brundtland Report introduced an interesting concept which acknowledged both the development imperative and the need for environmental protection. Unfortunately, sustainable development has lost most of its original meaning. Like democracy or human rights, it has become a principle which no one would dare question; everyone loves it, including some of the worst polluters on
goddess of Universal Remedy. With conceptual flaws and green hypocrisy, sustainable development has become just that – a trendy but rather void analytical concept which fails to capture the complexity of economic and environmental issues. Pompous concepts will not solve the problems at hand. Instead, citizens and policymakers could – and should – rethink global environmental policy in a number of ways: by questioning ever-increasing trade and the ecological cost of transporting greater volumes of goods across large distances; by finding viable alternatives to fossil fuels; and by changing consumerist behaviours in the West (the average American consumes approximately as much as 32 Kenyans annually). In many ways, sustainable development as it is currently conceived perpetuates the disease by treating only the symptoms. This article first appeared on socialjusticefirst.com Antoine Cerisier is a graduate of University College London, currently studying International Relations at the University of St. Gallen, Switzerland.
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Rethinking Economics | TEF & The University Times
Reflections on the dismal science Trinity-based economist Constantin Gurdgiev muses on the state of modern economics
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rom student walkouts and boycotts, to ‘Occupy Wall Street’ camps and Buckingham Palace, and even to the very home of the economics ‘Nobel Prize’, signs abound to suggest that the global financial crisis had thrown economics into the spotlight for failing to predict the largest singular event in economic history this side of the Great Depression. In a follow up to the 2012 Nobel Memorial Prize in Economics, Peter Nobel publicly denounced the award as ‘trademark infringement-unacceptably robbing the real Nobel Prizes’ of their value. After the Great Recession, the view from the Main Street is that economics is closer in nature to quackery than to science. This view, although reflective of some real errors that we economists have allowed to accumulate, is deeply incorrect. As a practitioner of the subject, I would not argue that economics is a science in the strict sense. The subject permits no strictly controlled and/or fully replicable experiments. Even in behavioural economics, the degree to which the experiments are controlled is bounded by the reality of infinitely varied and autonomous decision-making. Within economics itself, and especially within macroeconomics, too little attention is given to the peculiar nature of uncertainty. For example, one recent paper using a standard DSGE (Dynamic Stochastic General Equilibrium) model, augment-
“Too little attention is given to the peculiar nature of uncertainty” ed to allow the volatility of cross-sectional uncertainty to be time-dependent, shows that roughly 60% of US businesscycle output fluctuations, since the mid1980s, can be explained by shocks to idiosyncratic risks. However, such extensions to the model, which explicitly account for idiosyncratic uncertainty and volatility, are relatively new and are yet to gain the prominence that is accorded to their more
deterministic or stable equilibrium-driven counterparts. Even with more advances in mathematical modelling tools, economics – a study of social and individual decision-making in the presence of scarcity - is too rich, too dynamic, too deeply vested in uncertainty and behavioural biases to allow the pursuit of deterministic forecasts and conjectures. As a discipline, therefore, economics trades predictability for a quasi-philosophical interpretation of evidence. This evidence includes observations underwritten by variation and diversity, by dynamism and by multi-dimensional dependencies between many individuals, from which ultimately the observations are made. This is often viewed as economics’ main weakness. In modern society, we abhor un-
certainty and strive for stability and determinism – be it at micro level, in the capacity of social welfare nets to absorb cyclical household income shocks or at a macro level, in pursuing policies to lower volatility within the business cycles. As Nassim Taleb remarked, human beings are not ‘wired’ for living in uncertainty. Yet, uncertainty is the core fabric of our world, and as such, uncertainty is the ‘dark matter’ of economics. If economics is an inquiry, subject to evidence, and not a science, subject to conclusive proof, then economics cannot be responsible for delivering anything more than a systemic dictionary for narrating the space of potential outcomes or environments. Accepting this, however, requires real change in the way decision makers and society at large use economics. A system’s ability to withstand shocks and learn from adverse events relies on its
adaptive capacity. Over-reliance on prescribed responses and deterministic forecasts only increases the inherent fragility of social systems. We have witnessed these processes unfold in front of our eyes, when consensus-based decision making in Europe was tested by the crisis. Economists have solutions to deal with this. It is the political and social systems that exhibit inherent inability to cope with shocks or to learn from them in their aftermath. Indeed, as a growing literature relating to financial crises suggests, the shocks themselves were, at least in part, the outcome of consensus-determined analysis and regulatory prescriptions, which characterised the economic system prior to 2008. So the structural challenge for economics today (beyond the normal course of inquiry) does not rest with the need for development of new economic models or new econometric tools for forecasting. In fact, the sheer range of current research in economics – as exemplified by the range of debates at the latest American Economic Association meeting in San Diego, or by the award of the 2013 Fischer Black Prize to a researcher like Ulrike Malmendier, or even
by the work recognized last year, and indeed in recent decades, by the Nobel Memorial Prize committee – shows that economics has plenty of tools and theories to handle a much wider scope of topics and phenomena than all physical sciences combined. Instead, the challenge for modern economics is to encourage among society and among our own academic and policy work-practices, a philosophically-driven approach to debate and discourse. Such a debate should start by recognizing, as our experience of the events prior to and during the Great Recession have clearly demonstrated, the value of dissent, debate, and the value of challenging the established consensus. In economics, more than in any other field of inquiry, saying ‘I disagree’ will always hold more value than ‘I consent’.
SCHEDULE Friday 8th February 2013 16:00 -16:10 Welcome Address Patrick Prendergast (Provost, TCD) Eamon Gilmore TD (An Tanáiste)
16:15 -17:15 After The Great Recession, what have we learned? Lord Adair Turner (FSA) Andy Haldane (Bank of England)
Saturday 9th February 2013 10:15 -11:25 Rethinking Economics Rory Sutherland (Ogilvy UK) Liam Delaney (Sterling) Cameron Hepburn (LSE)
12:00 -12:50 Teaching Economics Differently? Alan Kirman (Aix-Marseille 111) Steve Keen (Western Sydney) Eleanor Denny (TCD) Wendy Carlin (UCL)
18:00 -18:50 Generation Emigration Panel Claire Byrne (RTÉ) Carmel O’Connor (PwC) Terry Neill (UBM) / Alan Barrett (ESRI) James Doorley (NYCI)
18:55 -19.15 The IMF Overview Peter Breuer (IMF)
19:40 -20.10 The Troika Bailout Stephen Kinsella (UL) Seamus Coffey (UCC)
12:55 -14:15 Policy Workshops
15:00 -15.45 The Future of Ireland’s Young People John Moran (Dept. Finance)
15:50 -16.30 Global Irish Leadership Willie Walsh (IAG)
20:15 -21.05 EU Banking Union Panel Arthur Beesley (Irish Times) Brian Hayes (Citi) Brian Lucey (TCD) Fiona Muldoon (Irish Central Bank)
21.05 -23.00 Drinks Reception & Entertainment
15% off Irish Rail train fares with a TEF ticket. More deails on the TEF website.