Palley: “The Outlook for Macroeconomics and Macroeconomic Policy”

Heterodox economist Thomas Palley says:

I noticed that I posted Simon Johnson’s “Quiet Coup” and Dani Rodrik’s (mild) response. Here’s an alternative hypothesis. The economics profession has been party to the capture of economic policy and government by the financial oligarchy. I hope you will consider discussing this alternative hypothesis on your blog.

Here’s the preface to his paper, “After the Bust: The Outlook for Macroeconomics and Macroeconomic Policy,” outlining his arguments:

Preface, by Dimitri B. Papadimitriou, January 2009: “Change” was the buzzword of the U.S. presidential campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas I. Palley, the neoliberal economic policy paradigm underlying the current agenda must itself change if there is to be a successful policy response to the crisis. He observes that the financial downturn has exposed the faulty economics of the existing policy paradigm, thus presenting the opportunity for real change, but that there are profound political, intellectual, and sociological obstacles to such change.

The ideology of the economics profession—mainstream economic theory—remains unreformed, says Palley, and he warns of a return to failed policies if a deep crisis is averted. Since Post Keynesians accurately predicted that the U.S. economy would implode from within, there is an opportunity for Post Keynesian economics to replace neoliberalism with a more successful approach.

Palley outlines the policy challenges, noting that there is significant disagreement among economic paradigms about how to ensure full employment and shared prosperity. A salient feature of the neoliberal economy, which is supported by mainstream economic theory (e.g., free trade, deregulation, and the notion of a natural rate of unemployment), is the disconnect between wages and productivity growth that explains widening income inequality. Workers are boxed in on all sides by globalization, labor market flexibility, concern with inflation rather than with full employment, and a belief in “small government” that has eroded economic rights and government services. Financialization, the economic foundation of neoliberalism, serves the interests of financial markets and top management. Thus, reversing the neoliberal paradigm requires a policy agenda that addresses financialization and ensures financial markets and corporations are more closely aligned with the greater public interest.

Palley outlines several major obstacles to changing both economics and economic policy. Social democratic political parties are divided in terms of the merits of the neoliberal economic paradigm.Other obstacles include the dominance of neoliberal economics within the academic community and among policymakers, which is supported by a misplaced belief that neoclassical economics is a scientific fact. This belief is used by the academic establishment to block alternative points of view.

New Keynesian economics is a form of real-business-cycle theory in the tradition of Arthur C. Pigou rather than John Maynard Keynes, says Palley. Though mainstream economists are willing to recommend Keynesian policies in times of economic crisis, they are unwilling to change the core analytical assumptions driving modern neoclassical macroeconomics (an example of so-called“cuckoo” economics).The only satisfactory escape from this intellectual and political stew is the creation of a new, progressive Keynesian consensus. That will require placing economics at the center of the political stage.


Originally published at the Economist’s View and reproduced here with the author’s permission.