Sunday, February 27, 2011

Time for a new social deal

The global crisis has developed around three key stages. The first one starts with the financial crisis caused partly by the subprime crisis in the US and global imblances between the different economic blocks, leading subsequently to the rescue of a large part of the banking system. The second stage is the crisis of sovereign debts- which has offset the effects of fiscal stimulus plans in the US and Europe, leading to a tightening of public finances which will worsen current sluggish growth. The third stage of the crisis concerns social reaction against fiscal austerity and wage cuts from the poorer as well as the protests on the other side of the mediterranean sea due to massive speculation on food products.

This sequence will transform radically the world with greater instability and conflict around the control of raw materials and the fight to secure energy supply. In this scenario, governments need to be more attentive to the needs and aspirations of people.

The 2010 Social Watch report* warns about the danger of increased poverty and social deprivation. The highest costs of the crisis are born by the poor, who lost their jobs and their homes, and had also to pay to save the banks in the form of higher taxes. This social injustice , as showned by protests in Northern Africa, is not sustainable any longer.

Measuring progress against the Millenium Development Goals, not only in terms of income per capita, but in terms of 'capabilities' (or access to rights), the report shows that there has not been any progress since 2000 (whilst poverty had decreased in the previous decade). The Basic Capability Index (Bci), a synthetic index including mortality among children below five years, reproductive health and basic education, has showed slower progress during the last decade (+3%) compared to the previous one (+5%) for all countries. During the same period, per capita income increased about 19% over 2000-2009 (17% over 1990-1999). This indicates that higher income growth was not accompanied by more rapid social progress, despite international efforts to reach the Millenium goals.

In the countries which are today affected by massive protests, the report notes that there has been a marked deterioration of the Bci. This indicates that further aid and larger access to trade from developing countries become today an ethical imperative in order to avoid social chaos. Banks were saved with thousand billions of dollars, but not the poor who would need much less to be given a decent life.

It's time for a new social deal.

* see Social Watch report 2010 "After the fall"
Social watch is a network of 400 NGOs including Oxfam, Amnesty and WWF present in 62 countries.

Saturday, February 26, 2011

Economists should listen to people

Economics has never been as popular as today. Books, articles, blogs, lectures are spreading and influencing public opinion. People want to understand what is happening to the economy and how it is possible to improve the situation. Yet, economists have lost credibility as they failed to predict the current economic crisis, the biggest since the Great Depression.

It is true that some professional economists such as Paul Krugman have a particular talent to explain economic problems to the general public in an intelligible way. The reason why economics is so sympathetic is that it is regarded as an open, pragmatic discipline. Economics is not more scientific because it is based on extensive use of maths and sophisticated economic models. The problem is not that economics has a scientific purpose but that even sophisticated models can be inadequate for economic forecasts because they were based on wrong assumptions.

R.Schiller, in a recent article wrote : ' sometimes we need to turn off autopilot and think for ourselves, and when a crisis occurs, use our best human intellect". This resembles to what Keynes' set as a method for economic analysis, not because he was unable to put his theory into mathematical language - he was the author of a complex book on probability - but because he wanted precisely to use his intellect to explain what was happening during the Great depression and how we could get out from it.

in his 'Essay on the nature and significance of economic science' (1932), Lord Robbins, a British economist, became famous for his definition of economics: ' a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses'. This definition owes to neoclassical theory more than to unconventional wisdom. Economic thinking has evolved considerably, but it does not mean that economists can provide answers to all issues. Connections with other disciplines have enriched the nature of economics and its significance by considering human beings as actors being able to influence the functioning of markets.

Like Keynes, R.Schiller pledges for full account of human behaviour, which by definition cannot be reduced to mathematical analysis. He acknowledges that the " relatively few professional economists who warned of the current crisis were people, it seems, who not only read the scholarly economics literature, but also brought into play more personal judgment; intuitive comparisons with past historical episodes; conclusions about speculative trading, price bubbles, and the stability of confidence; evaluations of the moral purposes of economic actors; and impressions that moral complacency had set in, lulling watchdogs to sleep".

In economics, like in any other social science, there is no universal truth, but just propositions which need to be validated by historical or empirical evidence. But we should acknowledge that economics is not the 'dismal science' described by Carlyle in his controversy with Malthus. It is, indeed, an ethical and historical science, and therefore is not an exact or purely abstract science. People's economics needs to be further developed, looking at their fundamental needs and aspirations for a better society.