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post-autistic economics
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issue 35
contents
PAE
Review index
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Forum on Economic
Reform In recent decades the alliance of neoclassical economics and neoliberalism has hijacked the term “economic
reform”. By presenting political
choices as market necessities, they have subverted public debate about what
economic policy changes are possible and are or are not desirable. This venue promotes discussion of economic
reform that is not limited to the one ideological point of view. Some Primitive Robust Tests of Some
Primitive Generalizations Kurt Rothschild (University
of Linz, Austria) ©
Copyright: Kurt Rothschild 2005 Few economists – in fact few
people in general – would deny that the economy is a very complex phenomenon
with many interdependencies and that complex phenomena are difficult to
analyse. Many of the important questions raised by economic theory and
economic policy cannot be answered easily and definitely because of the
dynamics and complexity of the economic system. In the fifties and sixties of
the last century this was clearly visible when economic policy controversies
were dominated by the metaphor of “magic polygons” (normally triangles or
pentagons) of desirable targets: growth, price stability, full employment,
balanced external relations, and a just or fair distribution of incomes. The
“magic” element mirrored the complexity and the interdependencies of the
system which prevent a full simultaneous achievement of all the desired
items. Quite apart from differences in the preferences for the competing
targets there were considerable uncertainties and disagreements with regard
to trade-offs and combinations connected with various policy decisions.
Economic theory and increasingly sophisticated empirical and econometric
studies helped to gain some insights but could not provide definite final
answers. Complexity, situational and historical differences, lack and
weakness of data all contributed (and still contribute) to a wide field of
observations which show that every decision requires careful considerations
of the question which results are probably relevant in a given situation. The
diversity of results also contributed to an awareness of the uncertainty and
openness of any action taken. Room for discussion and controversy was an
obvious and accepted necessity. With the advance of the neoliberal revolution, with Ms Thatcher’s TINA (There Is
No Alternative) pronouncement and the “Washington Consensus” the situation has
dramatically changed. At least in the political and public sphere the “magic”
has disappeared and has given place to some simple catchwords which are taken
as reliable signposts for an economic policy leading to growth and welfare
always and anywhere. Forgotten is the necessity for a careful weighing of
advantages and disadvantages, of trade-offs, winners and losers in connection
with different approaches. Deregulation, Privatisation, Balanced Budgets,
Central Bank Independency, Slim States are taken as guarantors for
satisfactory economic outcomes. Economic theory and applied economics
continue of course to show the diversity and fragility of outcomes under
different conditions1. But the more sophisticated and demanding
these studies become (which is part of the scientific progress) the less do
they influence the interest-driven public policy and policy discussions. Too
difficult to be understood fully by the layman they are either neglected in
the public discussion or reduced to vulgarised simplifications which can be
used to support the chosen neoliberal path. Rather than showing the
discrepancy between the simple neoliberal folklore
and the diversified assumptions and approaches of economic theory I want to
present in a similar simple way some robust economic facts in order to show
that the neoliberal catch-phrases cannot be taken
as reliable guides. There is a German proverb which says “Auf einen groben Klotz gehört ein grober
Keil” (“When dealing with a rough log you need a
rough wedge”) which is used here. The primitive generalizations are met with
primitive answers which cannot reveal the whole “truth” but should be
sufficiently robust to shatter the generality and credibility of the attacked
assumptions. What I am going to do is to
confront a few simple but strongly held neoliberal
articles of faith with a very rough picture of long-run experience
(1970-2004) of sixteen Western European OECD countries. The long period
should help to iron out short-term shocks and special partisan policies,
while a rough division of the sixteen countries into “good guys” and “bad
guys” by neoliberal standards presents the
stipulated robustness of the argument. In each of the following
examples the sixteen countries will be divided – for each characteristic
under discussion – into two groups: an upper group of the eight “best”
performers (by neoliberal standards), and a lower
group of the eight “worse” performers (always based on averages of the period
1970-2004). An analogous grouping of the sixteen countries is then provided
for characteristics which are supposed to be the consequence of good
behaviour2. The degree of correspondence between “cause” and
“effect” groups can then be regarded as a rough indication of the validity of
the simple beliefs. The procedure will be at once clear with the following
examples. An important item among the neoliberal targets is the achievement of price stability.
This is taken up in the first two examples postulating that low inflation is
beneficial for economic growth and low unemployment. (1) Low inflation promotes economic
growth In Table 1 the left part (1.1)
contains the sixteen countries ranked with regard to inflation rates (annual
change of consumer prices), and the right part (1.2) the ranking according to
GDP growth rates3. The figures in brackets below the upper and the
lower half show the range of values for each group. Thus in the case of
inflation we have a range of 3,1% for Switzerland to 5,6% for Norway in the
upper half and of 5,9% for Finland to 12,9% for Greece in the lower half.
(Averages for all countries are given in the Appendix). Comparing parts 1.1 and 1.2,
the quoted assumption demands that countries in the upper half, i.e. low
inflation and high growth (L/H for short) should coincide, as well as
countries in the lower half (H/L) indicating that high inflation is assumed
to hamper economic growth. As can be seen these required coincidences are by
no means the rule. They apply only to six of the sixteen countries: Austria,
Netherlands, Norway (L/H) and Sweden, UK and Italy (H/L). For the other ten
countries we have either high inflation coinciding with high growth (H/H),
viz. Finland, Ireland, Spain, Portugal, and Greece, or L/L countries
(Switzerland, Germany, Belgium, Denmark, France). TABLE
1 1.1 1.2 Inflation GDP Growth Annual % change of CPI Annual % change Switzerland Ireland Germany Norway Austria Portugal Netherlands Spain Belgium Finland France Greece Denmark Austria Norway Netherlands (3.1% - 5.6%) (5.2% - 2.5%) Finland Belgium Sweden France United Kingdom Italy Ireland United
Kingdom Italy Germany Spain Sweden Portugal Denmark Greece Switzerland (5.9% - 12.9%) (2.4% - 1.3%) Thus a first look shows dramatically that the simple generalization regarding inflation and growth is strongly contradicted by our rough look at reality. One reason for this (perhaps) surprising result is however |
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easily recognized. It concerns the inhomogeneity of the countries considered. When we
distinguish between economically more advanced and less advanced countries we
can allow for a special “catching-up” effect for the latter group giving it a
special growth advantage. Counting as less advanced the four countries (in
alphabetic order) Greece, Ireland4, Portugal and Spain we see that
all four have a high rank in the growth table. The positive catching-up
factor may have decisively counteracted negative inflation influences,
enabling all four countries to move into the H/H group. It seems therefore
appropriate to look at the situation when these four countries are excluded.
This is done in Table 1A. We now get twelve cases of which eight coincide
with the stipulated rule (L/H: Austria, Netherlands, Belgium, France; H/L:
Denmark, Sweden, UK, Italy) and four contradicting it (L/L: Switzerland,
Germany; H/H: Norway, Finland). With 8:4 in favour of the “rule” the
fragility of the “traditional” belief is less gross than before but still
considerable. TABLE
1A 1A.1 1A.2 Inflation GDP
Growth Annual % change of CPI Annual % change Switzerland Norway Germany Finland Austria Austria Netherlands Netherlands Belgium Belgium France France (3.1% - 5.4%) (3.3% -2.4%) Denmark Italy Norway UK Finland Germany Sweden Sweden United Kingdom Denmark Italy Switzerland (5.4% - 8.3%) (2.3% - 1.3%) (2) Low inflation promotes low
unemployment5 Just as in the former and in
the following examples the upper halves of 2.1 and 2.2 contain the desirable
cases (low inflation and low unemployment) and the lower halves the opposite
combination (high inflation and high unemployment). As before, correspondence
between the two sides (here: L/L and H/H) confirms the standard assumption,
and L/H or H/L contradict it. As Table 2 shows, there are 12
cases confirming the postulate and 4 (Belgium, France, Portugal, Sweden)
contradicting it. With a relation of 12 to 4 this assumption fares better
than the previous one but still rests on weak foundations. For less obvious
reasons than before the four “catching-up” countries seem to play a special
role. They form – together with Italy – the group with very high inflation
and unemployment rates. When they are excluded the result for the remaining
twelve countries shrinks to 8:46. The four contradicting cases are
divided into two L/H cases (Belgium and France) and two H/L cases (Portugal
and Sweden) reflecting the role of different policy targets and policies. TABLE 2 1A.1 1A.2 Inflation GDP Growth Annual %change of CPI Annual
% change Switzerland Norway Germany Finland Austria Austria Netherlands Netherlands Belgium Belgium France France (3.1% - 5.4%) (3.3%
- 2.4%) Denmark Italy Norway UK Finland Germany Sweden Sweden United Kingdom Denmark Italy Switzerland (5.4% - 8.3%) (2.3%
- 1.3%) (3) Low government expenditure (slim
states) promotes GDP growth As Table 3 shows, we get 10
confirming cases (L/H and H/L) and 6 contradicting cases (L/L and H/H). As in
all cases where growth is involved, the special catching-up effect dominates
and it is again interesting to look at the twelve “advanced” countries. The
relation between conformity and contradiction now shrinks from 10:6 to 6:6.
Finland remains as the only advanced country belonging to the L/H group. TABLE 3 3.1 3.2 Government Expenditure GDP Growth As % of GDP Annual % change Spain Ireland Switzerland Norway Portugal Portugal Greece Spain United
Kingdom Finland Finland Greece Ireland Austria Germany Netherlands (35.3% - 45.8%) (5.2% - 2.5%) Norway Belgium France France Italy Italy Austria United Kingdom Denmark Sweden Netherlands Denmark Sweden Switzerland (45.8% - 57.0%) (2.4% - 1.3%) Next we turn to the standard
assumption that trade unions and corporatism – by disturbing the market
mechanism and keeping up wages – are detrimental for growth and create
unemployment. (4) Low Trade Union Density (TUD) is favourable for GDP growth In Table 4 the upper halves
confront low TUD (trade union membership as a
percentage of non-agricultural employment) countries with high growth
countries and the opposite applies to the lower halves. Correspondence
consequently implies the stipulated connection L/H and H/L. From Table 4 we
get a draw of 8:8 between affirmation and negation. However here again taking
into account the special growth preponderance among the four late-comers
leads to a radically changed picture. Removing them from the sample results –
for the remaining 12 countries – in a (surprising?) relation of 4:8, i.e. a
clear domination of contradicting cases. The four “surviving” affirmative
cases are France, the Netherlands (L/H) and Denmark and Sweden (H/L). TABLE 4 4.1 4.2 Trade
Union Density GDP Growth As % of non-agricultural employees Annual % change France Ireland Spain Norway Greece Portugal Portugal Spain Switzerland Finland Netherlands Greece United
Kingdom Austria Germany Netherlands (6.1% - 29.6%) (5.2% - 2.5%) Italy Belgium Ireland France Austria Italy Belgium United Kingdom Norway Germany Finland Sweden Denmark Denmark Sweden Switzerland (30.6
– 77.2%) (2.4% - 1.3%) (5) Low TUD
promotes low unemployment The upper halves contain
“desirable” low rate countries, the lower half high rate countries, i.e.
correspondence (L/L and H/H) involves confirmation. Here the special growth
differentiation is irrelevant and the data for the 16-country case and the 12-country
case yield the same result of 50% correctness: 8:8 and 6:6 respectively. It
is noteworthy that Austria, Denmark, Norway, and Sweden (the “Scandinavian
Model” states) all fall into the contradictory H/L group. Finally we take up the case of
corporatism and growth which to some extent coincides with the TUD case, but goes beyond it by covering also other
elements (see Appendix). TABLE 5 5.1 5.2 Trade
Union Density Unemployment As % of non-agricultural employees Annual
% rate France Switzerland Spain Austria Greece Norway Portugal Sweden Switzerland
Portugal Netherlands Germany United
Kingdom Denmark (6.1% - 29.6%) (2.0% - 6.3%) Italy Greece Ireland United Kingdom Austria Finland Belgium France Norway Belgium Finland Italy Denmark Ireland Sweden Spain (30.6% - 77.2%) (6.7% - 13,5%) (6) Low corporatism favours high GDP
growth This comparison yields a
result of 8:8 for the sixteen countries and 6:6 for the twelve. The
difference vis-à-vis the TUD result for the group
of twelve is caused by shifts of Germany from a low TUD
value to a high Corporation Index and of Belgium from a high TUD value to a low Corporation Index. These shifts
improve the correspondence with growth. TABLE
6 6.1 6.2 Corporatism GNP
Growth Ranking from 1 to 16 (1= low,
16 = high) Annual
% change United Kingdom Ireland Switzerland Norway Spain Portugal France Spain Portugal Finland Greece Greece Ireland Austria Italy Netherlands (1-8) (5.2%
- 2.5%) Belgium Belgium Netherlands France Germany Italy Denmark United
Kingdom Norway Germany Sweden Sweden Austria Denmark Finland Switzerland (9-16) (2.4%
-1.3%) The few examples should
suffice to lead to the conclusion of this note that generalizations in
general and some neoliberal articles of faith in
particular rest on weak foundations or are altogether untenable. Politicians
and interest groups might perhaps sometimes be excused when they try to press
a point in the heat of disputes. Economists however should not only refrain from
such generalizations but should contribute to a better general recognition of
their fragility. Appendix Sources
and details for the Text Tables The rankings of GDP growth,
inflation, unemployment and government expenditure (averages of the period 1970-2004)
are all based on OECD sources. The data for Trade Union Density refer to the
situation before the turn of the century and come from the ILO World Labour Report 1997-1998. The Corporation Index
is a slightly extended version of an Index worked out by Noël P. Vergunst based on a combination of four items (values
around 2000): trade union density, centralisation of collective bargaining,
coordination of collective bargaining, and coverage rate of collective
bargaining (available at: http:www.vergunst.com). COUNTRY TABLE Averages 1970-2005
Endnotes 1. For a good example of
this (in relation to unemployment) see for instance Howell (2004). 2. The upper (”good“) group
can contain the low values of the characteristic (e.g. inflation,
unemployment) or the high values (e.g. GDP growth). 3. Sources and notes for
all tables are given in the Appendix. 4. The recent rapid growth
of the Irish economy has moved Ireland into a high-income range. But for the
earlier decades of the period considered (1970-2004) the catching-up
assumption can be regarded as valid. 5. This ”rule“ reflects the
neoclassical assumption that there is no long-run (traditional) Phillips
curve and that stable prices help to achieve general equilibrium including
labour markets. 6. Here and in the following
cases ranking tables for the twelve „advanced“ countries are omitted. They
can be easily deduced from the main Tables. Reference Howell, D. R. (2004), Fighting
Unemployment; The Limits of Free Market Orthodoxy. Oxford University Press:
Oxford. ___________________________ SUGGESTED
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