Toward the end of the Easter term, PCES hosted an debate in conjunction with the Manchester Debating Union (MDU) over the proposition “This House Believes That Mainstream Economics Has Failed”. Defending the proposition were supposed to be Frances Coppola, associate editor at Pieria, and James Meadway of the New Economics Foundation. Sadly, James couldn’t make it at the last minute due to being caught up in traffic in London, which left the defending side one short. Fortunately, PCES’ own Catriona Watson stepped in to argue against mainstream economics, though with only an hour or so to prepare her argument. In opposition were Dr Andrew Lilico, Executive Director and Principal of Europe Economics, and Dr John Ashcroft, Chief Economist at the Greater Manchester Chamber of Commerce. The vote beforehand was slightly in favour of the motion.
Coppola opened, commenting that her critique concerned mostly macroeconomics: the DSGE and VAR models used to by economists and central banks on the run up to the financial crisis which failed to see them coming. She argued that one of the major failures of these models was the inability to take finance as a fundamental part of capitalism, often omitting it altogether, or at best adding it as a secondary concern. The models falsely saw money, debt and finance as a largely inconsequential ‘mask’ over the ‘real’ economy, causing them to miss the trouble brewing in the financial sector.
Lilico then opened for the opposing team, stating that what he saw as the 4 major pillars of economics had remained in-tact following the financial crisis: the Modgliani-Miller theorem, the Capital Asset Pricing Model (CAPM), the Black-Scholes formula for option pricing and the Efficient Markets Hypothesis (EMH). In particular, he argued that the financial crisis does not present a problem for the EMH, since it predicts that such events are unpredictable, and that economists cannot fill the role of oracles any more than any other sciences can. He further argued that the success of mainstream economics can be seen in its influence over other disciplines, government and business.
Watson followed for the defending team, responding directly to a couple of Lilico’s points. First, she argued that conquest does not necessarily indicate substantive excess: economics may be influential, but this does mean the influence is a good thing. Second, she argued that there is a difference between perfectly foreseeing a crisis and knowing warnings signs, or at least how to prepare for such a possibility. Her own argument was that the failures of economics can be seen in the continuing problems of poverty, environmental crisis, instability, unemployment and others. Economics fails to understand these issues fully because they are typically presented as special cases of otherwise nicely functioning markets, and are not fundamental to the models. What’s more, economics is all too often used as a way to paint market forces as natural and inevitable, whilst the technical nature of economics prevents ordinary people from engaging with it.
Ashcroft gave the final opening statement, arguing that economics is a thriving discipline with a lot of uses, particularly in his background in business. He acknowledged that economics can be misused or hijacked to promote certain agendas, and criticised those who did so, but did not think it a fundamental failing of the discipline. He further disputed the idea that mainstream economists did not see the crisis coming, citing economists at HSBC, in the FBI and at Wall Street as having foreseen and acted upon the possibility of a financial crash. Finally, he admitted that there are many problems with economics, but believed that the discipline can evolve internally to meet those challenges.
The opening statements were followed by Q & A, with 3 questions from the audience, and each question answered by each speaker in turn. There was a degree of back and forth, although this was limited since MDU prefer to have one speaker speaking at a time. Coppola mentioned that economics needs to be more able to look outside its disciplinary boundaries, a point with which Lilico and Ashcroft seemed to agree (perhaps to varying degrees). Lilico argued that economic theory is important because it explains human behaviour in terms of what ‘makes sense’ (i.e. rationality), whereas if you assume behaviour is irrational then anything goes. Watson argued the debate had become too theoretical instead of focusing on real economic problems, whereas Ashcroft tried to differentiate between economics as a discipline and contemporary political issues. The final vote revealed the motion had passed, though with similar totals to the vote beforehand.
It was an interesting and lively debate, with some important points made on both sides. Nevertheless, there were a couple of issues from the audience’s perspective. First, as Watson noted, the debate was quite theoretical, while many in the audience were laypeople. At one point the audience seemed almost amused by the abstract turn the debate had taken, with the chair rightly noting at the end that it had been “confusing”. This was reflected in the fact that a substantial number of people chose to abstain both before and after the debate, with the amount of abstention actually increasing slightly. Second, nobody defined ‘mainstream economics’, and sometimes it felt like the debaters were speaking at cross purposes. Coppola arguments largely concerned macroeconomics, while Lilico focused on finance and financial economics. Watson’s criticisms applied mostly to undergraduate economics, with one eye kept on society’s economic problems, while Ashcroft, with his background in business, seemed mostly concerned with the applied, statistical side of economics. All in all, there was a good deal of engagement with both each other and with the audience’s questions, but the overarching narratives of each speaker approached the issue from different angles.