| Review of: | Applying the dismal science: When economists give advice to governments edited by Iain McLean, Colin Jennings |
|---|---|
| Reviewed By: | Roger Vickerman |
| Reviewed in: | Public Administration |
| Date accepted online: | 14/01/2008 |
| Published in print: | Volume 85, Issue 03, Pages 857-883 |
Reviews
One of the interesting things about teaching economics to undergraduates is that they expect there to be a clear and unambiguous answer when very often there isn't one. They have to learn to distinguish between a clear positive model of the way the economy works and the fact that this can produce different answers if we input different data or if people respond in different ways. This 'well it all depends' response is one of the reasons why it is believed that economists disagree, even with themselves. The failure to understand that is one of the reasons why economists get a bad press. Nevertheless, governments employ economists, the Government Economics Service in the UK is one of the major destinations for economics graduates and one with a very competitive entry.
But how far do governments really listen to the advice of economists, and can economists really make a difference? This new book, edited by a political scientist and an economist, does give some insight into this question. Based on a series of seminars held at Nuffield College, Oxford, it brings together eight contributions from people who have advised governments in senior and influential positions. These contributions, although self-standing, are woven together, with the help of a perceptive introduction by the editors, into a sort of history of the changing economic fortunes and priorities of the UK in the past 40 years.
The authors include two Chief Economic Advisers to the Treasury, a member of the Monetary Policy Committee of the Bank of England, a Bank of England Senior Manager, an adviser on transport, an adviser on auctions and competition policy, and Peter Jay, who has been variously a Treasury official, a journalist and UK Ambassador in Washington.
These authors take different approaches to their task. Peter Jay provides a commentary on events between 1964 and 1979 (focusing on the problems of the Labour governments in this period) from the perspective of the various positions he held during this period. This commentary concludes with his view, stated clearly in the course of the very severe economic problems of 1979, that one of the solutions to the UK's economic problems, would be an independent Currency Commission to conduct monetary policy, a forerunner of the Monetary Policy Committee (MPC) set up in 1997. This chapter rehearses themes that are picked up by Ed Balls in a review of macroeconomic policy-making under New Labour since 1997. As well as demonstrating the way in which Bank independence and the MPC have given a degree of stability to macroeconomic policy, Balls draws comparisons between the conduct of UK macro policy and that of the Eurozone. Perhaps not surprisingly Balls concludes that the more flexible British approach provides a better basis for policy than the more rigid framework of the Stability and Growth Pact.
While Balls writes from a perspective within government, Christopher Allsopp provides a view from one of the key institutions, the independent MPC. His focus is on the reaction function of each of the institutions involved in setting both monetary and fiscal policy. Allsopp's conclusion is not fundamentally different from that of Balls, however: a flexible and not a rules-based approach to policy. Allsopp does make the key point, however, which is that flexibility and judgement do not mean unpredictability; the actions of policy-makers have to be predictable if expectations are to be stable and that is seen as the key to stability in macroeconomic performance.
Alan Budd's chapter overlaps with that of Peter Jay in terms of the period covered although it focuses more on fiscal policy by looking at what Budd sees as a number of key Budgets which represented major shifts in policy: 1972-73, 1980-81 and 1993 and the changes which have occurred under New Labour. Here the emphasis is on the way fiscal policy can be used to change behaviour; an active fiscal policy now seems to be more one that operates as a microeconomic rather than a macroeconomic tool.
Mark Robson looks at the way national economic policy operates differentially in the regions by setting up a parable in which some regions of the UK join the Eurozone and others do not. In a nice pun, he refers to the 'Untied' Kingdom. Robson uses this both to show the slipperiness of the concept of an optimal currency area, but also to highlight many of the real problems that parts of the UK face when policy is set to meet the needs of one dominant region.
There are only two chapters which deal principally with microeconomic policy-making, Christopher Foster on transport and Paul Klemperer on auctions. Transport is one area where most economists have agreed on the basic requirements of policy and where extremely detailed modelling has been carried out to inform that policy, but politicians have been generally reluctant to implement the recommended policies. The irony identified by Foster is that the one politician who was prepared to force a recommended policy into practice, Ken Livingstone's London Congestion Charge, then ignored the advice of the modellers in extending the charging zone and increasing the charge. This 'abuse of social science', in Foster 's view, could put back the cause of the basic recommendation in favour of direct user charging. From the politician's perspective it may seem like 'damned when you don't act and damned when you do act', but this is often where balancing the art with science comes in: good economics requires good judgement as well as good analysis and modelling.
This comes home very forcefully in Paul Klemperer 's chapter entitled 'Using and Abusing Economic Theory'. Klemperer provides a nice historical link back to Alfred Marshall as the basis for arguing that applying theory requires both intuition and empirical evidence and not just mathematics. Klemperer has good evidence for this from auctions such as those of the 3G spectrum in telecommunications as different countries tried it different ways on the advice of various economic advisers. Some got it right and made a lot of money; some got it spectacularly wrong, as did some of those advising the bidders. Klemperer carefully steers the fine line between arguing that only simple economics is needed and arguing that complex problems can only be solved by complex solutions.
Tucked away in the middle of the book is Iain McLean's contribution on New Labour and New Social Democracy. He uses the perspective of a political scientist to look at the interaction between the economic priorities and their impacts on the way society develops. This again takes us back to pondering some of the big questions which preoccupied the great writers of the eighteenth and early nineteenth century: how to use social science to make society better and how can we know when we have succeeded. That is the great strength of this book: it forces us to ask why we do economics, not from a purely abstract set of values, but rather from the perspective of those who have had to wrestle with these issues on a day-to-day basis. We may not agree with all the interpretations, but this volume certainly provokes the reader into thinking about the issues: and in the context of real live economic problems. It does not provide answers but, rather, provides a valuable source of questions.