One of the speakers at the recent conference at Bretton Woods hosted by the Institute for New Economic Thinking (INET) was Lord Adair Turner, who heads England’s financial regulator. He challenged almost every fundamental assumption that has been the theoretical foundation for Western economists and policymakers since 1945. Leaders in Washington and other capitals, he claimed, have become hypnotized by a “self-reinforcing belief system” that prescribes liberalizing markets as the best and only answer for economic problems. Freeing markets from government control, Turner argued, does not necessarily maximize economic growth. He added that growth itself should not be the ultimate aim of a good society. Rich countries would be in better shape by trading off some growth for greater stability and equality.
What is most notable about Lord Turner’s remarks is what they reveal about the current state of thinking in economics. Divisions have proliferated not only at the theoretical level but in practical terms and these divisions are more acute today that at any time since the post-war period. That era featured the creation of the institutional cornerstones of economics – the World Bank and the IMF – but was also a time of fierce contestation between Keynesians and economist more sympathetic to exposing the world to market discipline without the involvement or interference of government. The jury is still out on who won that round, but the financial crisis clearly has called many models into question.
Today, the lines are drawn in similar fashion between the supporters of fiscal austerity and those that maintain that the real challenge lies in employment, not debt. Battles are being fought over whether basic market theory can account for the way people make economic choices, whether advanced computing power will allow us to map human economic behavior in the same way weather or climate change is tracked, or whether the concept of a rational, self-equilibrating market even makes sense in the wake of the financial crisis.
The real question in economics today is whether anyone will emerge to follow the paths of Keynes, Schumpeter and Friedman to chart a new course for a generation.