The opposition to austerity worldwide has been much strengthened by the loss of academic prestige incurred by the austerity camp in the field of economics. Carmen Reinhart and Kenneth Rogoff, both prominent neoclassical economists at Harvard University, were revealed to have made serious data errors in their influential paper on the history of public debt and its relation to economic growth. In this paper, “Growth in a Time of Debt”, the authors had argued that when “gross external debt reaches 60 percent of GDP”, a country’s annual growth declined by two percent, and “for levels of external debt in excess of 90 percent” GDP growth was “roughly cut in half.”(1) This has been widely seen as a major intellectual support for the austerity drive worldwide, and therefore the denouement of this paper has had a considerable impact. Not only did the paper leave out important data, but it also contained simple errors in spreadsheet calculation. This is all the more intriguing, and delicious for the press, because the counter-article’s co-author Thomas Herndon is still a graduate student, whereas Rogoff is one of the world’s most eminent neoclassical macroeconomists.
This could just be written off as a mere incidental oversight, such as happen in any science after all. But it gets much worse, and in a way that is illustrative of neoclassical economics and its relationship to the wider world. Reinhart and Rogoff retaliated to the flood of criticism and the many people blaming them for their unemployment, poverty, and degradation in the usual haughty manner of economists – which is to say, to deny the right of the mere plebs to infect their scientific deliberations with political concerns or direct criticism. In fact, they denied their responsibility for the austerity regime altogether, while at the same time reiterating their support for the ‘mainstream’ of their discipline and the importance it puts on “raising taxes and cutting spending”… in other words, austerity.
In their elevated distance and defense of the value-free science they stand on, this reminds one of none so much as of the merchant of Venice. Clad with the authority that neoclassical economics has in the political field, they appear as the triumphant Shylock, and proclaim: “My deeds upon my head! I crave the law”. But confronted with the consequences, our valiant economists withdraw, and speak with him in his defense: “You take my house when you do take the prop
That doth sustain my house; you take my life when you do take the means whereby I live.” How lacking in mercy if one takes away the prop that sustains the house of neoclassical economics!
Yet we should not be too easily tempted. There is more. Rogoff, presenting himself as justice perverted by evil intent, is hardly such a dignity beset upon as was Shylock. After all, he mentions in passing his ‘public service’ in the form of his senior position at the IMF, responsible for macroeconomic policy interventions in poor countries when they, too, were called upon to surrender their bond. But when it came to those transactions, there was no Portia to defend them in their body, and the IMF has a long history of cutting its pounds of flesh without much further ado. Illustrative of the attitude of neoclassical economists and the consequences of their value free science, innocent of any political meaning, is the open letter Rogoff indignantly published after fellow windbag Joseph Stiglitz had defected from the charmed circle of global economic stewardship and called out the IMF on its misdeeds. This letter can be found in its entirety here, and it is most edifying.
Rogoff swears by the good intentions of the IMF personnel: indeed, do they not suffer the slings and arrows of outrageous fortune? Is this not done in the pursuit of bringing the peoples sitting in darkness to the light of the efficient market economy? Are they not unsparing, unwavering, unstinting in their efforts to tell other countries how to manage their economies? To give their friendly, paternal ‘advice’ to the beggar in exchange for lending him the few coins that would keep him alive? (Lending with interest, of course, as fits the undeserving poor.) Who could object? But old uncle Stiglitz ruins this occasion’s pleasant spirit of charity and sacrifice, not unlike the care for the downtrodden peoples worthy of a Cecil Rhodes, by launching some forthright attacks on the abilities of these missionaries of the market. So our Rogoff is compelled to write paragraph after paragraph of barely concealed venom, questioning whether Stiglitz is not perhaps a little too full of himself to be a judge in this affair. Indeed, this criticism is not unwarranted; but then what does that make of Rogoff, as IMF official? If Stiglitz is no good judge of his own significance and abilities, how then is Rogoff a good judge in his own case?
One might perhaps see in him the Daniel of judicial wisdom alluded to in the play, if he showed himself a critical spirit towards his economic theories and their consequences, the same spirit he heckles Stiglitz for not having. But rather than doing so, he dismisses Stiglitz’s criticisms in his book, Globalization and its Discontents, as “at best highly controversial, at worst, snake oil”. That’s the right spirit of peer review and value-free science our Harvard Professor has come to insist on! What’s even more profound, he appeals to Stiglitz’s criticisms of disastrous IMF policies as not just wrong, because contrary to the orthodoxy, but in fact accuses Stiglitz of contributing to the crisis by the very act of criticism. How? Because criticism undermines the “confidence in the very institutions you were working for”. In this way, indeed, any priesthood would silence the mutterings of the novitiate about their unfortunate inability to grasp the necessity of celibacy, or to indulge the mysteries of the transsubstantiation. With a reasoning worthy of the Jesuits, we are made to believe that the problem is not that such theories are, indeed, “snake oil”, but rather that pointing out that they are may reduce confidence in the Holy Mother Church – with the predictable consequence that fewer souls will be saved. How could brother Stiglitz betray the cause so? Extra ecclesiam nulla salus! That is the motto of the neoclassical order.
Of course, as always with such apologetics, one cannot do without some sneering references to the absolute nature of the “laws of economics”, established and certified of course by none other than the same orthodoxy that would cast out even a very moderate dissenter like Stiglitz (by no means a radical or heterodox economist). No priesthood without its Holy Scripture, after all. In his analogy, Rogoff compares Stiglitz to an alien being for suggesting that said laws of economics might not quite be what the IMF imagines they are. Indeed, such faithlessness is only heard of among the barbarians, and since the neoclassical economists are not barbarians, Stiglitz must be one. It reminds one of the images on the maps in the Middle Ages, where beyond the narrow borders of the known world the curious minds were warned off by images of beasts and the inscription “here be dragons” – this is the attitude of the orthodox neoclassical economist to anything that would imply a revision of the theory more fundamental than changing a few inputs to a model.
Our final episode in the illustrative saga of Rogoff – and many more such could be written about similar economists – deals with the work Reinhart and Rogoff were best known for before the debt episode, namely their economic history of debt and financial crises, suggestively called This Time Is Different. Written in 2003, before the current crisis had developed, the glowing review it received in the New York Times makes for great reading in retrospect. Not just because of the slavish way orthodox economists are treated in the general media, as if they were the diviners and mediators with the fickle gods of fate of our time, but also because of the marvellously self-satisfied attitude displayed by the valiant economists themselves. Having been introduced as were they exciting excavators of the past undertaking a kind of detective story to track the proofs of financial crisis in previous times, the clearly overawed journalist interviews them and elicits some choice quotes.
Since the book finally came out after the crisis, despite its early origins, the interviewer cannot help but start at that point. ““The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.” You can say that again! Why might this be? Well, Rogoff and Reinhart do not hesitate to tell us the real problems with the discipline.
“In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor. Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations.” Wait… I have a strange feeling of being reminded of someone. I think their name begins with an R, but I am not sure… I must read on to be certain. ““There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”” Ah! Now I remember! It was Reinhart and Rogoff I was thinking of, authors of policies as well as papers based on the narrow, deductive extrapolation of theory from a small number of data points! De te fabula narratur. (After this, the reader can be spared the other three pages of fawning biographical prose produced by America’s flagship newspaper, I’m sure.)
Never mind the Marxist critique of political economy, never mind the Cambridge capital critique, never mind the many demonstrations of the incoherence of neoclassical production functions, never mind the utter predictive failure of neoclassical economics, never mind the negative outcomes of the IMF and World Bank’s “Structural Adjustment Programs”, never mind the failure of money neutrality theory or of ‘total factor productivity’ or so many of the major concepts of neoclassical economics. Never mind the results of such dogmatic attitudes when intervening at the expense of poor nations. One cannot, Rogoff insists, hold him or anyone else at the IMF responsible, or indeed any of the “doctors” he compares his colleagues to, peddling the bitter medicine of liberalization. (Perhaps his medical analogies are best reversed – is not the certain proclamation that his pills will cure all ailments the sign of the quack?) It is all done in good faith and in the pure light of science. We are to believe the neoclassical economists are honorable men – perhaps like Brutus and Cassius.
The least critique of their position, the least deviation from standard neoclassical economics, all this is “voodoo economics”, Rogoff insinuates. Let that be so. His theories are moribund, whereas voodoo is reputed to involve the ability to bring the dead, old ideas, back to life. Would it not be better to see if one of the many theorists of economic thought cast into an unmarked grave by the wayside could tell us a better path to go? Then perhaps our response should be, as the Gospel of Matthew tells us, to turn our backs to Rogoff and his ilk and let the dead bury their dead.
1) Reinhart & Rogoff, “Growth in a Time of Debt”. American Economic Review 100:2 (2010), p. 573-578.