The Death of Economics
By Paul Ormerod
Faber and Faber, 1994. 219 pp.
Reviewed by John Tomlinson
The title The Death of Economics seems the answer to every non-economist's dream as we tire of the multitude of Friedmanite look-a-likes who have taken over social commentary positions on news and current affairs programs. Ormerod does not succeed in killing the discipline, but he does provide a substantial critique of many of the prevailing myths in which monetarists, supply siders, economic rationalists and econometric efficiency experts would have us believe.
The book sets out to provide a brief history of economic thought in a way which allows the non-economist to become aware of the distortions which orthodox economists have encouraged us to accept as fact. Ormerod, an unashamed admirer of the Keynesian approach, writes in the tradition of political economy claiming antecedents in Adam Smith, Ricardo and Marx.
At one level, the underlying theme of the book is an attempt to restore society and social questions as the central issues in economic and political debate. At another level, the book can be interpreted as simply a new look at one of the most pressing issues facing the Western world: unemployment.
In order to clear a way through the labyrinth of econometric models, complex linear mathematics and convoluted dissembling of the current crop of new right economic experts, Ormerod analyses supply and demand theories, regulation and deregulation debates, the connections or lack of them between profit, wealth and investment, the competitive equilibrium concept and linear and non-linear modelling.
But even at its most ponderous the text is scattered with insights like: "Austerity and discipline are the hallmarks of the favoured policies of the International Monetary Fund (IMF) throughout the world, yet its own salary bill has risen by 38% in the last two years, and is budgeted to rise by a further 22% in 1994".
The Death of Economics contrasts and compares the ways in which European, Japanese and US governments have approached unemployment. Ormerod points to the period after the second world war when "the primary aim of the economy was not to control inflation, but to maintain a low level of unemployment", and goes on to engage in the debate which has been central in dividing Keynesians and monetarists: the extent to which government intervention affects longer-term levels of unemployment and productivity.
Ormerod discusses the concept of "non-accelerating inflation rate of unemployment" — which, he notes, some economists refer to as the "natural" rate of unemployment. Orthodox economists, he argues, claim the natural rate of unemployment can not be affected by government policies designed to influence the rate of spending in the economy because it is controlled by supply side forces.
This concept of the "natural" rate underpins the Australian government's green and white papers' targets of 5% unemployment by the end of the century. Ormerod's analysis refutes such thinking by showing that various countries become attracted to different rates of unemployment following shocks such as the 1970s oil crisis. That is, political and economic forces can combine to alter the prevailing rate of unemployment.
The argument that people remain unemployed for long periods due to excessively generous unemployment payments, so favoured by new right economists who want to totally deregulate labour markets, is dismissed on the grounds that unemployment benefits "have changed only slowly, if at all, in the various EC countries during the last 20 years" while unemployment has risen steadily. In addition, "this argument ignores the fact that most states have, and have had over time, rather strict laws which prevent the voluntarily unemployed drawing benefits at all".
In Australia, we are told that we can't have a decent guaranteed minimum income or jobs and training for all who need and want them because the necessary spending would lead to inflation. Such policies are maintained despite increasing inequalities. There are record profits and yet a massive reluctance to invest in new plant and equipment. Ormerod considers that "a policy obsession with securing very low inflation, and even eliminating it altogether, can be extremely dangerous. Apart from the likely short-term impact on unemployment ... very low inflation means that the real value of debt is eroded very slowly. Debtors will be constrained in their behaviour for a long period of time."
Ormerod notes, "In the major European economies during the past quarter of a century, real output has grown by at least 50% and in most cases by 75%, but that there has been virtually no net job creation". He could have been writing about Australia. Here, however, the jobs which are being created to replace those that have disappeared are overwhelmingly part-time and low paid.
Ormerod argues that "much of the present policy discourse is underpinned by the misleading premise of an underlying link between economic growth and unemployment; by the mistaken belief that any short-run relationship between the two which exists persists over time. It is also based upon a notion of equilibrium arising from the economists' mechanical view of the world, a view at an ever-increasing variance with reality."
He notes that in those countries where low levels of unemployment have survived over long periods of time there have been various forms of employers of last resort, either in the public (Western) or private (Japan) sphere. Demolishing the ideological and technical superstructure of orthodox and rightist economists, he concludes that "the promotion of the concept that the untrammelled, self-sufficient, competitive individual will maximise human welfare damages deeply the possibility of ever creating a truly affluent, cohesive society in which every one can participate".
The message is that there are good social reasons why we should ensure that everyone has the opportunity to engage in a meaningful existence, to insist they have sufficient income to do so with dignity and, despite the rhetoric of the monetarists, there is no good economic reason why we should not. The real question is not employment or unemployment, inflation or deflation, growth or recession, but how we treat the winners and losers in the economic game of life. The Death of Economics is very readable for a non-economist and should be read by every economist.