The Decline of Knowledge Based Policy and the Economics Nobel

 

I have structed this as a two-part post, where the second part is about one of the two winners of this year’s Nobel prize for economics. Both parts are directly connected, but I’ve split them because the second part is more of interest to those who know some economics.

The Decline of Knowledge Based Policy

I have written about this before, prompted by a post from Chris Dillow, who has returned to the theme more recently. Rereading all this I think we have a classic problem of overdetermination, by which I mean that we only have one observation - the decline in knowledge based policy over the last two decades - and far too many possible explanations for that observation. So here I want to counter that by putting forward just one story.

My proposition is that the decline in knowledge based policy in the UK is a result of something that happened long before the decline became evident: the adoption of neoliberal ideology by the Conservative party in the 1970s and 1980s. Not a consequence of neoliberalism, but neoliberalism being adopted by the UK’s dominant party of government. The distinction is crucial because in many ways the heyday of knowledge or evidence based policy, at least for social science, was the Labour government of 1997 onwards, and you can legitimately call that government neoliberal in many respects.

Of course neoliberalism was to an extent knowledge based, in that it used parts of economics to argue that markets were best at allocating resources, and certainly better than government. However I would argue that inpractice it was really an ideology of government that put the interests of business and corporations first, and used selected bits of knowledge to pretend that this was equivalent to maximising the interests of society.

Post war Conservative governments before this had of course always been attuned to the interests of business, but they also recognised other interests, and were prepared to overrule business interests if they thought society required that. Trade unions were tolerated, for example, as were the nationalised industries created by the Atlee government. That ended with the adoption by the Conservative party of neoliberal ideology.

In contrast, the New Labour government of Blair/Brown were much more prepared to modify that ideology in specific cases. The minimum wage is a clear example. That was why evidence based policy was able to flourish (comparatively) under that government. Of course not everything proposed by neoliberalism was necessarily wrong, so to many the initial Thatcher period might have seemed like it involved some knowledge based policy, even if some of the ideas they adopted turned out to be horribly wrong (e.g. monetarism).

The belief that steadily grew in the Conservative party under and after Thatcher that neoliberalism was all the knowledge that government needed meant that party lost what little interest it had in knowledge based policy. In particular, it stopped learning from its mistakes, and unlike Labour made no attempt to adjust after electoral defeat. This became very evident when they returned to power (in coalition with the Liberal Democrats) in 2010. Austerity was the opposite of knowledge based policy. It went against basic ideas in macroeconomics that were taught to both first year undergraduates and masters students in nearly all universities in the UK and the US.

In essence, the knowledge we had from both accepted economic theory and empirical evidence was that you don’t cut public spending in a recession, and in particular you don’t do so in a recession where interest rates had hit a lower bound and couldn’t be cut further. Doing so would either make the recession much worse or kill any recovery. The previous Labour government had understood that, which is why it adopted fiscal expansion in 2009. George Osborne and the Conservatives argued against that fiscal expansion, and when they gained power adopted a contractionary fiscal policy. The result was exactly what economic theory and evidence predicted. The recovery that started in 2010 stalled, and the economy didn’t start to show (albeit modest) signs of above trend growth again until 2013.

Osborne ignored macroeconomic knowledge because the neoliberalism his party had adopted argued for a small state and low taxes. The large budget deficits created by the biggest recession since WWII allowed him to scare voters into thinking that cuts in spending had to happen immediately to avoid the bond markets punishing the UK. The media largely cooperated in supporting this myth. They too had little time for knowledge based evidence for reasons that were not just political.

Austerity wasn’t the first time the Conservative party showed its disinterest in knowledge based policy, but austerity was the most obvious and it had a huge impact. Unfortunately this disinterest was rewarded when Cameron won the next election outright, and therefore his disregard for knowledge and evidence appeared validated. It was downhill from there and one year later economic knowledge was labelled ‘Project Fear’. Some on the Labour centre and right drew a similar lesson. (Not the left: John McDonnell as Shadow Chancellor was always interested in new ideas.) As Labour’s current disinterest in the economic viability of the university sector suggests, it’s a long road to get back to the heady days of evidence based policy under Brown and Blair. Conservative party policy making remains hopeless: Jill Rutter recently described their inheritance tax proposals as “myth-based”.

Michael Woodford jointly wins the 2026 Nobel

I’m not going to attempt to fully describe Michael Woodford’s contributions to macroeconomics, because others can do that much better than me. However I do want to correct an impression that some may have got from these tributes, and that is that Woodford’s work was all about monetary policy, and how central banks should operate. A great deal of his work was about this, but Woodford also wrote about fiscal policy, at exactly the time that this work was most needed - 2010.

First some background. In the 1980s and 1990s academic macroeconomics went through what is g...