Opinion: Orthodox thinking wonât do: Mathias Cormannâs leadership of the OECD has economists worried
4 October 2022
Writing in The Conversation, Professor Steve Keen (UCL Office of the Vice-Provost: Research) warns that under the "conventional" leadership of Mathias Cormann, the Organisation for Economic Cooperation and Development is ill-prepared for emerging economic challenges.
In June 2007, Jean-Philippe Cotis, the chief economist of the Organisation for Economic Cooperation and Development, declared that 2008 was going to be a great year.
The economic situation was âbetter than what we have experienced in yearsâ, he wrote, and the central forecast of the OECD, representing the worldâs 38 wealthiest countries, âremains indeed quite benignâ. He tipped âa soft landingâ in the United States and âsustained growthâ in OECD economies, with âstrong job creation and falling unemploymentâ.
That forecast â relying on the OECDâs âstate of the artâ economic model â proved, of course, to be spectacularly wrong. In 2008 the global financial crisis hit, the worst economic shock since the great depression.
Many critics, including myself, were not surprised. These âdynamic stochastic general equilibriumâ models make assumptions that even died-in-the-wool mainstream economists canât stomach. In 2010 the Nobel laureate Robert Solow told the US Congress they âdid not pass the smell testâ.
The OECDâs then secretary-general, JosĂ© Ăngel GurrĂa, took this failure of conventional economics to heart. In 2012 he established an internal think tank called New Approaches to Economic Challenges (NAEC) to explore new ways to analyse and manage the economy. He deliberately set it up outside the OECDâs economics department so it could be free to consider ideas that mainstream economics ignored.
NAEC was a breath of fresh air in the normally stale world of economic policy debate. It heard from all manner of researchers â anthropologists, neuroscientists, physicists and engineers, as well as mainstream and non-mainstream economists â who used techniques mainstream economics remained resistant to, even after its obvious failures.
Those of us who worked with NAEC or spoke at its public seminars enjoyed the freedom to think and talk outside the mainstream economic box. I spoke at several seminars, including on climate change and financial crises.
That came to an end with GurrĂaâs successor, Australian Mathias Cormann.
Cormann, who took over as OECD secretary-general in June 2021, had been Australiaâs finance minister from 2013 to 2020 under the the centre-right Coalition government. He had a reputation as an âeconomic dryâ, and someone who trusted the advice of economists.
One of his first actions at the OECD was to move the NAEC unit into the economics department. He also terminated the think tankâs regular public seminars, restricting them to the OECDâs ambassadors (one from each of its 38 member countries).
I and many other leading academics â including Nobel prizewinner Joe Stiglitz and Stephanie Kelton, the best-selling author of The Deficit Myth â felt this was a classic case of âif it ainât broke, donât fix it!â
We need new economic thinking for todayâs many new challenges, because the record of mainstream economists on these issues is frequently terrible.
Take, for example, the work of William Nordhaus, who won the 2018 Nobel economics prize for his work on climate change. He assumed manufacturing, services and finance wonât be affected by global warming because they happen in âcarefully controlled environmentsâ â otherwise known as indoors. (Iâve written about this and the appallingly bad neoclassical economics of climate change in the journal Globalizations.)
Weâre even facing problems that âconventionalâ economics is meant to understand, but which mainstream economists themselves admit theyâre confused by.
For example, Nobel laureate and New York Times columnist Paul Krugman wrote last week that he had underestimated the persistence of inflation, while also suggesting the US Federal Reserve was overreacting with its interest rate rises, which he said âwill surely cause a major economic slowdown, quite possibly a recessionâ.
If economists canât work out what to do with conventional economic problems, how likely are they to know what to do with unconventional ones such as climate change or the energy crisis facing Europe?
If ever out-of-the-box economic thinking was needed, itâs now.
In January we wrote to Cormann asking him to reverse his NAEC decision. Our letter said:
"As academic and professional economists, we know that economic orthodoxy can be wrong. The history of economics and economic policy is one in which certain theoretical frameworks and policy approaches frequently become orthodox, and then are later superseded. This is often because the empirical evidence changes; sometimes because rival theories come to be more convincing; in some cases both. In these circumstances it is important that an organisation providing advice to governments, like the OECD, is at the forefront, not just of the present orthodoxy, but of competing views, theoretical frameworks and policy approaches."
We got no acknowledgement, let alone a reply.
Therefore we decided to publish an an open letter to Cormann on September 27. Iâm happy to report Cormann has already replied to this letter. Noisy diplomacy works.
His response defends moving NAEC inside the OECDâs economics department (a decision with which we still respectfully disagree), but he also promises to invite past contributors to NAECâs public seminars to a discussion on NAECâs future work.
I look forward to receiving my invitation.
This article was first published in Ìęon 4ÌęOctober 2022.
Links
- Article inÌę
- UCL Office of the Vice-Provost: Research
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- Credit: Diego Thomazini via