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How discredited zombie economics still haunts us
By Wan Lixin |
March 12, 2011, Saturday
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Print Edition
Print Edition
JOHN Quiggin's "Zombie Economics: How Dead Ideas Still Walk Among Us" debunks the cult of the market, and is of particular relevance to China today.
As sentiments from the ongoing annual parliamentary session indicate, in the wake of decade-long roaring GDP, we begin to hear, at last, some murmurings of the gaping wealth gap, and there's talk of a "happiness index."
I am not interested in that kind of index, because the only easily measurable thing in our life is money. Obviously, given human greed, publishing a happiness index can only make everyone unhappy.
But that index debate does suggest the degree to which economists and officials have come to rely on externals to celebrate what's supposed to be our inner bliss.
This belief in "knowing" (science) as the only thing worth knowing and pursuing is still strong among us.
In Quiggin's book, the criticism is directed specifically at five economic principles that are quite influential but which he characterizes as "zombie" ideas.
These ideas have been refuted by the recent financial crisis, but as they are hard to kill, the discredited ideas may return to haunt us.
As a matter of fact, the governing principle of these zombie ideas - the celebration of "market liberalism" - has never been condemned as it deserves.
"The ideas that cause the crisis and were, at least briefly, laid to rest by it are already reviving and clawing their way through up the soft earth," the book reads.
Thus Quiggin, an economics professor at the University of Queensland in Australia, knifes through the five most dangerous principles of "market liberalism."
The first idea is "The Great Moderation," which proclaimed the era of permanent boom, free of recessions.
In a 2004 speech the chairman of the US Federal Reserve Ben Bernanke popularized the phenomenon that economists attributed to the liberalization of markets, deregulation and the fall of former Soviet Union.
Cult of market
What has happened in the past two decades in China contributes to a similar illusion of great moderation.
Thus, when the financial crisis loomed, there were various schemes for bailouts, because any fundamental correction was inconceivable.
The United States saved its investment bankers and auto makers, and in China a huge sum of money was pumped into real estate developers, auto makers, and infrastructure.
Two years on today, when we have declared victory in fighting the crisis, we are less certain if we could be equally spectacular in taming inflation and soaring home prices.
In the 1980s when China's reforms were first kicked off, the market was enshrined, which then led to massive layoffs of workers in state-owned enterprises (SOEs), in the name of flexibility and profitability.
Flexibility and profits soared, though we are less sure if those workers got a fair deal given how their former SOE chiefs (many morphed into execs and CEOs) have grown fat on state assets.
The second zombie idea, "The Efficient Market Hypothesis," is the central theoretical doctrine of market liberalism and maintains that markets are the best judges of an asset's short- and long-term value.
As everyone has easy access to the information, speculative bubbles do not exist, and would be corrected anyway when they occur.
Today we can see how the "irrational exuberance" has pushed China's assets prices (from property to infant milk powder) to a level that defies the wildest imagination.
As governments at all levels have played a crucial role in allowing property prices to soar to this level, everyone is eager to know how the current round of unprecedentedly stringent measures to dampen the property market will play out.
The third idea is the "Dynamic Stochastic General Equilibrium," meaning that the actions of individuals in a market trump government's macroeconomic management. This idea was first put forward to challenge John Maynard Keynes' promotion of governmental use of macroeconomic tools as levers to management the economy.
The fourth idea is "Trickle-down Economics," the notion that enriching the wealthy ultimately benefits everyone.
Last month's Century Weekly had a package on "The Poverty of Nutrients," which cites a survey of 1,458 students aged 10 to 13 years old in rural Sichuan Province.
It suggests 12 percent of those surveyed are suffering from retarded growth compared with their urban counterparts, largely due to malnutrition.
Trickle up, not down
That's an embarrassing fact for a country that is acclaimed as an economic miracle and now boasts the world's second-largest GDP.
Advocating growth, development or "making the pie bigger" is all based on trickle-down economics. But the trickle is mostly upward.
"The money was appropriated for the top in the hopes that it would trickle down to the needy ... Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands," said legendary American humorist Will Rogers.
The last great zombie idea is "Privitization," largely advocated to boost efficiency.
One encouraging message from the annual parliamentary session is that China will not go for privatization.
But some people are also wondering if we should re-nationalize those assets already privatized, and redeem those services still euphemized as public services, such as health care, education, and newspapers.
This book is certainly a good read for anyone eager to know why it is urgent that economists come up with a socially useful body of thought or suggestions.
We are talking about transfusing the "blood of morality" into real estate developers, but how can that happen if we do not allow our officials and economists to access that precious liquid first?
As sentiments from the ongoing annual parliamentary session indicate, in the wake of decade-long roaring GDP, we begin to hear, at last, some murmurings of the gaping wealth gap, and there's talk of a "happiness index."
I am not interested in that kind of index, because the only easily measurable thing in our life is money. Obviously, given human greed, publishing a happiness index can only make everyone unhappy.
But that index debate does suggest the degree to which economists and officials have come to rely on externals to celebrate what's supposed to be our inner bliss.
This belief in "knowing" (science) as the only thing worth knowing and pursuing is still strong among us.
In Quiggin's book, the criticism is directed specifically at five economic principles that are quite influential but which he characterizes as "zombie" ideas.
These ideas have been refuted by the recent financial crisis, but as they are hard to kill, the discredited ideas may return to haunt us.
As a matter of fact, the governing principle of these zombie ideas - the celebration of "market liberalism" - has never been condemned as it deserves.
"The ideas that cause the crisis and were, at least briefly, laid to rest by it are already reviving and clawing their way through up the soft earth," the book reads.
Thus Quiggin, an economics professor at the University of Queensland in Australia, knifes through the five most dangerous principles of "market liberalism."
The first idea is "The Great Moderation," which proclaimed the era of permanent boom, free of recessions.
In a 2004 speech the chairman of the US Federal Reserve Ben Bernanke popularized the phenomenon that economists attributed to the liberalization of markets, deregulation and the fall of former Soviet Union.
Cult of market
What has happened in the past two decades in China contributes to a similar illusion of great moderation.
Thus, when the financial crisis loomed, there were various schemes for bailouts, because any fundamental correction was inconceivable.
The United States saved its investment bankers and auto makers, and in China a huge sum of money was pumped into real estate developers, auto makers, and infrastructure.
Two years on today, when we have declared victory in fighting the crisis, we are less certain if we could be equally spectacular in taming inflation and soaring home prices.
In the 1980s when China's reforms were first kicked off, the market was enshrined, which then led to massive layoffs of workers in state-owned enterprises (SOEs), in the name of flexibility and profitability.
Flexibility and profits soared, though we are less sure if those workers got a fair deal given how their former SOE chiefs (many morphed into execs and CEOs) have grown fat on state assets.
The second zombie idea, "The Efficient Market Hypothesis," is the central theoretical doctrine of market liberalism and maintains that markets are the best judges of an asset's short- and long-term value.
As everyone has easy access to the information, speculative bubbles do not exist, and would be corrected anyway when they occur.
Today we can see how the "irrational exuberance" has pushed China's assets prices (from property to infant milk powder) to a level that defies the wildest imagination.
As governments at all levels have played a crucial role in allowing property prices to soar to this level, everyone is eager to know how the current round of unprecedentedly stringent measures to dampen the property market will play out.
The third idea is the "Dynamic Stochastic General Equilibrium," meaning that the actions of individuals in a market trump government's macroeconomic management. This idea was first put forward to challenge John Maynard Keynes' promotion of governmental use of macroeconomic tools as levers to management the economy.
The fourth idea is "Trickle-down Economics," the notion that enriching the wealthy ultimately benefits everyone.
Last month's Century Weekly had a package on "The Poverty of Nutrients," which cites a survey of 1,458 students aged 10 to 13 years old in rural Sichuan Province.
It suggests 12 percent of those surveyed are suffering from retarded growth compared with their urban counterparts, largely due to malnutrition.
Trickle up, not down
That's an embarrassing fact for a country that is acclaimed as an economic miracle and now boasts the world's second-largest GDP.
Advocating growth, development or "making the pie bigger" is all based on trickle-down economics. But the trickle is mostly upward.
"The money was appropriated for the top in the hopes that it would trickle down to the needy ... Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands," said legendary American humorist Will Rogers.
The last great zombie idea is "Privitization," largely advocated to boost efficiency.
One encouraging message from the annual parliamentary session is that China will not go for privatization.
But some people are also wondering if we should re-nationalize those assets already privatized, and redeem those services still euphemized as public services, such as health care, education, and newspapers.
This book is certainly a good read for anyone eager to know why it is urgent that economists come up with a socially useful body of thought or suggestions.
We are talking about transfusing the "blood of morality" into real estate developers, but how can that happen if we do not allow our officials and economists to access that precious liquid first?
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