Quiggin vs Williamson: The home game

A while ago, my stoush with US economist Stephen Williamson over his attack on Zombie Economics (in some blog posts and what was presented as a review, for the Journal of Economic Literature) attracted a fair bit of attention around the Intertubes. Now Williamson’s longer review, to which I briefly responded here, has turned up in Agenda, published by the ANU School of Economics.

There’s a history here. Way back before blogging was born, the current editor of Agenda, William Coleman co-authored a book, Exasperating Calculators, published by Keith Windschuttle’s MacLeay Press in which I got a brief but critical mention, along with lots of others. I wrote a fairly scathing review (over the fold, also with a review of a book by Wolfgang Kasper) and I think there may have been one or two more rounds.

So, I wasn’t all that surprised to see Williamson’s piece appearing in Agenda, although I do feel (given Williamson’s putdowns of me as an Aussie yokel, and member of the “farm team”) that they could have tried for an Australian, instead of an import on this occasion. I don’t have time for a full-length response at the moment, except to say that I don’t think Williamson really engages with my argument at any point.

Quiggin, J. (2001), ‘The economic rationalists strike out’, Australian Financial Review, 6 April. Review of, Building Prosperity: Australia’s Future as a Global Player by Wolfgang Kasper (2000) and Exasperating Calculators: The Rage over Economic Rationalism and the Campaign against Australian Economists by William Coleman and Alf Hagger (2001).

It is a brave economist who revisits the predictions they made twenty years ago, particularly if those predictions were accompanied by policy advice, and that advice has been followed. If your advice has been rejected, it is usually easy enough to find some subsequent disaster and say ‘I told you so’. But economic outcomes are so hard to predict and control, and effective advocacy requires such a high level of optimism, that the successful advocate is almost bound to be disappointed by the outcomes.

Wolfgang Kasper is not deterred by such considerations. In 1980, along with four other eminent Australian economists, he published a book entitled Australia at the Crossroads, advocating a program of radical microeconomic reform. The book contrasted two possible paths for Australia, referred to as ‘mercantilist’ and ‘libertarian’. The mercantilist path was seen as a continuation of the policies of the post-war period and was described as involving:
• protection against import competition
• protection against changes wrought by new technologies
• maintenance of restrictions on capital inflows and on free competition in capital markets
• defence of a fairly rigid system of relative occupational wages and of real wages irrespective of market forces
• continuation of an extensive government role as benevolent provider of many basic services including education, health and welfare
• government by lobbying and associated control by producer groups with short sighted policies aimed essentially at winning the next election
• consumerism and environmentalism supported by bureaucratic regulation

The libertarian alternative path involved
• free international trade
• acceptance of the structural changes wrought by new technology and the removal of protection
• elimination of restrictions on international capital flows and on free competition in the domestic capital markets
• resolute application of anti-monopoly and restrictive trade practices legislation
• deregulation of many markets and other activities, especially in the area of entry by persons and firms that want to compete
• greater variation of occupational wages and of real wages in response to market forces
• reduction of the government’s role as a producer of many basic services, including education, health and welfare
• expansion of the government’s role as a provider of income maintenance

Using scenarios devised by Kasper, the Crossroads group estimated that the mercantilist approach would yield annual growth in income per person of 1.7 per cent, while the libertarian approach would yield growth of 3.8 per cent. Over 25 years, the resulting income gap is around 25 per cent.
With the wisdom of hindsight, it is easy to see that nearly all the items on the libertarian agenda have been implemented. Kasper appears satisfied with the result. Over the period since 1975 income per capita has grown by 1.8 per cent annually, a result which Kasper describes as ‘an acceleration’ and ‘not overwhelming but not disastrous’. In order to achieve this rate, as he says, Australians have been forced to ‘work harder and to compete’.

Alert readers will have noticed a problem. Isn’t growth of 1.8 per cent what we were supposed to get under the dismal Mercantilist scenario? And at least in that scenario we got to be ‘relaxed and comfortable’ instead of hard-driven and competitive. Is it any wonder that Australians are less than thrilled with radical microeconomic reform ?

Kasper has two answers to this objection. First, he says the reforms were delayed and only partially implemented. Second, he relies on Productivity Commission research, drawing on ABS data, which shows that productivity accelerated dramatically towards the end of the century, from a historical average rate of 1.2 per cent to a 2.4 per cent for the period from 1993-94 to 1997-8.

On the first point, it is worth noting that in many areas reform went further than the Crossroads group dreamed possible. For example, they did not seriously discuss privatisation and they envisaged a more extensive role for the Arbitration Commission than is involved in the system of enterprise bargaining introduced in the early 1990s.

On the second point, Kasper, like many other economists, failed to note the publication, without much fanfare, of revised statistics in 1999. These lower the productivity growth rate for the for the period from 1993-94 to 1997-8 to 1.7 per cent, and showed productivity decelerating in the late 1990s. The long-run average was also revised downwards, but only to 1.1 per cent. When proper account is taken of cyclical factors (productivity always grows faster in expansions) and other data problems, the revised data give little or no support to the idea of a productivity ‘miracle’ or ‘new economy’.

Whatever the problems of past predictions, Kasper is happy to offer new ones. This time he offers a ‘cricket’ scenario based on backsliding into regulation, and a ‘bee’ scenario based on more extensive economic liberalism. The cricket scenario, he claims, will yield annual growth in income per person of 1.25 per cent over the period from 2000 to 2025, while the libertarian approach would yield growth of 3.0 per cent.

These predictions are basically the same as those in Crossroads, except that both are a bit more pessimistic and probably therefore more realistic. More importantly, by 2025, both Kasper and his critics will have long since been replaced by other economists debating other issues.

By contrast with Crossroads, Kasper’s policy proposals this time around are surprisingly ill-defined. He has abandoned belief in ‘expansion of the government’s role as a provider of income maintenance’ (actually, I suspect this was a compromise forced on him by his co-authors), and now denounces the welfare state. He wants to limit public spending to 25 per cent of GDP. But nothing is spelt out, and most of the advocacy in the book deals with tired ideas for constitutional reform (community initiated referenda, term limits, a Hayekian ‘Third Chamber’ and so on).

A final comment relates to Kasper’s subtitle ‘Australia’s future as a global player’. I can only assume that this nationalistic phrase, quite inconsistent with Kasper’s libertarian stance, was added for marketing reasons. Readers looking for any discussion of strategic industry policy, the ‘branch office economy’ debate, or anything else that might be suggested by this subtitle, will be sorely disappointed.

Another look at old debates is provided by Coleman and Hagger, who revisit the debate launched by Michael Pusey’s Economic Rationalism in Canberra in 1991. Their book, Exasperating Calculators*, is indeed exasperating. Whenever the authors make a definite statement about their own beliefs they appear eminently reasonable. Using the method of selective quotation favored by the authors, it is possible to produce the following summary of their argument:
(1) Economic rationalism is highly unpopular in Australia, indeed the Economic Rationalist is a ‘folk devil’ (p 299)
(2) This is also true in the rest of the world ‘By the mid-1990s, Economic Rationalism – Rogernomics, Thatcherism, Reaganomics– was politically spent’ (p 261)
(3) ‘In the mind of the Economic Irrationalists [Pusey, Manne and others], it is economists who have brought about Economic Rationalism’ (p 289)
(4) But in reality, ‘pure neoclassical theory cannot be identified with Economic Rationalism’. The majority of Australian economists ‘strongly disagreed with the proposition that government outlays should be reduced as a percentage of GDP’ and ‘the stereotyping of the Professoriate as uniformly Rationalist is wrong’ (pp 206-207)
(5) Moreover, there is little evidence to back the strong claims made by Economic Rationalists ‘We do not mean to suggest, for example, that the fact that industrial production grew by a smidgen more under Thatcher than under her predecessor vindicates her policies’ (p 82)
(6) Economists should educate the public about the points on which they agree, in particular the point that there is an extensive role for government intervention, including, but not limited to, externalities, public goods and macroeconomic stabilisation. In particular, economics does not support a presumption in favour of small government: ‘as far as economics is concerned, the size of government doesn’t really matter’ (p 259)

From this summary, it would be reasonable to conclude that the authors endorse the judgement they correctly attribute to this reviewer ‘[Quiggin] agrees with the Economic Irrationalists about the [adverse] impact of Economic Rationalism. But he disagrees with their remedy: get rid of economists’.
Unfortunately, the quotations presented above give a highly misleading picture of the tone of the book as a whole, which is more accurately summarized by the use of the term ‘Economic Irrationalist’ as a pejorative label for opponents of ‘Rogernomics, Thatcherism and Reaganomics’. In a continuous series of sly asides, pointed footnotes and pedantic quibbles, it is made crystal clear that the Economic Rationalists are the good guys and that anyone who opposes them (or even fails to defend them with sufficient ferocity) is an enemy of reason and progress.

Unfortunately, as the authors have observed, the majority of Australian economists fall into the latter class. As a result, although the authors claim to be responding to a ‘campaign against Australian economists’, their book contains more personal attacks on Australian economists, living and dead, of all schools and persuasions, than any other volume I have read. Those denounced include H.C. Coombs (‘elderly’ and ‘nostalgic’), Russel Mathews (‘frenzied’), Geoffrey Brennan (an ‘appeaser’), Stephen King and Peter Lloyd (‘indefensible’), Clive Hamilton (‘florid irrationalism’), Ted Wheelwright (‘insignificant’) and even Wolfgang Kasper, among many others. (The present reviewer gets off relatively lightly, as a ‘distinguished economic theorist’, who is prone to ‘foolishness’ in matters of policy).

A couple of professional economists of the free-market persuasion (John Freebairn and Ian Harper) are favorably mentioned in passing. But the real defenders of Australian economics, it seems, are three writers who have abandoned the economics profession for right-wing politics: John Hewson, P.P McGuinness and John Stone. With friends like these, those concerned with the public image of the economics profession may well ask, who needs the enemies attacked by Coleman and Hagger?
Coleman and Hagger claim to promote values of academic integrity, trashed by the Economic Irrationalists, but conspicuously fail their own tests. They criticise the ‘Irrationalists’ for offering various and inconsistent definitions of Economic Rationalism, then fail to offer any definition of their own. This does not stop them from making throwaway statements to the effect that particular policies and ideas are, or are not, consistent with Economic Rationalism.

They criticise statistical claims made by non-economists like Manne and Pusey, but play fast and loose with the data themselves. A typical example is the following (p 113) ‘Pusey in February 1992 diagnosed the New Zealand economy as dead in the water. Over the next five years, New Zealand’s real GDP rose by 22 per cent’. Why, one might ask, does this refutation refer to a five-year period? Coleman and Hagger know, but unwary readers may not, that after a five-year recovery, the New Zealand economy relapsed into recession in 1997, and was once again ‘dead in the water’ by the late 1990s.
More trivially, Coleman and Hagger make repeated fun of Pusey’s misspelling of proper names. Yet they refer to their prominent colleague, Wolfgang Kasper, as ‘Kaspar’. Fellow-economist Brian Dollery comes off even worse, appearing as ‘Brean Dollery’ in the text and ‘Brean Dolery’ in the index. It is hard to avoid such errors, but those who live in glass houses shouldn’t throw stones.

Connoisseurs of vituperation, a field in which Australians have long excelled, will find this book a worthy addition to their shelves. Those looking for a balanced view of economic rationalism and its critics would do better to seek out the ‘indefensible’ volume edited by King and Lloyd.

Wolfgang Kasper (2000), Building Prosperity: Australia’s Future as a Global Player, Centre for Independent Studies, St Leonards NSW, 118 +xxv pp, $27.45.
William Coleman and Alf Hagger (2001), Exasperating Calculators: The Rage over Economic Rationalism and the Campaign against Australian Economists,MacLeay Press, Paddington NSW , 336pp, $24.20

see also
King, S. and Lloyd, P. (ed.), (1993) Economic Rationalism: Dead End or Way Forward?, Allen and Unwin, St. Leonards, NSW.

* The title is drawn from Hancock’s Australia which has lots of neat quotes about Australian attitudes to economists. This was a fairly obscure work by the 1990s, but I cited it on exactly this point in my 1996 book Great Expectations, a fact not mentioned by Coleman and Hagger. Just sayin’.

104 thoughts on “Quiggin vs Williamson: The home game

  1. @Adam (ak)

    Actually, I made a mistake interpreting the papers I was reading (have just reread them). Mea culpa.

    The Calvo model suggests that there is a long run tradeoff between inflation and unemployment, but that it is very steep.

    This model has a few other peculiar features. High real interest rates directly reduce inflation, before their effects on demand and slack in the economy come into play. The short run Phillips curve is upward sloping, where changes in policy are anticipated (ie disinflation reduces unemployment while it is happening). And shocks to inflation very quickly wash out of the system (unlike empirical estimates from, eg VARs).

    Other NK Phillips curves (eg sticky information) have a vertical LR Phillips curve.

    Most empirical estimates of the coefficient on expected inflation in NK Phillips curve tend from high but less than one to more than one. They are outperformed empirically by an old fashioned accelerationist Phillips curve.

    This may be because of difficulties in measuring inflationary expectations. But the features of the Calvo model mentioned above mean that it is unlikely to be the true model.

  2. After reading even more, I found that what I said first _does_ apply to some variants of the Calvo model (I didn’t misinterpret the model, just mistook one model for another): the intercept parameters shifts when the policy reaction function shifts resulting in a vertical LR Phillips curve (the Svensson model).

    I am trying to track down any paper that specifically tests this proposition, over shifts in policy regime (eg pre and post inflation targetting, or the shift in inflation target in the US from 4% under Volker to 2% under Greenspan). I wish I had access to Econlit!

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