A group of economists hit the headlines last week with their claim that Jeremy Corbyn’s policies are supported by mainstream economics. Perhaps the best known of them is David Blanchflower, a Monetary Policy Committee member when Gordon Brown was Chancellor. He predicted before the 2010 General Election that under the Conservatives, unemployment would rise from 2.5 million to 4 million, even 5 million was ‘not inconceivable’. The actual number now is 1.85 million. Still, economic forecasting is a notoriously difficult exercise.
The claim that Corbyn represents orthodox economic thinking is not easy to sustain. It is not possible to find a single article in a leading academic journal which recommends nationalising large swathes of the economy, particularly without compensation. Indeed, completely opposite themes are stressed, such as the importance of competition and markets, and respect for the principle of contracts and the rule of law.
To be fair, the Corbynistas only endorse his tax and spend policies. They claim that support for fiscal and monetary expansion is now the economic mainstream. But they fail to take into account one of the most fundamental concepts in mainstream macroeconomics, the so-called Lucas critique. This esoteric idea, quite unknown to the general public, has profound practical implications.
Many Keynesian economists try and assess the impact of policy changes in the following way. They take the key aggregate variables in an economy, such as personal consumer spending, exports, unemployment and the like, and use advanced statistical techniques to correlate them to other variables. Data is used over the past twenty or thirty years, to get enough observations. What emerges is the average impact over this period of changes in one variable on another. To take a simple purely illustrative example, we might find that if sterling fell by 10 per cent, on average over the past the value of exports increased by 5 per cent.
All these statistical relationships are bundled together in a computer, and questions can then be asked. What might happen if public spending were increased? The complex interrelationships in the programme are calculated, and the answer pops out. Forty years ago, Chicago based Nobel Laureate Robert Lucas made his critique. Changes in policy may very well change the average relationships which previously existed. The past is not necessarily a guide to the impact of a policy change. President Hollande discovered the practical power of this point when he put tax rates up to 75 per cent. He was presumably advised, on the basis of evidence from the past, that this would raise revenue. But hundreds of thousands of the most enterprising French citizens did not pay the tax at all. They simply left the country.
The idea that Corbyn’s policies on state control of enterprise can be separated from his fiscal and monetary proposals is not one which bears more than a moment’s scrutiny. The Lucas critique applies in spades. Any analysis which pontificates on the effects of the latter without taking into effect the whole gamut of his polices can hardly be taken seriously.
As published in City AM on Wednesday 2nd September 2015