Question: Professor Sen, do you have the impression that economists and economic policy makers are learning the right lessons from the most severe economic and financial crisis since the Great Depression?
Answer: I don’t think that at all. I’m quite disappointed by the nature of economic thinking as well as social thinking that connects economics with politics.
What’s going wrong?
Several features of policy making are worrying, particularly in Europe. The first is a democratic failure. An economic policy has to be ultimately something that people understand, appreciate and support. That’s what democracy is all about. The old idea of “no taxation without representation” is not there in Europe at the moment.
In which respect?
If you are living in a southern country, in Greece, and Portugal and Spain, the electorates views are much less important than the views of the bankers, the rating agencies and the financial institutions. One result of European monetary integration, without a political integration, is that the population of many of these countries has no voice. Economics is de-linked from the political base. That I think is a mistake and it goes completely against the big European movement that began in the 40s and fostered the idea of a democratic, united Europe.
Cutting back public debt has become the priority of policymakers in Europe. A lot of economists in Germany appreciate this.They argue that public finances have been on an unsustainable track.
Public debt in Europe has to come down, there is no question about that. However, I think the timing is wrong. At the moment the official priority seems to be to cut debt first and think about growth later. To me, this seems to be a big mistake.
Why’s that?
Economic history shows that public debts are much more easily paid back in periods of high growth rates. This is true for the years following the second world war as well as for the United States during the Clinton administration, or Sweden in the 1990s.
What’s the alternative?
One has to bear in mind the role of the state, which includes not only providing support to vulnerable people and a social safety net, but also regulating the market economy. Right now, well directed stimulation is needed, rather than drastically cutting down the state.
Since the crisis broke out the economics profession in general and mainstream economics in particular have been severely criticised. Do you think this is justified?
The criticism of mainstream economics is justified to a limited extent. It is certainly true that the focus of attention in mainstream economics has tended to be on assuming the market to be working perfectly and there being no need for regulation. However, while this view has been a very dominant part of mainstream economics, you have to bear in mind that mainstream economics is not all centered around one unified theme. I don’t think all of mainstream economics should be held responsible.
Do you think that neoclassical macro economists should bear the brunt of the blame?
This would be an oversimplification. Neoclassical economics has many different paths. There are mainstream neoclassical economists who have been very critical of the complete reliance on the markets.
For example?
Take Arthur Cecil Pigou. Often, he is described as an important intellectual antagonist to John Maynard Keynes. On the other hand, Pigou talked a lot about the state, income distribution, and poverty. But at the same time, he was very much a neo-classical economist. Keynes was far less concerned about inequality and poverty than Pigou was.
Putting a lot of faith in the functioning of free markets has a long tradition in economics. Take Adam Smith for example. The work of Adam Smith was much more diverse than is currently appreciated.
Smith described how the market economy works very well. However, he also pointed out why we need the state and well-reasoned regulation. He was also very much concerned about redistributional issues as well as issues of poverty. In fact, nothing engaged Adam Smith more than the issue of poverty.
Why is our view of Smith so biased?
Parts of the economics profession took only the first part of his work seriously but disregarded the other part. I think what has happened is that mainstream economics fell prey to a biased reading of the tradition that it had inherited.
Why did that happen?
I think a lot of economists were deeply impressed by the elegance of their models. These models describe an imagined economy where the markets functioned perfectly. In such an environment, the market achieves very good results and does not need any kind of state intervention. That’s a very elegant model. It was something which Adam Smith did discuss, but he discussed it along with all the limitations that must be borne in mind. Other early economists who used simplified models of this kind also stressed the importance of noting that the world isn’t anything like that. Edgeworth did that, Walras did that, Wicksell did that. Many modern economists take their simplified models too seriously.
In which ways do you think new economic thinking is necessary and how should it look like?
I think we need a bigger, more integrated view that economists tended to look for, in the past. We have to see the totality of the concerns that make human beings want a good economy. The kind of economic thinking that I would like to see pays a lot more attention to issues of human freedom. What I have in mind is real freedom, not just formal liberties but also what kind of lives people manage to achieve, what they can do with their lives, and what help of the state they need for more substantive freedom. The basic question economists should ask themselves is: What can we do to have a decent society where people get much more freedom to live the kind of lives of which they would have reason to be proud and happy.
You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore…
Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.
Is there any hope that this trend can be reversed?
Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.
Do you think the focus on mathematics in current economics is the flip side of the neglect of the history of economic thought?
I don’t think that there is any conflict between mathematical reasoning and being interested in the history of thought. Many of our early thinkers were quite mathematical. The connection between mathematics and economics is very strong, and there is no reason to be ashamed of it. What is to be avoided is to be concentrated only on mathematical economics. We must not neglect the insights that come from parts of the subject where mathematics is not sensible to use and different kinds of reasoning are useful. I don’t think the conflict is between mathematics and other kinds of methods. The conflict is between taking an integrated, broad, comprehensive view as opposed to a narrow view whether it is mathematical or anti-mathematical.
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