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 “better than what we have experienced in years”, he wrote, and the central forecast of the OECD, representing the world’s 38 wealthiest countries, “remains indeed quite benign”. He tipped “a soft landing” in the United States and “sustained growth” in OECD economies, with “strong job creation and falling unemployment”.
That forecast – relying on the OECD’s “state of the art” economic model – 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 “dynamic stochastic general equilibrium” models make assumptions that even died-in-the-wool mainstream economists can’t stomach. In 2010 the Nobel laureate Robert Solow told the US Congress they “did not pass the smell test”.
The OECD’s then secretary-general, José Ángel Gurría, 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 OECD’s 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 – anthropologists, neuroscientists, physicists and engineers, as well as mainstream and non-mainstream economists – 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.
Cormann changes tack
Cormann, who took over as OECD secretary-general in June 2021, had been Australia’s finance minister from 2013 to 2020 under the the centre-right Coalition government. He had a reputation as an “economic dry”, 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 tank’s regular public seminars, restricting them to the OECD’s ambassadors (one from each of its 38 member countries).
I and many other leading academics – including Nobel prizewinner Joe Stiglitz and Stephanie Kelton, the best-selling author of The Deficit Myth – felt this was a classic case of “if it ain’t broke, don’t fix it!”
Why unconventional thinking is needed
We need new economic thinking for today’s 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 won’t be affected by global warming because they happen in “carefully controlled environments” – otherwise known as indoors. (I’ve written about this and the appallingly bad neoclassical economics of climate change in the journal Globalizations.)
We’re even facing problems that “conventional” economics is meant to understand, but which mainstream economists themselves admit they’re 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 “will surely cause a major economic slowdown, quite possibly a recession”.
If economists can’t 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, it’s now.
Getting a response
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.
His response defends moving NAEC inside the OECD’s economics department (a decision with which we still respectfully disagree), but he also promises to invite past contributors to NAEC’s public seminars to a discussion on NAEC’s future work.
I look forward to receiving my invitation.
- ^ Organisation for Economic Cooperation and Development (www.oecd.org)
- ^ he wrote (www.oecd-ilibrary.org)
- ^ told the US Congress (www.gpo.gov)
- ^ New Approaches to Economic Challenges (www.oecd.org)
- ^ on climate change (www.youtube.com)
- ^ financial crises (www.oecd.org)
- ^ Mathias Cormann (en.wikipedia.org)
- ^ Six questions about Mathias Cormann, newly appointed Secretary General of the OECD (theconversation.com)
- ^ Nobel prizewinner Joe Stiglitz (en.wikipedia.org)
- ^ Stephanie Kelton (stephaniekelton.com)
- ^ The Deficit Myth (stephaniekelton.com)
- ^ 2018 Nobel economics prize (www.nobelprize.org)
- ^ Globalizations (t.co)
- ^ Climate change: how economists underestimated benefits of action for decades (theconversation.com)
- ^ last week (www.nytimes.com)
- ^ wrote to Cormann (docs.google.com)
- ^ an open letter to Cormann (docs.google.com)
Authors: Steve Keen, Honorary Professor of Economics, UCL