In my university studies, I was very impressed with Thomas Kuhn’s Structure of Scientific Revolutions, in which he coined the term “paradigm shift” to describe how science shifts abruptly from one view of the world to another.
Economics has seemed immune to paradigm shifts. The radical Keynesian view was never adopted widely and has been subverted into neoclassical economics, the basis of all major institutions’ models from the 1950s to today.
It has survived, despite its gaping flaws, because the alternatives (neo-Marxist or green/sustainable) pose threats to the status quo. Of all the social scientists, economists are most in thrall to wealth holders (far too many of them are employed by banks) and most inclined to promote theories that justify the status quo and the elites it favours.
The financial crash of 2008 and its consequences were the death-knell for neoclassical economics. Models that have no explanatory or predictive power are for all practical purposes useless, which is pretty much the case for neoclassical models. Everyone ‘in the know’ knows central bankers do not have a clue about the true effects of quantitative easing or the consequences of trying to reverse it. So we can be confident that a paradigm shift in economics is coming, and probably soon.
Political developments in Europe, the UK and US suggest increasing social turbulence and susceptibility to simplistic, populist theories. These need not necessarily be bad: the best-selling economics book of all time remains Henry George’s Progress and Poverty, published in 1879, in which he advocated a land/resources tax. Thanks to popular support, this was almost adopted by the UK’s Liberal government in 1911 and is today promoted by many leading economists (including the green/sustainable camp) as the best way of preventing excessive concentration of wealth.
Among the sacred cows of neo-classical orthodoxy I expect to be shot as a result of paradigm shift are:
- The notion that the hundreds of billions of government bonds bought by central banks through QE actually exist.
- The theory that monetary policy is a better way of stimulating an economy than state spending.
- The notion that certain asset classes should be favoured by tax policy, such as business property.
- National accounting policies that regard payment of a citizen’s income as different from giving everyone a personal income tax allowance.
Paradigm shifts create uncertainty. Radical action usually precedes the intellectual model that justifies it. The owners of wealth have most to lose and will do so as a result of a likely upturn in inflation over the next few years. Discomfort and anxiety are the least the moderately wealthy can expect.
A paradigm shift does not change reality. Our day-to-day existence is subject to Newtonian laws, even though quantum physics governs our devices. Well-managed businesses are likely to remain important wealth creators, even if under a new paradigm the state is seen as having the primary role in the big investments that generate higher living standards.
Anyone who believes there is a path to historic ‘normal’ from today’s conditions is dreaming, and those dreams could turn into nightmares for their clients.
Chris Gilchrist is director of Fiveways Financial Planning