Keynes famously stated that ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist’. In Italy a ‘practical man’, Silvio Berlusconi, has been replaced by Mario Monti, a man history may determine to be just another ‘defunct economist’. So why have Italy ditched the hugely entertaining if highly controversial Berlusconi for a man known for his reserved character and awkward social skills? Does the rise of a technocratic government in Italy represent the next era, where economists step out of the background and become the new politicians?
There are some very good reasons why politicians, relying as they do on popularity and obsessed as they are with their prospects for re-election are not best placed to make sensible decisions with respect to the economy. In 1975 Nordhaus discussed ideas relating to the suggestion that there is a political business cycle. The model relies on three key assumptions. Firstly, politicians are all identical and only care for being in office. Whilst this is obviously a simplification, the battle for the centre ground of politics (at least in England) means that the differences between politicians of the leading parties can appear insignificant (is there really that much difference between David Cameron and Nick Clegg?). As for only caring for being in office, there are countless examples of politicians from Putin to Berlusconi to Blair who have been extremely reluctant to relinquish their power. The second assumption is that the timing of elections is fixed – this helps to simplify the model, and we may soon move to fixed terms for our elections in any case. Finally, the third building block of the model is that politicians are opportunistic. No arguments here.
The conclusion of Nordhaus’ model is that politicians will want to increase output and decrease unemployment in the run-up to an election, by say increasing government expenditure. For obvious reasons, this is likely to boost popularity and lead to a greater chance of winning a second (or third, or fourth) term. However, following what our opportunistic politician hopes will be another victory he faces the prospect of an inflation rate that is too high, so government spending must then be reduced and economic growth must be brought back down. After this happens the cycle is repeated all over again for the next election.
By being reliant on the opinions of the general public, politicians are faced with incentives that lead to them spending heavily before an election when this may not be the best course of action for the economy. It could be argued that political opportunism during the Blair years has left us facing the high debt, double-dip disaster of today. What if an economist was in charge instead?
We can see that politicians may not always act in the best interests of the economy. They can ignore their economic advisers and press ahead with the plans that help them achieve electoral success. This is where technocratic governments like Mario Monti’s come into their own. Mr Monti plans on serving until 2013 at which point he will stand aside. As he does not have to worry about re-election and by extension his popularity, he is in a position where he can use his economic training to take the unpopular economic decisions that are right for his country. Benefiting not just Italy, but the rest of the eurozone as well.
This makes a compelling case for ditching our slimy politicians and instead placing highly respected economists in positions of power for fixed terms until we ride out the waves of economic crisis and find ourselves in calmer waters. Sadly, economists are far from perfect. To start with, it is hard to put your faith in a discipline that has constantly changed and evolved over time. Ideas that were the cornerstones of macroeconomic theory in the past are side-notes that have been proved ‘wrong’ today. Future generations may regard our economics to be littered with problems and poor Mario may simply be remembered as a terrible economist.
In addition, economists are famous for disagreeing. Economics is not an exact science and as a result of this the core theories and tools can be interpreted in very different ways. Furthermore, the predictive powers of economics have left a lot to be desired. The old joke that economists have predicted nine out of the last four recessions rings alarmingly true. Very few economists saw the credit crunch coming; yet the majority claim to be able to explain it. Another problem with economists occupying positions of power is their indecisiveness. Faced with a collection of academics that constantly stated ‘on the other hand’, Harry Truman frustratedly demanded ‘a one-handed economist’. In politics a bold decision maker is often required, perhaps economists as the new politicians would simply over-think the problems with the resulting lack of timely decisions being worse than a politician’s snap judgement.
However, so far we have ignored the biggest and most significant thorn in this argument. Politics and economics cannot be separated. To assume that this is possible is to expect too much from even the most diligent economist. Our instinctive political opinions colour our understanding of economic theories and steer us to our conclusions.
In the end then, economists are unlikely to become our leading politicians anytime soon. In the case of countries that are in crisis such as Italy, a highly respected economist can have a role to play. In theory, economists operating on fixed terms would not be susceptible to Nordhaus’ political business cycle. On the other hand, the instability of economics as a discipline, the propensity of economists to disagree, their poor predictive powers as a collective and their inability to make decisions ensure that politicians will not be displaced anytime soon. Mario may be giving us a preview but we are unlikely to ever see the full monty.