Over the past few decades, Economics has become increasingly focused on modelling to make policy recommendations. Unfortunately, such forecasting requires forecasters to foresee many variables, leading to imprecise forecasts. Economists have found a way around these uncertainties by making unreasonable assumptions about the economy and guarding their findings with a wall of ‘ceteris paribus.’ Consequently, modelling becomes an exercise in validating the ex-ante hypotheses of economists. The recent Productivity Commission Report from Australia’s Productivity Commission is an example of this futile exercise.
Computable General Equilibrium
Before examining the Commission’s report, it is important to understand the Computable General Equilibrium (CGE) models that are used to misguide the public. Like any abstract model, these require some simplification of the real world. However, CGE models take it a step too far. They require representative firms that don’t behave like firms in the real world but like a rational human with an infinite lifespan. The mathematical equations are then arranged to comply with these unreasonable assumptions. Further, these models are usually static, meaning that the adjustment process is ignored and the model leaps from one equilibrium to another. Unsurprisingly, these models usually become an exercise in fulfilling the conclusions economists originally have in mind.
While abstract modelling is important, it should be kept in mind that models are meant to be somewhat realistic and not make ideological assumptions.
Such modelling produces results that have little to say about the real world. These equations and models then become a sophisticated way of preventing scrutiny from observers who have little knowledge about these complex models.
Productivity Commission Report
The Commission is hardly a heterodox organisation. It has a track record of advising the government to privatise public services, using neoclassical models, methods, and theories.
Their recent recommendation on privatising vocational training was one such example of groupthink, which ended badly with many newly privatised operators becoming insolvent after drawing great government funding.
The Commission after a futile exercise in the CGE models discussed above came up with the following conclusion:
“Lifting productivity in the non-market sector to deliver high-quality services at the lowest cost, by changing incentives and culture.”
Which is just a way of suggesting that workers work harder and longer for lower pay.
Further, the ideological bias of the report really comes to the fore as the authors reveal some more of the ridiculous assumptions in the model:
Capital is fully mobile and flexible, which is never the case in the real world.
Foreign investment is not affected by domestic policy or variables. If this was the case, Russia’s economy would not have been in a slump.
Government spending does not affect the model’s productivity parameters.
Apparently, the Australian government does not affect productivity even when 65% of Australian students attend government schools.
With such assumptions, the authors might as well clearly state the recommendations they had in mind before engaging in modelling.
The problem for the nation is that when the government ratifies this sort of incorrect ideology by designing a policy that reflects it, the outcomes undermine the stated objective. The profit sector uses the government as a pawn. Through funding rules, lobbying and all the rest of it, the state becomes an agent for capital.
Conclusion
One of the features of neoliberalism that has ensured it’s survival for decades and become the school of economic thought is that it engages in such modelling.
The modelling introduces unnecessary technical complexity to keep the public out of the discussion and only serves to reinforce the ideological presumptions of the modeller, with little benefit to society.
John Maynard Keynes envisioned economics as a humble discipline that serves non-economists. Unfortunately, economics continues to evolve into a discipline that indulges in theorising and modelling for its own sake, staying as far away from the real world as possible and as insular as possible in technique.
The drawbacks of modelling should come as no surprise to anyone, after all the IMF famously admitted getting its fiscal multiplier wrong (the model conveniently assumed that the Ricardian equivalence holds) after imposing austerity on Greece.
If Economists really want to add value to society, they must be more pluralistic in technique and theory, otherwise, their policy advice will have little to do with the real world.
Written by: Rohan Dubey
Edited by: Shamonnita Banerjee