New Keynesians, mathematics and democracy

Principia Mathematica, GB 1987

Tere are quite a few economists who suffer from physics envy.1 They believe that they can do for the economic sciences what Newton did for the physical sciences with the publication of Principia Mathematica. They believe that the application of sufficiently complicated mathematics will eventually lead them to a Grand Unifying Theory — into which they plug some data about the economy and it spits out optimum policy prescriptions.

Of all the schools of economics, it is the New Keynesians who are most susceptible to physics envy.

On the face of it this shouldn’t be a problem. However, the New Keynesians use their mathematical models to support a case for subverting democracy. They assert that politicians cannot be trusted with making the ‘right’ decisions about the economy and that the decisions they do make inevitably lead to ‘sub-optimal’ outcomes for society. The assertion is backed-up with some fiendishly complicated maths.

Their goal is to strip ministers of the ability to make fiscal policy — any and all decisions about spending and taxation. The New Keynesians want all this power to be transferred to an unelected committee, one they call a Fiscal Council. Despite this fundamentally undemocratic stance, the New Keynesians usually consider themselves to be ‘of the Left’ (or at least ‘not of the Right’).

I will deal with Fiscal Councils in more detail another time. Right now I want to show how the New Keynesians use mathematics to ‘prove’ some very odd stuff as a precursor to the demand for Fiscal Councils. Take, for example, a paper by Campbell Leith and Simon Wren-Lewis entitled Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy.2 The thrust of the paper is that our particular form of party-based democracy naturally leads to ‘deficit bias’. Apparently, that’s because politicians are never ‘fully benevolent’ once they achieve power. They will, for example, use ‘debt strategically to tie the hands of the other party, and influence the outcome of any future elections’.

The New Keynesian analysis of the electoral cycle is that it leads to ‘macroeconomic costs [which] are at least as large as the costs normally associated with [the] business cycle’ and it is the ‘party of big government’ which causes the most problems. In short, democracy is bad for us and democracy which leads to a Labour government is particularly bad.3

The authors identify the root problem to be one of ‘heterogeneity’ — the fact that different political parties will have different views about how to run the country. Let’s look at a snippet from the paper to see how they use maths to support this earth-shattering discovery.

Sub-optimal welfare functions, Leith and Wren-Lewis 2009

The density of the maths in the extract, both in terms of accessibility and page coverage, is representative of the entire sixty page document.

The authors say they:

wish to consider how policy is affected by political parties having welfare functions which differ from the social optimum due to heterogeneity in preferences over government spending

They are saying that there is a quantifiable ‘social optimum’ policy outcome and that different party-political policies will necessarily result in sub-optimal outcomes. How do we define, in a non-political manner, what constitutes a socially optimum outcome? Economic decisions are always, by definition, political.

And then there’s this:

we need to define the equivalent welfare measures adopted by our political parties when they solely represent the interests of one of the two types of household present in our economy

This lays bare a fundamental problem with the New Keynesians. Their model reduces the economy — the complexity of which is beyond the limits of human understanding — to a ridiculously simple model which bears no relation to reality. They then selectively prime the model with whatever data provides the desired answer. In this case they have defined a model economy with only two household types and then assume that a political party will ‘solely represent’ the interest of one of them. Is that really what politicians do?

Besides, surely the whole point of the democratic process is that it results in policies which give advantages to some groups at the expense of others. Isn’t that what elections are all about? Or am I missing something? Do we really need mathematics to show us the bleeding obvious?

As Lars P Syll says, the New Keynesian model is:

a methodology that is more or less used without a smack of argument to justify its relevance4

Anyway, at least this model has two households. That goes much further than the standard New Keynesian model, which merely contains a single infinitely-lived household.

There’s another reason why I chose this particular extract. I may not be a mathematician (I have forgotten pretty much all my A-Level maths), but even I can see that the workings here contain a simple mistake. It’s a trivial and very obvious error and I am sure most of you will spot it. Clue: It looks as though the authors don’t know how to calculate an average.5

It doesn’t really matter that this particular document contains an error — few people are going to read it — but it does matter when faulty maths is used to drive policy. In 2010, George Osborne used the mathematical work of Carmen Reinhart and Kenneth Rogoff as justification for his austerity budget.6 Reinhart and Rogoff’s calculations were subsequently shown to contain basic spreadsheet errors which, when corrected, nullified their original findings.7

Alfred Marshall, the British economist, had some interesting advice about the role of mathematics in economics. He said this back in 1906:

1. Use mathematics as shorthand language, rather than as an engine of inquiry;
2. Keep to them till you have done;
3. Translate into English;
4. Then illustrate by examples that are important in real life;
5. Burn the mathematics;
6. If you can’t succeed in 4, burn 3. This last I do often.8

Marshall’s somewhat flippant remarks shouldn’t be taken too seriously and I am not saying that there isn’t a place in economics for complex mathematics. But there certainly isn’t a place for maths which is used to attack democracy and that is precisely the use to which the New Keynesians are putting it. The New Keynesian ‘mathiness’ is there to add intellectual weight, to obfuscate, to intimidate and to ‘prove’ that the political is non-political.

Just about the only use I can imagine for it is as the basis for a Yes Minister sketch.9 Something like this, perhaps:

HACKER [AT DESK, READING PAPERS IN MANILA FOLDER]: What the blazes do you mean? We cannot possibly cancel the Council House Building Programme. Why on Earth would we want to do that?

SIR HUMPHREY [STANDING AT SIDE OF DESK]: Because it is sub-optimal, minister.

HACKER: But building more council houses was the main plank of our election campaign...

SIR HUMPHREY: That's as may be, but it does not make it any more optimal.

HACKER: But what evidence is there for the plan lacking optimalism?

SIR HUMPHREY: The mathematics is quite clear.

HACKER [PEERING AT THE FOLDER]: Maths? What maths?

SIR HUMPHREY: Overleaf, minister.

HACKER [TURNS A PAGE]: Good Lord! How am I supposed to understand this? I may have got my degree from LSE, but this is the stuff of boffins in lab coats.

SIR HUMPHREY: It's probably best to keep that opinion to yourself, minister.

HACKER: Why so?

SIR HUMPHREY: Because we don't want the press finding out that you cannot comprehend basic economics...

HACKER: Basic? Ha! Just look at it. Nobody short of a nuclear physicist could possibly decipher this.

SIR HUMPHREY: Bernard and I thought it was rather straightforward. And don't forget, minister, you appointed the authors.

HACKER [FRANTICALLY SHUFFLING THROUGH THE PAPERS]: I did?

SIR HUMPHREY: Yes. The Fiscal Council.

HACKER: Oh, them... Do we really have to do what they say?

SIR HUMPHREY: That is the whole point of having them.

HACKER: Oh well, so be it. Perhaps you could draft me something suitable to put to the PM.

SIR HUMPHREY: Certainly, minister.

Worryingly, the desire for political power to be handed over to unelected committees is present in other places too. It’s there in the Money Creation Committee proposed by Positive Money and it’s there in the Basic Income Policy Committee proposed by Guy Standing. And for some people it’s in their belief that continued membership of the European Union is the only thing that will stop our politicians turning the UK into a neoliberal nightmare.

For the supporters of Positive Money and Basic Income (together with some Remainers), the clamour for these ‘fully benevolent’ committees is driven by a distrust of politicians and a lack of faith in the democratic process. They have very strong views about how the country should be run and want to embed those views in what they see as ‘non-political’ structures. They want the country to be run by people like themselves, but don’t want to go through the bother of getting those people elected (and re-elected every five years).

For the New Keynesian economists it’s much more personal. They want to be running the committees.

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1. See Physics envy, Wikipedia
2. Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy, Campbell Leith and Simon Wren-Lewis, November 2009, Oxford University
3. It’s worth noting that John McDonnell appointed Simon Wren-Lewis to his ill-fated Economic Advisory Committee. Wren-Lewis went on to support Owen Smith in his leadership contest with Jeremy Corbyn.
4. The state of ‘New Keynesian’ economics, Lars P. Syll, 24 July 2018.
5. This paper exists in several versions across the Internet. All have the same error. See Leith: Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy, Google Scholar.
6. ’Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by Professor Ken Rogoff, former Chief Economist at the IMF, and his co-author Carmen Reinhart. In a series of papers and now a book, they have demonstrated in exhaustive historical and statistical detail [that] all financial crises ultimately have their origins in one thing — rapid and unsustainable increases in debt.’ George Osborne, Mais Lecture – A New Economic Model, 24 October 2010, Sayit
7. See Growth in a Time of Debt, Wikipedia.
8. Letter to A.L. Bowley, Alfred Marshall, 27 February 1906, Wikiquote
9. Yes Minister was a satirical sitcom produced by the BBC during the 1980s. It follows Jim Hacker, the Minister for Administrative Affairs, in his struggle with a civil service hell-bent on thwarting any and all progressive plans he has for government. Chief among those determined to disrupt Hacker is Sir Humphrey Appleby, the Permanent Secretary. Think of it as The Thick of It without all the swearing.

2 Responses

  1. Brian Philp says:

    This sort of thing happens quite a lot. There is a 200 page paper by a world famous mathematician called Thompson. Everyone regards the result as true while the author said 20 years after its publication that there are probably still errors in it. However the gobbledygook in which this typo occurs is typical. When hardly anything is defined it is almost certainly wrong. Certainly the hypothesis of a two family scenario is ridiculous.

  2. larry says:

    Alan, looking at this post again, I ask myself, how could you read this rubbish FIVE times? I almost lost the will to live after reading one of them only once. Your fortitude and discipline are exemplary.

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