The article by Fairfax economics editor Ross Gittins today (September 27, 2010) – How to limit the looming interest rate rises – is a testament to how ingrained the neo-liberal thinking is when it comes to discussing sensible economic policy. He argues that the Australian government needs to get back into budget surplus as quickly as possible and then continue to generate bigger and bigger surpluses and pay down all the outstanding public debt. Evidently this is because we are experiencing strong export conditions and face a dramatic inflationary threat. However, even if that is true (the boom and inflation threat) there are better ways to manage the adjustment process so that inflation remains stable especially when the private sector is still so heavily indebted (as a result of the last credit binge). The other policy options available to the Australian government clearly warrant continued budget deficits. The sticking point: Gittins and most other commentators think that when you have 13 per cent of your willing labour resources idle you are approaching full capacity. I consider that the fact that that proposition has currency is the ultimate evidence of the success of neo-liberalism in poisoning our judgement and distorting the policy debate and policy choices.

Many readers have written to me asking me to explain the British Treasury view during the Great Depression. This view was really the product of several decades of literature which culminated in the political process during the 1929 British election where the number one issue of the day was mass unemployment. The Treasury View was thoroughly discredited in the immediate period after it was articulated and comprised one side of the famous Keynes versus the Classics debate. When propositions – such as the Earth was flat – are shown to be incorrect constructions of reality the ideas cease to be knowledge and instead become historical curiosities which allow us to benchmark how far our education systems have taken us. However, the same cannot be said for my profession.

In the last few days I have read some really loony stuff. One article from an esteemed investment advisor (which I will not dignify by a link) was arguing that the build up of public debt is signalling the death knell for democracy and that capitalism will survive but our freedoms will be gone. I asked some basic questions – which freedoms are they exactly? – and – Why should a rise in private wealth lead to constitutional change or revolution that would deprive us of a vote? But the trend in policy is becoming very clear. Fiscal policy makers are succumbing to the relentless attacks from the deficit terrorists and withdrawing the essential stimulus that has been propping up growth. Most economies are starting to slow again as a result. The response is to seek solace in monetary policy – as if it is effective. The point is that the neo-liberal years have seen the promotion of monetary policy as the principle counter-stabilisation tool – driven by the obsession with inflation. This ceding of macroeconomic policy responsibility to unelected officials in central banks was a major erosion of our democratic rights. Moreover, it has been a failed policy strategy. It is neither an effective inflation control nor does it promote growth. So we are just heading back to where the crisis started. Pity the unemployed.

I have always been antagonistic to the mainstream economic theory. I came into economics from mathematics and the mainstream neoclassical lectures were so mindless (using very simple mathematical models poorly) that I had plenty of time to read other literature which took me far and wide into all sorts of interesting areas (anthropology, sociology, philosophy, history, politics, radical political economy etc). I also realised that the development of very high level skills in empirical research (econometrics and statistics) was essential for a young radical economist. Most radicals fail in this regard and hide their inability to engage in technical debates with the mainstream by claiming that formalism is flawed. It might be but to successfully take on the mainstream you have to be able to cut through all their technical nonsense that they use as authority to support their ridiculous policy conclusions. That is why I studied econometrics and use it in my own work. It was strange being a graduate student. The left called be a technocrat (a put-down in their circles) while the right called me a pop-sociologist (a put down in their circles). I just knew I was on the right track when I had all the defenders of unsupportable positions off-side. But an appreciation of the empirical side of debates is very important if a credible challenge to the dominant paradigm is to be made. That has motivated me in my career.

When I give public lectures about economic policy I often pose the question – how should we judge the effectiveness of public policy? I pose a simple rule of thumb! I judge whether social and economic policy is effective not by how rich it makes society in general but how rich it makes the poor! I see richness in broad terms which embrace both economic and social valuations. Applying this rule of thumb has led me to conclude that the majority of nations in the advanced world are now failed states with run-down and corrupted public institutions. The conclusion is more stark when applied to less developed nations suffering under the neo-liberal yoke imposed on them by institutions like the IMF and the strong donor nations. But the rising poverty in the advanced world as a result of the extended current crisis is making it clear that our economic systems and the policy regimes that are being imposed on them by the neo-liberals are no longer delivering satisfactory outcomes. There needs to paradigm change – urgently.