The IMF: time for a rethink

Deep, deep below the surface momentous changes are happening in the world of political economics. For thirty years the ideas of a school of economics generally known as 'neo-liberal economics' have reigned supreme. That reign has ended in chaos.

Neo-liberalism, which is basically a re-run of the thinking of late nineteenth century Europe, became so dominant that most people, including politicians, journalists and even some economists, are scarcely aware that other schools exist. How many university economics faculties, for example, offer serious courses in ecological, or post-Keynesian, or institutional, or Marxist, or feminist economics, to name just a few of the possible alternative schools of thought that can be drawn on?

Such ignorance is no longer tenable: the entire intellectual basis of neo-liberal economics, which rests heavily on ideas such as unceasingly rational human behaviour and an almost metaphysical belief in the perfection of markets, has been so discredited that no-one, and we mean no-one, can dig it out from the wreckage of its own hubris.

For those of us with an interest in such things, signs of the tectonic shifts underway are plain to see. It is a truth universally acknowledged, for example, that the rescue package designed and implemented in 2008/09 to save the global banking system from itself was Keynesian in conception. Its success came as no surprise to those who have studied Keynesian economics and understand that governments must play the key role in rectifying market failures (those who only studied neo-liberal economics might need to look that term up).

Governments around the world are converting en masse away from neo-liberalism to a more interventionist position - though neo-liberals, like zombies, have an alarming capacity for just keeping going. But we have not quite returned to the position of the period from 1950s through to the mid-1970s when even conservative US President Richard Nixon felt obliged to declare: "we are all Keynesians now."

Amongst the ranked cheerleaders of the failed neo-liberal school of economics, the International Monetary Fund was an early and powerful convert. The IMF led the way in enforcing the orthodox policy prescriptions of the neo-liberal school, which in a nutshell required central banks to use interest policy to target a fixed inflation rate, with minimal use of other policy tools - especially tax policy and regulation - to intervene in the activities of markets. Well, whoops, that didn't work did it?!!

A fresh report from IMF researchers, Rethinking Macroeconomic Policy, does exactly what it says on the front cover: it reflects on the IMF's core intellectual platform of recent decades and concludes that, among other things, government regulatory tools and fiscal policy - the way that governments raise and spend money - have a positive role to play in economic policy-making. This involves intervention both during upturns, when stabilisers are required to prevent over-heating, and during the downturns when public spending needs to rise to compensate for falling demand elsewhere. Well, no shit Sherlock, the heterodox economists among us will be saying, but trust us when we say that this little insight has potentially earth-shattering consequences.