In Praise of....Political Economy

Trust the Germans to spot a winner!

Some 18 months ago I bought a small book which I have carted from the Carpathians ….and back…briefly dipped into but then abandoned - from my impatience these days with economics….Its title, Austerity (2013), was hardly calculated to bring me to orgasm but its subtitle – “history of a dangerous idea” – should have told me that this was no ordinary pseudo-technical stuff. It took author Mark Blyth’s electrifying youtube performances (a more sedate performance is a recent presentation at the University of Glasgow) to bring the book back down from my shelves (metaphorically – since the book is still in the Carpathians) for more careful reading. 
What I found is a book I would rate as the best read of the new century! 

Mark Blyth is that rarity – a Scot and political scientist (but with an American post-graduate specialism in “economic ideas and political change in the 20^th century”) whose book reminds us of the Scottish tradition of political economy. Since 2009 he has been Professor of International Political Economy at the Ivy League Brown University - quite an achievement for a Dundee lad from a poor working class background who generally pays warm tribute to the support he owes to the welfare state....  

The book can be read in its entirety at Austerity – the history of a dangerous idea and you can get a good sense of the respect with which its being treated by colleagues in the special symposium Comparative European Politics ran on the book in 2013 – with this being Blyth’s powerful response

For those impatient with academic jousting, Le Monde Diplomatique ran this good summary

Blyth’s book is divided into two parts. The first is an account of the crisis, starting with the United States and moving on to Europe. Blyth’s narrative does not drown in financial jargon. He sets out to explain as simply as possible what the jargon means and what role it played in the crisis.

For those interested in understanding collateral deals in US repo markets, the structure of mortgage-backed derivatives, repo transactions, correlation and tail risk, Blyth’s book is a good place to start.

His explanation of the crisis is compelling: innovatory financial instruments were allied with a set of ideas about how the economy works, and in particular about how one should evaluate risk in the economy, which together contributed to a build-up of risks within the global financial system and their explosion in 2008. These ideas also facilitated the transfer of the crisis from the US to Europe.

Blyth dismisses the popular notion that the crisis is somehow the result of the moral failing of particular individuals — the ‘Fred Goodwin problem’. It is, for Blyth, a failure of the private sector as a whole. That it has been paid for by the public purse can only be explained by the contradictory set of ideas, which prevail today, about the dangers of state intervention. It is these ideas that Blyth calls ‘austerity’. 

The second half of the book is a great primer in political economy. Describing the intellectual origins of the idea of austerity, Blyth gives us potted accounts of the ideas of Hume, Locke, Smith and Ricardo. He ties these ideas together with political developments, presenting us with a picture of the 20th century that sees Keynesian ideas fighting it out with older ideas about austerity and government probity. A short-lived victory for Keynesian economics after the Second World War was eventually overthrown by a mixture of economic crises, public choice theories of democracy and the rational expectations revolution in economic theory.
This journey through the idea of austerity ends with a chapter on its implementation.

This is a devastating account of how attempts at putting the idea into practice — from the struggle of governments with the Gold Standard in the 1920s and 1930s to the travails of more recent ‘austerity successes’ like Sweden and Ireland — never seems to work.

But it took those canny Germans to appreciate Blyth’s genius. Given the choice last year to award a prize for the economics writing of the year which included Thomas Pikety’s highly profiled (but, I suspect, seldom read) "Capital", they chose Mark Blyth’s "Austerity" – for reasons they explain here  

"Political economy" sank out of fashion in the 1970s as the pretensions of economics to be treated as a science overwhelmed academia......Blyth's book (and chair at an Ivy league University) is yet another welcome sign of the grip of "scientific" pretensions being broken..... 

historical note

The phrase économie politique actually first appeared in France in 1615 with a book by Antoine de Montchrétien - Traité de l’economie politique - with the world's first professorship in political economy established in 1754 at the University of Naples, Vienna University following suit soon thereafter (in 1763). And it was to be Thomas Malthus who, in 1805, became England's first professor of political economy, at the East India Company College.

As it happens. I graduated (in 1964) with an MA (Hons) in ”Political Economy and Politics” from …..no less than the University of Glasgow where Adam Smith occupied a chair (in Moral Philosophy) from 1753 for more than a decade – attracting students from many parts of Europe to his lectures which increasingly focused on the causes of national wealth. He then acted as tutor on the Grand Tour (engaging then with the French physiocrats) but returned after a few years to Kircaldy to write his magnum opus “The Wealth of Nations” which appeared in 1776. 
The Glasgow course in Political Economy must be one of the longest running - it disappeared (as a name) only in the early 1990s....