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Emerging stronger from crisis

by André Lieber

In depth

The global financial crisis has cast doubt on many paradigms: job applicants lining up in Denver, Colorado, in May

The global financial crisis has cast doubt on many paradigms: job applicants lining up in Denver, Colorado, in May

The global financial crisis is affecting economics and business schools. This is an opportunity for introducing new ideas into political debate. Development economists along with development cooperation should rise to these challenges. Given their experience in dealing with crises, they are likely to benefit from doing so. [ By André Lieber ]

Business schools and universities’ economics departments are experiencing a period of unrest. The global economic crisis is shaking up doctrines, for ­instance in the field of public finance, the discipline of studying the budgetary activities of government authorities. Familiar and long-established models are cast in doubt both, at the national and also the international level. So, of course, are the policies that were based on these models (Kirchgässner, 2009).

Prominent economists are speaking out against the financial and fiscal dogmas of the past three decades. Among them are Brad de Long, Paul Krugman, Wilhelm ­Buiter, Geoffrey Hodgson, David Colander and Joseph Stiglitz (Colander, 2009).

Whether one shares their views or ­rather considers old convictions hardened in the light of recent experience, there are currently opportunities to introduce new ideas into public debate. Development economics as a specific sub-discipline of economics should grasp these opportunities with determination. This discipline undeniably commands crisis expertise.

Indeed, crisis is anything but new for development economists. In a sense, one might even call them crisis veterans ­because, in much the same way as banks have now lost confidence in risk models, donor governments and development agencies lost confidence in the implementability and predictability of development in the 1990s.
In the era of the Washington Consensus, research focussed on the structures of the countries that received development aid. Structural adjustment programmes were introduced to correct structures that were considered flawed. When these programmes failed, research increasingly began to look at donor structures. Buzzwords like donor harmonisation and aid effectiveness began to mark international debate.

Nonetheless, a sense of perplexity ­prevails. If any development paradigm ­appeals to a majority of development economists at all any more, it is that there “are no blueprints”, which basically means that there really isn’t any paradigm either. ­Models were explicitly abandoned, and ­some development economists began to get bogged down in the debate over methods and methodology.

Contemporary macroeconomics, how­ever, with few exceptions, did not even deal with the subject of crisis, while development economists concentrated on causes and symptoms of crisis. In spite of various success stories in developing countries, unstable financial markets, weak or non-existent institutions and highly indebted national budgets are still typical of many poor nations. Related issues have now ­gained centre-stage of economic debate and policymaking in rich nations.

In the meantime it is nothing new that development economics itself is in the midst of a crisis. Since its beginnings in the mid-20th century, the discipline was re­pea­tedly challenged. In 1981, Albert O. ­Hirschman, one of the founding fathers, wrote a polemic in which he lamented its depressing state. His provocative thesis was that only those economists who failed to establish themselves in fields like trade, monetary theory and general economics turned to development economics.

In view of the global financial crisis, however, development economists have more to offer than many critics believe. This can be demonstrated by using three key terms – diversity, change and cognition.
– Diversity: Development economics subsists on the diversity of its analyses, ­methods and solutions. Development is not something to simply be “arranged” by technocrats. Informal factors deserve just as much consideration as regulated procedures and formal institutions. Elinor Ostrom, a political scientist and co-winner of the 2009 Nobel Prize for Economics, specialised in how cooperation is achieved in various cultures at various levels (see Eduardo Araral in D+C/E+Z 11/2009, p. 424ff). It is only appropriate that she encourages academic diversity in order to do justice to the diversity of our environments (Ostrom, 2005).
– Change: Development economics is ­above all a theory of institutional ­change. This change reflects interaction between endogenous and exogenous factors. In such processes, actors’ rationality is bounded in several ways (Evans, 2004). Particularly in times of insecurity and complexity in terms of multi-layered challenges, many actors rely on common-sense reasoning and a mix of idiosyncratic principles, norms, traditions and morals (Gigerenzer et. al., 1999 / Smith, 2003).
– Cognition: Development economists are aware of the relevance of cultural and cognitive factors for institutional change. Indeed, research is considering the impact of the paradigms that guide economic policymaking. The interaction between ideas and institutional settings matters beyond mere mentalism. It is important to understand what ideas, visions and mental models influential actors share in processes of change (Denzau/North, 1994). In this sense, economics is about co-evolving configurations which are shaped by ­notions of meaning (semantics), rules and sanctions (institutions) and day-to-day routines (practices) (Plumpe, 2009).

In his standard reading “Die drei ­Nationalökonomien”, the German economist Werner Sombart (1863-1941) dis­tinguished between three types of political economy: duty-based or evaluating, natural scientific or taxonomic, and interpretative. The first system was about quantification and mathematisation, the second ­about purely descriptive science and the third about human co-existence.

A return to the principles of the national economy is neither conceivable nor desirable in our current age of globalisation. But the perception of economics as a science of human coexistence has lost ­nothing of its validity. It remains as topical as ever.