How Serious People Think About Economics, Now & Then: Harry Swain in 2005

I can't but notice that the Globe has recently published a series of good articles exploring the limits of blinkered dogmatic adherence to classical and neo-classical economic theory as regards policy-making, however excellent it is, as a theory. Among others I noted there was the front page story on last Saturday's ROB, Currencies behaving badly: Why conventional practices can fail, with its piquant wisdom from BoM's Doug Porter: "The larger problem, he said, is that Japan, Canada and every other country is 'dealing with one big player – China – who isn’t playing by the rules.'" and from Dan Ciuriak, former deputy chief economist at DFAIT: "one of the flaws of exchange rate orthodoxy is that currencies don’t actually float, they fluctuate. 'WE'RE PURISTS IN A NON-PURE WORLD,' explained Mr. Ciuriak, now an Ottawa-based consulting economist. 'We ought to be interventionists.'"

Then on Monday, the ROB had another front-page story, Economists and their fairy tale world of prognostication in which the theses behind David Orrell's book Economyths are explored, namely that, as in the previous article, contrary to theory, the world is imperfect and people and institutions are not perfect rational actors, as was the point of previous article. Of course, economists are not the straw-men idiots Orrell evokes, and they have long known this, as he admits himself, given his evocation of behavioural economics, etc., but it is always useful and very necessary to remind people that theory is not all, or rather, is the least of it. Beautiful as theories may be, and as helpful in understanding the world from this or that vector, appreciating reality's imperfections is more important as far as the general good is concerned. This book would seem a helpful corrective, or reminder, to one-track minds. That is perhaps Orrell's most perceptive point, made many times before, of course, the psychological insight into such blinkered minds:
"'It’s not easy to give up (such a cherished theory) without changing your entire world view,' says David Orrell".

And today there was the excellent analysis of global trade by Jim Stanford in the front Comment section, The new protectionism is shutting us out, occupying the top half of the prime real estate facing the editorial page. I was taken by his reminder of the foolishness of trying to be plus catholique que le pape in a world of cheating, thieving heathen:

Where does Canada fit into this game? As usual, we don our Boy Scout’s uniform and pledge to play fair. While China, Japan and others actively manage their currencies, we allow ours to soar unfettered. As Germany and Korea subsidize and direct technological advances, we eschew “picking winners” and leave it up to business. As countries everywhere leverage government spending into domestic jobs, we pursue trade agreements that would undermine our already-weak domestic-sourcing policies.

There’s no point finger-pointing and hectoring others to “play by the rules,” too. That will get us nowhere. So long as the world trade system imposes no requirements for balance or mutual benefit, protectionism (official or unofficial) will always make sense for individual countries … and they’ll always find ways to do it.

John Maynard Keynes was ahead of his time in recognizing the dangers of trade imbalances for worldwide demand. After the Second World War, he lobbied for a new global payments system, forcing both surplus and deficit countries to address chronic trade imbalances and share the burden of adjustment. He was overruled by free-marketeers who accepted the logic of dog-eat-dog global competition. And it’s that logic, regardless of politicians’ lip service, that’s deepening the global malaise.

Of course, decent economists have always been wise about the distance between theory and reality, Keynes famously anticipated the entire discipline of what we now call behavioural economics with his beauty contest (which is how he picked his own stock winners, in the morning, in bed, after browsing the papers): "“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

And Adam Smith was no fool about man's nature (well that was the whole point of his writing wasn't it?):
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Smith was opposed to mercantilism for many good reasons, and for free-ish commerce, but I doubt a man who understood human nature, and thus that of institutions, would ever have recommended that Canada behave like the lone boy scout in a den of cheats. Try to reform the cheats, try to regulate them, try to prevent their worst effects, but pretend they don't exist? He was too canny a Scot for a' that.

The Globe seems to have been making a point this past week, perhaps to some charmingly blinkered classical or neo-classical boy scout, somewhere or other. If I might be of assistance, on the off chance such a lad might come across the following wisdom, might I be so bold as to offer a further example of how serious people think about and understand economics. One can't predict things, but if one has a sense of the world, and how it works, one can often anticipate its twists and turns in some meagre manner. For example, back in November 2005, Harry Swain, former Deputy Minister of Industry Canada (among many other things), gave a bitingly sensible speech (for example, note his criticism of Brison's silliness about Federal real estate, a mistake the Cons pursued), which was right in so many ways. But because of the heightened political tenor of the time, his most important remark was largely ignored, as attention focussed more on the Martin Government failings, which were only to deepen under Harper - by comparison, we now think of Martin as a veritable Solon, Pericles, Roosevelt and Pearson, all rolled into one PMPM. Here is Swain, in early November 2005:

"We are overdue for a cracking good recession. This time it will have nothing to do with any Canadian sins of economic policy...but rather with the stupendous mistakes being made south of the border....No economy running the imbalances the US is doing can long continue doing so. And because we threw away the Third Option and crawled in bed with the elephant seventeen years ago we will suffer its fate."

Smart guy, eh? Hope we get that EU deal done, though it seems unlikely - getting into bed with us means getting into bed with the elephant, and they have never wanted to before. Still, one must live in hope. Anyway, I just thought that might be a helpful example of how wise men who practise economics with an eye on reality and the public good think about things. Though I'm sure academia was also full of clever chaps saying similar things - wasn't it?

PS. Swain's bio at the time:
Harry Swain is a company director and management consultant from Toronto. His consulting focus is strategic and financial advice for public and private sector clients. Recently he chaired the research advisory panel for the judicial inquiry on Walkerton. Previous appointments include CEO of Hambros Canada and director of its UK merchant banking parent, Deputy Minister of Industry Canada, and Deputy Minister of Indian Affairs and Northern Development. Educated at the universities of British Columbia, Minnesota and Cambridge, he holds a doctorate in economic geography and an LL.D. from the University of Victoria.