Who Needs a New Economic Paradigm?

Andrés Velasco, a former finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science.

LONDON – Demand for new economic paradigms is fast outrunning supply. On the left, the Institute for New Economic Thinking claims that “mainstream economics has demonstrated blind spots that have impaired its effectiveness and credibility – and failed society at large … We need a new vision of the economy that aims to serve society.”

The more than 500 economists who signed the Berlin Declaration, including such luminaries as Dani Rodrik, Laura Tyson, Thomas Piketty, Mariana Mazzucato, and Angus Deaton, told the world that “we are living through a critical period. Markets on their own will neither stop climate change nor lead to a less unequal distribution of wealth. Trickle-down has failed … What is needed is a new political consensus addressing the deep drivers of people’s distrust.”

Not to be outdone, the right also calls for a new agenda that the president of the Heritage Foundation says should be “based on the principles of limited government, economic freedom, a robust civil society, and a strong national defense.” The new agenda’s goal? To counter “woke totalitarianism’s escalating culture war.”

And just last week, Argentina’s libertarian president Javier Milei told the General Assembly that instead of the UN’s “supranational program of a socialist nature,” the world needs a “freedom agenda.”

Most economists are allergic to grandiose calls for new agendas and paradigms. Over the last quarter-century, the profession has been moving in exactly the opposite direction, hoping to tiptoe its way to prosperity one small policy intervention at a time: give villagers a micro loan, provide bed nets to people at risk of contracting malaria, measure the results, see what works. “One big advantage of focusing on clearly defined interventions,” claim the Nobel laureates Esther Duflo and Abhijit Banerjee, is that “we can experiment with them, abandon the ones that do not work, and improve the ones with potential.”

When asked whether a policy is desirable, economists’ most likely answer is “it depends.” What works in one place at one time may not work in another. That is why Rodrik is on record counseling “beware of economists bearing paradigms.” And, back in 1970, the great development economist Albert Hirschman titled an influential essay “The Search for Paradigms as a Hindrance to Understanding.”

So, who is right, the skeptics or the gurus?

At first blush, it is hard not to sympathize with the skeptics. Many aspiring agendas, novel narratives, and pioneering paradigms offer little more than hot air. And when a new paradigm does emerge, it can easily become ossified, a repository of yesterday’s clichés instead of tomorrow’s answers.

Yet, if handled with care, economic paradigms do have an important role to play. The classic in the field is Thomas Kuhn, who defined paradigms as “universally recognized scientific achievements that for a time provide model problems and solutions to a community of practitioners.”

The world is messy, so to understand even small bits of it we need hints. Why are some people poor? Think about productivity, answers the paradigm of conventional (neoclassical) economics.

Wrong, counters the alternative paradigm of Marxian economics. To understand why some people are poor, you have to think about exploitation. Once your paradigm has told you where to look, you can set about gathering evidence and identifying causal links.

Paradigms also save time and effort by identifying those policies that never work. Once you embrace the paradigm of a market for money where demand equals supply, it is hard not to conclude that financing large budget deficits by printing money will, sooner or later, get you into trouble. People who do not want to hold all that money will try to get rid of it by purchasing goods, which in turn will bid up the price of those goods and cause inflation.

Useful paradigms are about principles, not policies. Good policies depend on circumstances. A set of principles, organized around a paradigm, helps policymakers look for answers that are best for their countries, given their unique history. This approach yields the opposite of the common one-size-fits-all recipe.

Helpful policy advice comes in conditional propositions: “If this is your set of circumstances, do this; if not, do that.” A paradigm that advocates, say, a universal basic income for all countries, big and small, rich and poor, is not a paradigm; it is an obsession or, worse, a ploy to fleece the naive.

But perhaps the most important role of paradigms is political as well as cognitive. Paradigms give rise to narratives, or accounts that organize the infinite amounts of information out there into something we can understand.

Psychologists have long argued that humans are wired for processing information via narratives. Narratives are only partly evidence-based, because they rely on a combination of logic, data, and imagination. So, they can deal with the big questions of politics – growth and prosperity, equality and justice – and not just with the questions of whether a tiny loan or a bed net will make someone slightly better off. And it is those big questions of politics that inflame passions and mobilize people.

In democracies, leaders must persuade voters of the advantage of a given policy. But voters are seldom interested in the theoretical assumptions or the empirical evidence on which the policy rests. Voters want to know about the big ideas and the values that policy embodies.

Something else psychologists teach is that people are naturally moralistic. Voters will ask the policymaker: is your policy just? Does it give me and my family a fair chance? Does it make us freer? The let-us-test-what-works approach of paradigm-free economics cannot answer such questions.

As calls to arms go, the cry “test broadly, gather sufficient evidence, and then proceed gradually” is not compelling. That is a huge problem for evidence-bound, tinkering-prone reformers. They seem content to call for effectiveness, while most philosophies call for greatness. Christianity vows to deliver salvation forever. Marxism offers a classless society. Populists promise a nation free from the influence of egoistic elites and foreign rogues. The conclusion is unavoidable: to succeed in politics and policymaking, get yourself a paradigm. Just make sure it is a good one!