The Strange Lack of Macro-Economic Knowledge

 

In the whole West, both in academia, in politics, and anywhere actually, good macro-economic understanding is absent and this absence is in itself being ignored as well, while the consequences are major.

Almost direct as a result, already 25 years ago, we allowed China, with its low prices, to start breaking down the core of our manufacturing industry, they have prices against which we cannot compete. This, in turn, if continued, inevitably spells the slow, inexorable end of the solidity of our Western society.

The most shocking example of this absence of macro insight can be found in the speech given by President Bill Clinton on March 8, 2000, at the Paul Nitze School of Advanced International Studies in New York, in which, with totally misconceived arguments, he initiated this free trade relation with China that we all know about. In these last 25 years, this faulty decision, followed naïvely as it was by all countries of the Western world and beyond, has helped China become the world’s economic super-power, already as it is, beginning to tower over the US.

It is important to read what Bill Clinton said. I quote him here, while numbering the errors :

“The (coming) WTO agreement will move China in the right direction. It will advance the goals America has worked for in China for the past three decades. And of course, it will advance our own economic interests (1). Economically, this agreement is the equivalent of a one-way street (2). It requires China to open its markets—with a fifth of the world's population, potentially the biggest markets in the world—to both our products and services in unprecedented new ways. All we do is to agree to maintain the present access which China enjoys.

Chinese tariffs, from telecommunications products to automobiles to agriculture, will fall by half or more in just five years. For the first time, our companies will be able to sell and distribute products in China made by workers here in America, without being forced to relocate manufacturing to China (3), sell through the Chinese Government, or transfer valuable technology (4). For the first time, we'll be able to export products without exporting jobs (5). Meanwhile, we'll get valuable new safeguards against any surges of imports from China (6 !!! ).”

This nonsense is still deeply shocking.

None of the professors teaching macro in our many prestigious American universities reacted, which in itself is proof of their strange, shared incompetence. They should of course have protested, because what the President had said could not be missed, it was aired in all American newspapers the next day and it was clearly a major macro issue of global dimension. But none of these respected academicians took his pen.

Another, almost equally grave example of the absence of knowledge of macro is how in Europe, from 1999 till end 2024, President of the European Commission Ursula von der Leyen appointed an Italian politician, Paolo Gentiloni, as European Commissioner for Economy. Mr. Gentiloni, a former PM of Italy, is not an economist and has no idea of macro-economy whatsoever. The fact that no journalist nor any university professor, over these five years where Gentiloni has been totally useless, exposed there was something wrong with his appointment, is another aspect of this lack and – even worse - of the general ignorance of the lack. The simple fact that speaking or writing about an economic issue requires economic knowledge, and is of course required in an economic function, in a job, this fact is not recognized by politicians in the US, nor is it in Europe! This lack, together with the ignorance of it, apparently is ubiquitous.

Next to these two tell-tale examples, there are many others.

After reading the above, any reasonable American will of course think “This cannot be right, our great universities certainly have professors and other thinkers who know all the ins and outs of macro-economy ! “. That would be a reasonable supposition. But reality is different. Present-day academia does not have such persons. The question arises “How is that possible?”.

Teaching Keynesianism.

In order to explain the above, we must take a look at how teachers of macro-economy share a basic misconception, everywhere. Looking up with AI (that is: via Chapchat) what is being taught, one gets seven major lines :

1.      The Economy Is Driven by Both Supply and Demand.

2.      Markets Tend to Move Toward Equilibrium, but Not Always Smoothly

3.      he Federal Reserve influences the economy through interest rates, expectations, and influences financial markets (monetary policy) and also demand through taxing and spending (fiscal policy).

4.      Models Are Used to Simplify and Predict

5.      Inflation and Unemployment Involve Tradeoffs (in the short run)

6.      Economic Growth Depends Primarily on Productivity

7.      Expectations Matter

The above true statements show a few of the most important consequences of Keynes’ theory, but they do not give the theory itself, they do not teach the insight in macro that John Maynard Keynes delivered to the world for the first time in 1937.

John Maynard Keynes.

Before Keynes, the major thinkers about economy, Adam Smith, John Locke, David Hume, Jean-Baptiste Say et alii, had never understood how depressions work. Keynes explained it for the first time, but the seven above subjects are not teaching that. They are just a list of symptoms or, better, consequences of the Theory and they skip the theory itself, do not provide insight. In other words, Keynesianism is not being taught nowadays. I would hope there is at least one exception to this fact, somewhere there must be some good teaching, but if so, it is not making a splash.

But then, in stark contrast to the lack in academia described here, there is, still available on Amazon, the standard book where anybody with an adequate brain can learn macro-economy! It is “Modern Economy” published in 1947 by Dutch Professor dr. J. Pen, who, after WW2, was able to explain J.M. Keynes’s Theory of Employment in more easily readable language than Keynes had used himself. This book also shows the Keynesian model is beautiful. The feeling I got is that it’s like a highly complicated clockwork. Once understood, predictions about what a given economic situation would yield in future, came easily and automatically. Keynes’ theory is a delight. And here is the url of that so famous little book. https://www.amazon.nl/-/en/Jan-Pen/dp/0140207104?utm_source=chatgpt.com.

This book can still be purchased on Amazon, more than 70 years after its first edition! Originally in Dutch, it was recognized as the standard study material about Keynes, and was translated into 38 languages at the time.

The negative influence of financiers.

The above also begs the question how the present lack of insight can at all have come about. Maybe one of the causes is that financially trained politicians have always doubted about what Keynes exposed, and still do. The most often repeated consequences of K’s theory, which is that Governments can spend themselves out of a recession, goes against one of the basic instincts of any financially trained person, because he/she knows that when times are financially difficult, it is imperative to restrain spending. That is true for individuals, for businesses and other organizations.  But for governments, as was extensively aired in the press at the time, Keynes’ theory says the opposite ! That makes financiers distrust ‘this intellectual nonsense’, as they often say.

One of the clearest examples of the dramatic consequence of this skepticism in financial trained politicians is how German Minister of Finance Wolfgang Schäuble, around 2014, who had been given responsibility by the European countries to oversee European financial help for Greece, made dramatically wrong decisions. He withheld the available funds because he was convinced spending had first to be constrained, when in this situation in Greece, Keynes’ theory argued that the money needed to be spent. As Schäuble held back the available finance, the then Greek finance minister, Yanis Varufakis, begged him for the money. Schäuble kept refusing and so, Greek GNP shrank by 25% ! A whole quarter of GNP gone because the financier Schäuble distrusted Keynes’ theory.

In 2021, I had three conversations about this subject with Dutch former Finance Minister Onno Ruding, who had famously put the Dutch finances in order and later became Vice-Chairman of Citicorp/Citibank in New York. A great man. But he and I did not agree and he ended our third talk with authority, saying “Keynes cannot be trusted!” and without further words showed me the door.

This instinctive aversion of K’s ideas by financially responsible people is probably one of the basic reasons why K is not being taken seriously, and why his theory is not being taught well. A second reason might be that one needs a rare high level of intellect, a high IQ,  and have the motivation, the wish, to fully understand what Keynes wrote, in order to understand his theory. It is high level stuff. That too is a hindrance for learning, let alone for teaching this theory.

The point of this article is to show that the absence of good macro-economic competence must absolutely change. If the present void continues, it will be at our peril. General opinion about this matter, too, must undergo a radical change.

Right now, we are simply letting our industry be destroyed by economic blindness. The Draghi Report of August 2024 too,  about European competitiveness, although highly praised everywhere, bears a responsibility. It failed to mention the cheap Chinese cost of manufacturing as our single biggest problem in competition.

This article therefore pleads

-                 For the book by professor Pen to be again considered as THE syllabus of teaching at universities;

-                 For professors teaching Macro, to be tested for IQ and not be hired or even be sacked when  inadequate.

-                 For examination of students of macro to be based on understanding Professor Pen’s book.

-                 For a general recognition that politicians responsible for economy be truly economically trained, not just famous for having brilliantly done something non-economic, like Messrs. Gentiloni and Draghi.

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