The Dismal Science? Is Economics Influential Enough In Government Decision Making?

On Monday, October 17th, 2011, the Institute for Government launched the new InsideOUT publication by Vicky Pryce, former joint Head of the Government Economic Service and Chief Economist at the Department of Business, Innovation and Skills.

Speaker

Vicky Pryce, Senior Managing Director of FTI's Economic Consulting practice. She is the former joint Head of the Government Economic Service (2007-2010), and Chief Economist at the Department of Business, Innovation and Skills (2002-2010). Before joining the civil service, she was Partner at London Economics, Partner and Chief Economist at KPMG, and an Economist at Esso Europe.

Discussants

• Rt Hon Vince Cable MP: Secretary of State for Business, Innovation and Skills and former Chief Economist at Shell.
• Jonathan Portes: Director of the National Institute for Economic and Social Research and former Chief Economist in the Cabinet Office at the Department for Work and Pensions.

The discussion was chaired by the BBC's Evan Davis, presenter of the Today Programme and former BBC Economics editor.

About this event

Vicky Pryce outlined the key themes of her InsideOut report for the IfG, The Dismal Science?. She began by explaining that economics is fundamentally about the allocation of scarce resources, a challenge that lies at the heart of the political process, and that economists should therefore be viewed as friends of government and democracy.

Although economists think they do science, with the rigour and clarity which is often missing from other disciplines, they face two difficulties. First, economics is a social science: it has no laws and the outcomes of its "controlled experiments" vary. This creates a tension between politicians wanting quick action and economists acknowledging uncertainty. Second, economists often disagree, especially on macro-economics. Yet, Vicky Pryce argued that economists carry valuable baggage. The undermining of the "efficient markets" theory in the wake of the 2008 financial crisis should not lead to a wider dismissal of the whole of economic activity as a way of looking at the world.

Economists - Pryce argued - enjoy a world where they can associate numbers to things, weigh costs and benefits, and in doing so, encounter two problems: first, they have no "utility function" and cannot prioritize their measurements since the weight politicians give to trade-offs is only revealed in decision making. Second, the methodological processes used by government economists do not fit with how policy is made. "But having understood how decisions actually get made", Pryce argued, economists face a dilemma: should they be involved in government, accepting politicians are not rational actors while knowing they can still help make policy better, or should they remain faithful to their theory, trumpeting the truth from a distance and being ignored ?

During her time as joint Head of the Government Economic Service, Vicky Pryce saw the seniority of the Chief Economists across departments go up. The financial crisis increased demand for economists. However, the recession has resulted in growing tensions between the need for economic advice in government to steer through the troubled economic context, and cuts in the GES.

Government economists realise that Ministers need to translate their manifestos into policies: as civil servants, their duty is to ensure ministers act wisely. To remain relevant, economists must find proper and relevant evidence, and say if evidence does not exist, even at the cost of "being loved by all policy makers".

Responses

Jonathan Portes pointed out that although citizens and the government should not look to economists for good macroecomic forecasts and predictions instead they can do three things. First, they can add value through their distinctive way of thinking about policy, using concepts such as opportunity costs, as well as an understanding of general equilibrium, and their awareness that correlation is not causation. Second, government economists can assess without prejudice (but not necessarily without ideology) when evidence is "good enough", despite scholarly disagreement. Finally, they can explain to Ministers things that are true, but not obvious (such as Keynes' paradox of thrift).

Rt Hon Vince Cable MP highlighted improvements in evidence-based policy-making over the past three decades. In short, evidence-based policy can de-politicise issues, and surrounds departmental decision making with good processes. The Stern Review on climate change and the Turner Commission on pensions reform are but two examples of policy-making on ideological issues made on the basis of sound evidence. Government can improve the way it operates by creating structures providing evidence and independent assessment - particularly on emotional and ideological issues.

Yet, there are problems in constructing an evidence-based environment. First, the wrong measurement might be chosen (the MPC's measure of inflation did not encompass housing costs, resulting in a property bubble); second, in some areas of government, evidence-based policy is not allowed (for example in aircraft user pricing, where demand is distorted); third, collecting data is long and difficult, which constrains policymaking in some areas; finally, evidence-based policy cannot help with certain big issues, notably in macroeconomic policy.

Question and answer session

Evan Davies hosted a Q&A session. Key points are noted below, but the full event, including the Q&A is available to hear below.

More than one member of the audience cautioned that one should not conflate evidence-based policy with economists' participation, as if other professions apart from economists could not add value. It is incorrect that only economists can properly consider wedge issues. Moreover, when the crisis occurred, economic policy has been devised by professional economists at the ECB, the FED and the Bank of England, more than at any period in time. More attention should be paid to other professions in government, such as accountancy and law.

The rationale for a German-style Ministry for Economics, a French-style national plan where economists dominate, and a National Economic Council as in the previous government was explored. Vince Cable asked which additional powers could feasibly be transferred from the Treasury to any expanded BIS since fiscal policy is in the finance ministry; monetary policy was outsourced to the Bank of England. Moreover, it is vital that economists stay close to politicians rather than concentrated in a single hub.

Finally, it was argued that the subjectivity of economic advice should be acknowledged. Assessing without prejudice whether evidence is sound enough requires judgement but is not ideology free and is subjective. Although one should not pretend that economists as social scientists are objective, it is possible to give objective advice without prejudice while recognising one's advice is influenced by one's ideological framework.

More information

• Watch a video of this event on YouTube