Dissident vs Mainstream Tension at New Economic Thinking Conference

What is the right way to achieve change?

I’ve been spending a lot of time with a variety of economists — mainstream and dissident — at the Bretton Woods forum organized this week by the Institute for New Economic Thinking.

I think that the conference and discussion are first rate. The UK’s Financial Services Authority chief Lord Adair Turner gave a real tour de force last night (will post video soon) on the key economic questions that need to be rethought.The most important question he put on the table is whether economic growth is always good, particularly growth that doesn’t generate jobs, happiness or enhance quality of life.

INET founding sponsor George Soros commented to me that Turner is impressive because he keeps probing, keeps wrestling with the tough questions. Soros also said that if there is a John Maynard Keynes of our time, it is Adair Turner, and I’d agree.

But there is a constructive tension in this meeting. There are mainstreamers like former Treasury Secretary Lawrence Summers and former UK Prime Minister Gordon Brown who have been part of the system that created the conditions for the great financial meltdown — and yet many feel that they have not admitted their responsibility or given a full self-critique of themselves and their governments. In part, I think that this is true — though I felt that both the Summers and Gordon Brown presentations were important, revealing, and very valuable.

But after one panel session yesterday afternoon, University of Texas at Austin/LBJ School of Public Affairs economist James K. Galbraith broke through some of the feeling of officialdom here and asked “the fraud” question.

He said:

I’m James Galbraith. I find it striking — even astonishing — that at this late date, after the publication of the Financial Crisis Inquiry Commission Report and many other studies, that we could have a session dealing with “supervision of large complex financial institutions” and that in an hour and a half of discussions, including the passionate interventions of two discussants [including Simon Johnson], the word “fraud” would not be mentioned even once.
My point bears especially on the Basel process, in that the toxic infection of German and Swiss banks, mentioned earlier, was by US assets rated AAA by entities known as Nationally Recognized Statistical Rating Organizations, yet these assets were overwhelmingly rooted in fraud. And capital buffers, however well-meaning, are worthless in the presence of pervasive accounting fraud, which was the case here.
My question is, how do you propose to deal with this fact?

Galbraith didn’t get a full-on answer, but it was an important question that got a lot of folks talking in the back halls. There is an important dissident vs. mainstream dynamic here that I think is a valuable part of what the Institute for New Economic Thinking is doing in trying to change the course of contemporary economic modeling, teaching, and thinking.