Magazine article Renewal : a Journal of Labour Politics

Macro-Economic Crisis and Policy Revolution

Magazine article Renewal : a Journal of Labour Politics

Macro-Economic Crisis and Policy Revolution

Article excerpt

The financial crisis triggered (though not caused by) the collapse of Lehman Brothers in September 2008 was frightening in its intensity. Indeed, at its nadir the very survival of modern capitalism appeared to be in question. That crisis, widely seen to have been essentially the product of lax regulation coupled with the growing interconnectedness of the global financial system, triggered the first worldwide recession since the end of the Second World War, the length and depth of which is not yet certain.

The response of governments, not least the response of the UK government, to both these crises was rapid and intense (much more so than most critics acknowledge), and in many ways it was surprising. Suddenly Keynesianism re-entered the vocabulary of policymakers. Gone was the reification of the market. Now the talk was of market imperfections, low output equilibriums, and the need for action by the state to raise aggregate demand.

Does this rapid change in the language of international political economy presage a major change in the framework of macro-economic policymaking? In the UK context, are we looking at change of a similar order to the Keynesian revolution that flowed from the experience of the 1930s, or of the replacement of that framework in the 1970s by the neoliberal model with which we are so familiar? In short, are we looking at a 'paradigm shift' in economic policymaking?

In this article, I begin by mapping out a model of policy change that seeks to integrate changes in economic ideas and the role of administrative and political institutions in responding to economic performance problems in explaining why economic policy revolutions sometimes occur but also why they sometimes don't: why evolution rather than revolution may sometimes be the order of the day. I then go on to examine successively the 'Keynesian' and the 'monetarist' revolutions in the context of this model. I end by examining developments over the past year and arguing that, though some of the conditions necessary for a 'paradigm shift' are in place, as things stand at the moment that shift is unlikely to occur.

Policy learning

The relationship between ideas and policy change is complex and much debated (e.g. Bfyth, 1997; Berman, 1998; Hall, 1989 and 1993; Hay, 2001). New ideas are not normally seen as leading ineluctably to new policies (Goldstein and Keohane, 1 993). Instead, policy change appears to flow from a process in which there is a complex interrelationship between ideas, interests and institutions (Berman, 1 998; Hall, 1 997; Walsh, 2000), though the means by which ideas enter the policy process remains surprisingly obscure (Blyth, 1997).

Peter Hall proposed that policy change flowed from a process that he dubbed 'social learning' (Hall, 1993). That process could, he argued, give rise to three orders of change, each more substantive than the last: first order change involved changes to the settings of existing instruments; second order change saw new instruments adopted, albeit within the context of unchanged policy goals; and, finally, third order change saw alterations to the very goals of policy. Whereas first and second order change amounted to what Thomas Kuhn called 'normal science' in his discussion of scientific revolutions (Kuhn, 1996), third order change represented a marked shift in the intellectual framework within which policy was made. Such a framework, Hall suggested, should be thought of in terms of a gestalt governing not just policymakers' goals, and the choice of instruments and settings made by them to achieve those goals, but their perception of the very problems they sought to correct (1993, 279).

In explaining why a prevailing policy paradigm might break down, Hall argued that policymakers constantly seek to correct problems via first and second order changes - rather like a pilot making constant corrections in order to keep a plane stable and heading in the right direction - but that instability would occur if the problem (and thus its solution) lay beyond the scope of the existing paradigm. …

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