Economics and our rendering of capitalist theory is inherently broken. That’s the argument of many economists, including Mark Blyth, Professor of international Political Economy at Brown University.

The New Economy: Mark, you’ve suggested a blind fixation on austerity, but that’s not quite accurate is it? With continued phases of QE pumping cash into the economy.
Mark Blyth: What’s the point of quantitative easing? Well you can go through the whole thing about boosting asset prices and trickle down growth, but the point of it really is it’s the sterilisation of government debt. That’s really what it does.

Now, if you’re already making sure that your debt’s not getting any bigger because you’re quantitatively easing to equivalent of the rate of growth in the debt, which is what Britain has been doing since it started QE, which is why its debt profile is flat, why then do you need to do tight fiscal at the same time?

So if I have a choice between the IMF and markets, I’ll go
with markets

If the whole argument for tight fiscal policy, austerity, is that you need to reduce the debt, and QE has basically made your debt flat, then it becomes redundant. The only reason you’re doing it is what we used to call class warfare. You want to kill the welfare budget.

The New Economy: You’ve queried economic models, quite rightly so, but this is a young human science, what are your thoughts on behavioural economics?
Mark Blyth: I think it’s a very very good idea, but the problem is it’s basically turning economics into psychology. Economics’ claim to fame is that it has a general theory and very special theories coming from that, based from Arrow-Debreu general equilibrium, macro, and so on.

There’s no such thing as adding up all the error rates that you get when people don’t conform to the model, which is kind of what behaviourism does, and then you get to a kind of behavioural Debreu or general set of equations that you can work from, in the way that economics currently does.

So I like behavioural economics because if it succeeds it will probably end up destroying economics.

The New Economy: You’ve rightly identified many austerity plans have been imposed by foreigners. Let’s look at the IMF for a moment, an organisation that travels the world, offering refinancing plans, and procedures for recovery. But to me there’s an element of almost colonialism about it. What are your thoughts on the way the IMF conducts itself?
Mark Blyth: When it became the modern IMF in 1974, when Bretton Woods ended and its original mission to basically police the set of fixed exchange rates ended, it turned itself into if you will the information policeman and then creditor to the developing world.

Has it done a great job? No. Would private markets have done a better job? Well one way to look at it is the largest developmental project in the world that’s ever been successful has been China, and simply opening up and then allowing cheap labour into the global economy has turned them into the largest economy in the world and has taken 400 million people out of poverty.

So if I have a choice between the IMF and markets, I’ll go with markets.

The New Economy: You’ve made reference to a number of historical crises, but Kenneth Rogoff has quite famously argued this time is different. Can we really learn so much from history, or collectively are we at a new debt level and structurally unique as Rogoff suggests?
Mark Blyth: Well remember that his point in the book is to say ‘this time is different’ is a fallacy, that this time it never is different. So basically what he’s saying is, these things are hardy perennials or constant features, and they are.

What’s unprecedented this time is the way that over the past 30 years, finance has been allowed to build itself into if you will a volatility machine whose insurance policy is the taxpayer. I think that’s the unprecedented part, and we still haven’t got to grips with that with any of the post-crisis reforms.

The New Economy: I should argue the problem perhaps you’re alluding to is one of a failing of the distribution and redistribution of wealth. How do we fix that?
Mark Blyth: You actually read Piketty, who put this back on the agenda, yes the numbers are shocking and we’re back to the 1920s and all the rest of it, but to me it’s better thinking about this in terms of long-term growth, and that’s what his book’s really about.

What he speaks to is the fact that developed economies such as the US and particularly Europe, are now older societies with lower growth profiles that have done their period of technological catch-up. The problem there is you’ve got ageing populations that want to consume huge amount of resources, for example, on healthcare, and you don’t have the young demographic behind it to support it.

Those types of long-term growth problems are, to me, far more important than these short-term inequality effects. The two of them compound each other, but I think in the long run it’s the other ones who are going to be more important.