WORKING PAPER No. 02/2019 The Times They Are A-Changing? Exploring the potential shift away from the neoliberal political-economic paradigm Laurie Macfarlane 1, Laurie Laybourn-Langton2*, Michael Jacobs3 June 2019 Abstract Modern economic history can be roughly split into different eras in which certain sets of ideas dominate politics and policy-making. This paper seeks to understand if a shift in the ‘political- economic paradigm’ is currently under way by inspecting the state of debates across a range of economic policy areas. It introduces the concept of ‘orthodox’, ‘modified’ and ‘alternative’ paradigms, corresponding to the status quo, its modification in the face of disruption or changed political goals, and a fundamental break from that status quo, respectively. Its central conclusion is that a significant shift is under way in many economic policy areas in many mainstream economic institutions. This shift has mainly occurred from ‘orthodox’ paradigm approaches – those that might broadly be described as based on neoclassical principles – to a ‘modified’ approach that alters the neoclassical approach in many ways but maintains its fundamental basis. Little to no movement towards what might be described as truly ‘alternative’ paradigm approaches is yet under way, though some mainstream institutions are exhibiting openness to these ideas. As such, an overall paradigm shift away from the dominant neoliberal paradigm is not yet underway. Keywords: political-economic paradigm; neoliberalism; heterodox economics JEL Classifications: B20, B25, E00, H10, P16, P50 Acknowledgements: Thanks go to all those interviewed by the authors, who attended various workshops that fed into this paper, and who completed the survey on institutional approaches to economic ideas and policies. Particular thanks go to the Forum for a New Economy for their generous support. 1Policy Fellow at the Institute for Innovation and Public Policy (IIPP), University College London (UCL) 2Associate Fellow at the Institute for Public Policy Research (IPPR), University College London (UCL) 3Professorial Fellow, Sheffield Political Economy Research Institute (SPERI), University of Sheffield *Corresponding Author: [email protected] Executive summary Modern economic history can be roughly split into different eras in which certain sets of ideas dominate politics and policy-making. These ‘political-economic’ paradigms hold great sway over the practice of economics by governments and other leading institutions and over politics in general. In many nations, particularly the USA and UK, ‘paradigm shifts’ from one era to another occurred around the end of the Second World War and in the wake of the economic crises of the 1970s, representing a fundamental break from the political-economic approaches of the status quo. Economic and political conditions since the financial crisis in 2008 suggest the possibility of a new paradigm shift away from the dominant approach, sometimes referred to as ‘neoliberalism’. This paper seeks to understand if such a shift is under way by inspecting the state of debates across a range of economic policy areas. To do so, we introduce the concept of ‘orthodox’, ‘modified’ and ‘alternative’ paradigms, corresponding to the status quo, its modification in the face of disruption or changed political goals, and a fundamental break from that status quo, respectively. The shift from an orthodox paradigm to a modified version or a fundamentally new set of approaches is manifested in a change in the objectives, analytical frameworks and policies adopted by key governments and institutions across a range of policy areas. We therefore apply our characterisation of different paradigms to several policy areas in a number of major governing and multilateral institutions, in order to understand whether and how far such changes have occurred or are occurring. Our central conclusion is that a significant shift is under way in many economic policy areas in many mainstream economic institutions. This shift has mainly occurred from ‘orthodox’ paradigm approaches – those that might broadly be described as based on neoclassical principles – to a ‘modified’ approach that alters the neoclassical approach in many ways but maintains its fundamental basis. Little to no movement towards what might be described as truly ‘alternative’ paradigm approaches is yet under way, though some mainstream institutions are exhibiting openness to these ideas. As such, an overall paradigm shift away from the dominant neoliberal paradigm is not yet underway. More work is needed to understand the shift process in other economic institutions, including at local level and in the developing world, and within institutions themselves. 1 Table of Contents 1. Introduction 2. Paradigm concepts: orthodox, modified and alternatives 3. Paradigms by policy area 4. Analysis 5. Conclusion and recommendations References 2 1. Introduction Modern economic history can be roughly split into different eras in which certain sets of ideas dominate politics and policy-making. These ‘political-economic’ paradigms hold great sway over the practice of economic policy by governments and other leading institutions and over politics in general. In many nations, particularly the USA and UK, ‘paradigm shifts’ from one era to another occurred around the end of the Second World War and in the wake of the economic crises of the 1970s, representing a fundamental break from the political-economic approaches of the status quo. Economic and political conditions since the financial crisis in 2008 suggest the possibility of a new paradigm shift away from the dominant approach, sometimes to referred to as ‘neoliberalism’. This paper seeks to understand if such a shift is under way by inspecting the state of debates across a range of economic policy areas. To do so, we introduce the concept of ‘orthodox’, ‘modified’ and ‘alternative’ paradigms, corresponding to the status quo, its modification in the face of disruption or new political goals, and a fundamental break from that status quo, respectively. The shift from an orthodox paradigm to a modified version or a fundamentally new set of approaches is manifested in a change in the objectives, analytical frameworks and policies adopted by key governments and institutions across a range of policy areas. We therefore apply our characterisation of different paradigms to several policy areas in a number of major governing and multilateral institutions, in order to understand whether and how far such changes have occurred or are occurring. Our central conclusion is that a shift from the ‘orthodox’ to a ‘modified’ paradigm has occurred or is under way in many economic policy areas in at least some mainstream economic institutions. But, perhaps unsurprisingly, there is little evidence in most fields of any more radical change to ‘alternative’ paradigms. In part 2 we review theoretical approaches to understanding how ideas change and introduce our orthodox, modified and alternative paradigm schema. In part 3 we characterise orthodox, modified and alternative approaches across a range of policy areas, and seek to understand the state of debate within major economic policy institutions, including the IMF, OECD and domestic economic policymaking institutions, such as the Bank of England and the German Federal Ministry of Finance, drawing on a literature review and interviews with those working in these institutions. In part 4 we analyse our findings, drawing conclusions as to the overall state of a contemporary paradigm shift and barriers to change, and make recommendations for further work. Part 5 concludes. 3 2. Paradigm concepts: orthodox, modified and alternatives Modern economic history can be roughly split into different eras in which certain sets of ideas dominate politics and policy-making. We shall refer to a dominant group of ideas as a ‘political- economic paradigm’. Such paradigms generally encompass: ● A set of political and/or economic goals, often responding to major problems and challenges, which are regarded as important in policy-making and for wider society ● A general analytical and theoretical framework for understanding the way economies and societies work, most of which sits in the academia ● A public narrative and language which describes and justifies the goals and analytical framework ● A set of principal economic and social policies, based on the analytical framework, which will achieve the goals and overcome the identified problems Political-economic paradigms can exert a powerful influence over academic, political media debates, and over the institutions of policy-making, both national and international. Over the last hundred years, Western political economy has broadly experienced two major periods of breakdown and transition from one politico-economic paradigm to another1: ● From laissez-faire to the post-war consensus: The first breakdown and transition took place between the Wall Street Crash of 1929 and the Great Depression of the 1930s and the creation of the Bretton Wood institutions and welfare states after World War Two. This led to a forty-year period of mainly Keynesian economic orthodoxy and policy approaches often described as the ‘post-war consensus’ in Britain, and coinciding with ‘les Trentes Glorieuses’ in France and the ‘Wirtschaftswunder’ in Germany. ● From the post-war consensus to neoliberalism: The second breakdown and transition took place between the currency and oil shocks of the early 1970s and the adoption of free market