Book II. Trias Politica and Economic Supreme Court

Trias Politica and Economic Supreme Court

4. The Trias Politica

Montesquieu published his De l’Esprit des Lois in 1748. An English translation can be found on the internet, and a short biographical note, taken from there, has been included in an appendix. Though his book discusses many issues, it remained famous for the theory of the separation of powers, i.e. of the Legislative, Executive and Judicial branches of government. The American phrase is ‘checks and balances’. A key passage in Book XI shows that Montesquieu also refers to the existing case of England - so that his role is not one of originator but one of keen observer and developer of theory:

“One nation there is also in the world that has for the direct end of its constitution political liberty. We shall presently examine the principles on which this liberty is founded; if they are sound, liberty will appear in its highest perfection.

To discover political liberty in a constitution, no great labour is requisite. If we are capable of seeing it where it exists, it is soon found, and we need not go far in search of it.

6. Of the Constitution of England. In every government there are three sorts of power: the legislative; the executive in respect to things dependent on the law of nations; and the executive in regard to matters that depend on the civil law.

By virtue of the first, the prince or magistrate enacts temporary or perpetual laws, and amends or abrogates those that have been already enacted. By the second, he makes peace or war, sends or receives embassies, establishes the public security, and provides against invasions. By the third, he punishes criminals, or determines the disputes that arise between individuals. The latter we shall call the judiciary power, and the other simply the executive power of the state.

The political liberty of the subject is a tranquillity of mind arising from the opinion each person has of his safety. In order to have this liberty, it is requisite the government be so constituted as one man need not be afraid of another.

When the legislative and executive powers are united in the same person, or in the same body of magistrates, there can be no liberty; because apprehensions may arise, lest the same monarch or senate should enact tyrannical laws, to execute them in a tyrannical manner.

Again, there is no liberty, if the judiciary power be not separated from the legislative and executive. Were it joined with the legislative, the life and liberty of the subject would be exposed to arbitrary control; for the judge would be then the legislator.

Were it joined to the executive power, the judge might behave with violence and oppression.

There would be an end of everything, were the same man or the same body, whether of the nobles or of the people, to exercise those three powers, that of enacting laws, that of executing the public resolutions, and of trying the causes of individuals.”

It is useful to recall Montesquieu’s definition of political liberty:

“We must have continually present to our minds the difference between independence and liberty. Liberty is a right of doing whatever the laws permit, and if a citizen could do what they forbid he would be no longer possessed of liberty, because all his fellow-citizens would have the same power.”

Thus, of key importance: A person with few means can take less advantage of his liberties than a person with more means. A person with insufficient means might be regarded as not free at all. This brings us to the economic amendment to Montesquieu’s heritage.

There appears to be a clear link between Montesquieu and Adam Smith. In his preface to his edition of Smith (1776; 1974), Skinner explains that Smith used the historic method to provide him with empirical input (rather than econometrics). Quite fittingly, Skinner writes:

“(…) it was Montesquieu rather than Voltaire who provided the most important impetus to their studies. Montesquieu was widely regarded as the ‘greatest genius of the present age’ and his Esprit des Lois came to be enjoy a considerable vogue in the circle of Smith’s friends. But while Montesquieu’s work provided an important stimulus, the Historians in general, and Smith in particular, went well beyond the teaching of the master. In the words of one of their number: ‘The great Montesquieu pointed out the road. He was the Lord Bacon of this brand of philosophy. Dr Smith is the Newton.’” (p30)

The limitations of the Trias Politica with regards to economics are a well-known theme. Marshall’s “Principles of economics” opens with the painful story of poverty - as Mankiw unfortunately waits till p421.

David M. Kennedy (1999:245), “Freedom from Fear; The American people in Depression and War”, quotes Roosevelt in a special message to the US Congress on June 8 1934:

“(…) ‘the interdependence of members of families upon each other and of the families within a small community upon each other’ provided fullfillment and security. But those simple frontier conditions now had disappeared. ‘The complexities of great communities and of organized industry makes less real these simple means of security. Therefor, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it.’ The federal government was established under the Constitution, he recollected, ‘to promote the general welfare,’ and it was now government’s ‘plain duty to provide for that security upon which welfare depends’. (…)”

5. The economic record of the 20th century

Unemployment and poverty can be seen as indicators for the quality of the management of the state. They are social phenomena, and thus depend upon the rules that society defines. When they exist, then apparently something is wrong with the management.

The economic record of this century may be judged with mixed feelings. Much has been achieved, but much has gone wrong too:

1. Two World Wars.

2. The Great Depression 1930 - 1940.

3. The Great Stagflation 1970 - the present (2005).

4. Disputable ways for decolonisation and development co-operation.

5. The economic disaster in Russia and Eastern Europe after the Fall of the Berlin Wall.

6. The environment.

Of this record, the wars are the focal points of attention.

Wars are disasters for the common citizen. Perhaps wars need to be fought for political reasons, but, an economist can express some doubt. In fact, Keynes wrote his General Theory with an eye to the threat of war:

“War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.”

John Maynard Keynes, “The General Theory of Employment, Interest and Money”, 1936:381-382

Skidelsky even makes a strong case that it took the War for people to start listening to Keynes:

“In his biography of Keynes, Sir Roy Harrod reports a widely acclaimed speech delivered by his subject to the House of Lords in 1946, the year of his death. ‘But Keynes had been talking in this style ... for some twenty-seven years. Why had his words not been listened to .... ?’ (...) Unemployment as a problem in economic theory may have been sufficient to produce a revolution in the discipline; unemployment was not a sufficient problem to society to produce a revolution in political ideas. If it was not the prolonged experience of mass unemployment that finally broke the hold of nineteenth-century ideas, what was it ? A strong case can be made out for war. ‘Normal’ life could coexist with unemployment; it could not with modern war.”

Robert Skidelsky, “The reception of the Keynesian revolution”, in Milo Keynes, “Essays on John Maynard Keynes”, CUP 1975:89 & 102-103

Kennedy (1999) makes clear that ‘Keynesian’ elements like maintaining aggregate demand were prominent elements in even Herbert Hoover’s policies. Similarly, deliberate inflation was considered by Roosevelt e.g. to help farmers reduce their debt burden. Nevertheless, Kennedy has to write: “In the ninth year of the Great Depression and the sixth year of Roosevelt’s New Deal [i.e. 1938 /TC], with more than ten million workers still unemployed, America had still not found a formula for economic recovery.” (p362) There was contact between Roosevelt and Keynes, but with little effect - Roosevelt apparently regarded Keynes pejoratively as an academic theorist. Then:

“Deprived of adequate public or private means of revival, the economy sputtered on, not reaching the output levels of 1937 until the fateful year of 1941, when the threat of war, not enlightened New Deal policies, compelled government expenditures at levels previously unimaginable.” (p360)

The policy stagnation around 1938 is the more surprising, since Kennedy reports Roosevelt saying on a Fireside Chat at that time (April 14 1938): “History proves that dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones.” (p362)

Keynes is an amazing person also on the following. Skidelsky makes another important point about Keynes’s role in the aftermath of the First World War in turning people’s attention from geopolitical power to economic growth:

“None of this is to deny that The Economic Consequences of the Peace was a very influential book. Of the dozens of accounts of the Treaty which appeared in the 1920s it is the only one which has not sunk without a trace. It captured a mood. It said with great authority, flashing advocacy and moral indignation what ‘educated’ opinion wanted said. It also had an influence at a deeper level. Wickham Steed was right: it was a revolt of economics against politics. The war had been fought in the name of the nation, state, emperor. These, Keynes argued, were false gods, from whom he sought to divert allegiance towards economic tasks. It was a message calculated to appeal to the nation of Cobden and Bright, once it had recovered of its intoxication with military victories. It helped form the outlook of a new generation. The nineteen-twenties saw a new breed of economist-politician, who talked about the gold standard and the balance of trade as fluently as pre-war politicians had talked about the Two-Power standard and the balance of power. (…) The idea that the creation of opulence was the main task of rulers was born in 1919 though it came of age only after the Second World War.” Skidelsky (1983:399).

Reading this, one would tend to think that there still is a risk when politicians get involved with the economy.

The Trias Politica setting is usefully limited to the nation-state. However, if we were to limit our attention to the nation-state, could we really neglect the external conditions ? One would think not. A crucial chapter in the theory of the nation-state concerns the external relations: trade and war by tradition, and then, in our age: the risks of world population growth and of environmental disaster, i.e. risks that may spill over across the border. Wise managers would not close their eyes to external risks. Hence, though this book concentrates on the situation in the Western democracies, we also regard the non-democracies in the developing world.

Projections for the future indicate such external risks:

“The Global Crisis scenario (...) explores the risks and dangers of a neglect of, and late response to regional and global challenges (...) the world may end up in the throes of widespread distress, an eco-crisis, which can only be corrected at high cost. The policy message conveyed by this scenario is abundantly clear. Dismissing this scenario as unduly gloomy and pessimistic is in our view, absurd; such a statement would be tantamount to a complete denial of large segments of twentieth-century history.”

Centraal Planbureau, “Scanning the future”, SDU 1992:211

World population is forecasted in 1999 to rise to 9 billion around 2050, with a forecast error of 1.5 billion lower or higher. The central forecast already is a reduction from a forecast of 9.5 billion as the result of AIDS. This disease not only kills, but also reduces the quality of life for the surviving. Other diseases may well develop. Or, for AIDS itself, given the huge number of infected, a mutation could develop that can be transferred by flies or mosquitos too - that already transfer diseases. Another problem is that when policy succeeds in improving a situation, then such new room tends to be taken up for growth again. So it would be some kind of a miracle if the world would hit the ‘low’ 7.5 billion target with a healthy, well fed, educated and peaceful population.

UNDP administrator Speth correctly states:

“Fifty years after the adoption of the Universal Declaration of Human Rights, one third of the world’s people are enslaved by a poverty so complete that it denies them fundamental rights.” (UNDP 1999 internet site)

This quote usefully recalls to memory that Montesquieu’s liberty has been extended in this century with more rights, so that there is an even stronger intellectual case to test whether the system of Trias Politica serves the demands made on it.

Amartya Sen’s “Development as freedom” (1999) is along this line of reasoning.

The hypothesis of self-interest clarifies that Western nations are less interested in the development issue. Surely, if the Democratic State knew that economic policies were feasible that would make external development Pareto improving rather than wasteful, then it would deem it wise to pursue such a course. And part of the argument in this book is that such knowledge does not get the attention that it deserves. On the other hand, we should presume the lack of that attention, and the lack of sufficient knowledge. But we can still argue that the current world development situation should provide the West with some worry anyhow.

For Western democracies, current situations in the developing world might be regarded as replays of their own past, and as forecasts for their own future - if times of distress were to return again. A 1996 UN-WIDER statement was:

“Thus, man-made crises have become a serious, perhaps the most serious, threat to human security in the present world.”

“Over the last ten years, the number of humanitarian crises has escalated from an average of 20-25 a year to about 65-70, while the number of people affected has risen more than proportionately. The International Red Cross estimates that the number of persons involved is increasing by about ten million a year. As a result, scores of people have been left dead, maimed, starving, displaced, homeless and hopeless. Afghanistan, Bosnia-Herzegovina, Burundi, Cambodia, Central America, Haiti, Liberia, Sierra Leone, Rwanda and Transcaucasia are the countries or regions where the most acute crises have occurred during the last two decades. In turn, Guyana, Kenya, Surinam and Zaire are nations where negative trends in the factors under analysis make many fear that social explosions may take place in the not too distant future, unless corrective measures are introduced urgently.” (idem)

E. Wayne Nafziger (1998), of UN-WIDER, reports in the Financial Times:

“Many people believe that humanitarian disasters are ethnically determined, arising from differences of language, race, tribe or national origin between disputants. These differences, it is thought, are so deeply rooted that they are not amenable to economic and political reform: violence cannot be avoided. That is too pessimistic a conclusion. Our research focuses on the contribution to humanitarian crises of two factors: national income and the role of the government. Both provide some reasons for modest optimism, or at least subjects for action. (…) An analysis of the root causes of humanitarian crises indicates that the mechanism for preventing them are primarily macro-economic.”

Then, there are Russia and Eastern Europe after the Fall of the Berlin Wall in 1989. The risks of turmoil in Russia, while nuclear weapons are abundantly about, were already evident in 1989, and indeed we have seen an attempted coup against Gorbachev and later the bombing of the Duma parliament building. Eastern Europe had the criminal actions of Milosevic. The risks with respect to Russia still exist. Both in 1989 and today in 2004 a reasonable expectation was and is that Eastern developments would and will be positive. But the crucial issue does not concern the average, but the risk. Who understands the economics of unemployment will see that Western economic policy is deficient on this point - a topic that we shall return to.

In the middle of 1999 the UNDP also published a report on Eastern Europe. The conclusion is that there is much more misery than commonly recognised, and that most misery is needless and also a result of wrong decisions by Western governments. In an interview with director Kruiderink, a key question and answer is:

Q: “According to some experts it went wrong precisely since the economic reforms did not go far enough.” A: “Nonsense. The ruin would only have been greater. No, precisely the reform of the state should have been the main target. Some people actually said that ten years ago, but they were not listened to. They were considered to be softies, since they wanted to maintain parts of the communist system. You currently see economists of the Worldbank and IMF slowly change their minds too.”

What is crucial is that the methods, by which such dissenting ‘softies’ were silenced, were unscientific. Crucial policy preparations were left to the fric and fray of politics and bureaucrats, unworthy of a decent democracy.

There is Robert Barro’s research in the relationship between democracy and growth. An early report is in Barro (1996) but he has been working on it since. His results suggest that it first takes a certain level of income before democracy has a chance. This reminds one of the willingness of Westerners to accept dictatorships in developing countries as long as economic welfare is increasing. Four comments can be made: The present discussion is targetted at existing democracies, and Barro’s finding then is only relevant as a warning of what could happen if the risk of, say, an eco-crisis would materialise. Secondly, Barro seems to imply that current democracies are finished, and that there is no next stage. But we can advance. Thirdly, once the concept of an Economic Supreme Court is clear, then one could imagine that a dictatorship on the way to a democracy (notably China) could first install such a Court - and the rule of law - before it moves towards elections. Finally, we should read Sen (1999a) as an answer to the Barro analysis, since it could rather be that democracy futhers development and growth.

Above uses plain human survival to judge on the economic record, it focusses on war, humantarian disasters, overpopulation, diseases, environmental deterioration. It is sobering to regard the more standard economic outcome. Table 1 reviews the unemployment in the European Union for 2003, reassembling the data after the enlargement of May 1 2004.

Table 1. Unemployment in the European Union in 2003

Eurostat

EU (after enlargment)

EU 15

Total population

451 million

378 million

Unemployed

19.0 million

14.2 million

Idem, % labour force (age 15+) % % % 9.1 %

8.1 %

Participation

72.0 %

72.4 %

The unemployment figure excludes many welfare state benefit recipients who could work when judged from other standards. For example, there is the well-known case of ‘disability’ with a major fraction of hidden unemployment, see OECD (2003). A hypothesis in public choice theory is that policy makers in the past solved part of their problem with unemployment by allowing an increase in these other welfare programmes. The recent focus in the policy debate is upon increasing participation again, shifting people from such arrangements back into the labour force. This debate however runs into the problem of unemployment again. Disability, sickness, early retirement and welfare relief might be reduced (by reducing problems in the bureaucracy, solving principal-agent problems, and by adjusting definitions, reducing entitlements), yet it might well cause higher unemployment again and thus only shift the problem. A major insight thus is that unemployment remains the root problem for macro-economic policy making. It is proper that we pose the question: why is it that the EU doesn’t achieve more employment ? This question can best be answered by taking a long run point of view - which is not the standard economic point of view.

We can conclude this chapter as follows. The economic record of the last century is mixed, and human suffering was large. For the future: there still are serious risks. Bad economic conditions don’t necessarily result into wars. During the Great Depression the US remained a democracy and didn’t resort to fascism. Though it came close ! Nevertheless, there can be situations in which certain politicians can rise to power by exploiting social, religious and racial sentiments - which sentiments actually draw on economic distress and uncertainty. Such is actually the rule, and stable democracy is rather the exception. Though the probability of such developments might be limited, in the currently affluent West, their costs would be great, and hence the risk may be sufficiently large to try to do something about it. If the system already fails now, what may happen if circumstances would turn out to be far less favourable ?

Since Western societies since the Second World War already have much experience with standard approaches to enhance economic security, and are apparently failing to a large degree, it becomes time to look for a more fundamental approach. We may look into the very process of economic policy making itself.

6. An Economic Supreme Court

Since the problem is found to be equal across nations and across time, we may look for common factors. The basic factor that we can identify is the Trias Politica structure of Western democracies. The present checks and balances are imperfect. This structure appears to allow too much leeway for forces that are detrimental to the economic well-being of the population at large, their economic security and their possibilities for the pursuit of happiness. The structure of economic policy making allows politicians, bureaucrats and special interest groups too much room to distort the contribution of economic scientists.

The conceptual scheme of the Trias Politica was a useful ladder to climb out of the situation of feodality and absolute kings. But a ladder is not a goal in itself. Democracy is a living concept and can develop further. If we find that the Trias Politica fail with regards to our needs, then we should adapt it.

In the past there have been two steps towards more independence and more checks and balances in the management of the economy. First there was the independent Central Bank, and then the separate Council of Economic Advisers to the government (or other planning body). Indeed, the situation after the Second World War has been much improved: instead of a Great Depression we only got a Great Stagflation.

Okun (1983), “The economist and Presidential leadership”, provides an recommendable account of current practice. Two quotes are particularly relevant, one that observes current partiality and one that advises impartiality:

“Given these constraints, members of the Council of Economic Advisers are clearly recognized as the President’s men. If they speak publicly, they will be identified as spokesmen for administrative positions.”

“One wishes for a more effective way of influencing public and congressional opinion in the areas of professional consensus. There is a role to be played by a Supreme Court in the profession, although a less important one than that actually fulfilled by the Council and the Bureau of the Budget in recent years.” (p580)

We are advised to go one step further than the current situation, and create a scientific Economic Supreme Court safeguarded within the Constitution as an equal partner next to the three of the Trias Politica. Its role will be limited, but crucial.

The argument is not that politicians could not be qualified in economics. The argument is the balance of power. Having an Economic Supreme Court increases democracy, since it improves the quality of the checks and balances. It caters to the civic right of good government and to the right to know.

The crucial considerations are:

· The first point is theory dependence. The State will decide on its policy while using an economic model. Hence policy is directly dependent upon the state of economic theory. Who is going to decide what the current state of theory is ?

· The second point concerns self-reference (reflexiveness). The model contains a submodel of State instruments. Clarity requires that policy itself is clearly formulated and put into the model too (with error terms to allow for possible discretion).

· The third point is conflictive self-reference. One can conceive the situation that the government announces a policy while the true scientific forecast shows that the policy is untenable and will be repealed later. Hence there is an internal source of conflict - the worst kind, not a dysfunctional person, but a logical knot.

· Finally, there is a ‘general conflict of interests’. Governments have more objectives, and any power group might want to exert its influence anyway.

It follows from this that the Constitution should warrant for the Economic Supreme Court:

· It would be possible for the Court to use a model with an endogenous government. The Court would scientifically forecast government actions, instead of conditionally. The conditional forecast assumption that government promises will be kept and government assumptions realised, will be dropped.

· As the Court will have a scientific base, there can be publications and discussions with different analyses, and these would not by themselves mean a breach of confidentiality.

· The Court cannot exist without some power.

It would suffice for the Court to have the power to veto the national budget if the information that the Executive presents or uses for the budget is scientifically incorrect (in the judgement of the Court). The information and statistics only. The Court will focus on the statement on the deficit and the national debt, since all errors accumulate in those figures - though it can call any number or piece of economic information into question. Parliament of course keeps the power to decide on the budget and on policy. President and Parliament would lose the power to make misleading statements as judged by the Court.

An appendix contains a draft constitutional amendment as an example, to start thinking about it. The appendices also contain a description of the current US Council of Economic Advisers, and the difference should be clear - e.g. where the CEA appears to have no scientific status.

With an Economic Supreme Court in place, a downside is that a nation could get stuck in a specific economic theory. A Court could believe in Monetarism while reality would require something differently. Indeed, Keynes himself addressed his General Theory to his fellow economists, who were as conservative as politicians in rejecting his proposals about fighting the Great Depression. To answer this: Such stagnation in policy making can happen nowadays too, but the situation with a Court is much more transparant. Also, the very job of the Court requires it to pay attention to the data, and this tends to make for eclectic views.

7. Position of the Court in economic theory

It is useful to indicate in more abstract terms what this book does. Unemployment is not taken as a natural disaster like an earthquake, but regarded as the result of policy. The central questions in the political economy of employment are: can one solve unemployment and poverty, does one know how, and does one want to ?

Next to the budget set and preferences, it appears useful to distinguish information. Government policy making is not guided by prices as markets are. Perceptions play an special role. For example, when policy makers associate tax policy with income distribution policy, and in that manner overlook inefficiencies such as the tax void, then policies are blocked that would otherwise benefit everyone.

Colignatus (1990a) forecasted a revival of institutional economics. We see this happening in the literature indeed. This current book belongs to that development. An Economic Surpreme Court, or the lack of it, is a topic in institutional economics, and thus has a natural position in the proposed new synthesis.

There have been precursors to this approach indeed. Galbraith (1998:199) correctly quotes Michael Kalecki (“Political aspects of full employment”):

“The assumption that a Government will maintain full employment if only it knows how to do it is fallacious.”

8. The record of economics itself

Economics is not a finished science. Hicks (1983) even rejects the notion of ‘science’ itself, and writes a chapter with the title ‘A discipline not a science’. (See also below.) He quotes Keynes:

“The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, a technique of thinking, which helps its possessor to draw correct conclusions.”

A joke is that there are as many theories as economists, and five for Keynes. Krugman (1994ab, 1996a) describes eloquently how Western economies came from full employment and a period of great expectations to a period with unemployment and inflation and a productivity slowdown, and as a result diminished expectations. He is even more eloquent in describing the different fashions in economics and economic policy making. He gives a brilliant discussion of Keynesians, Monetarists, Supply-siders, Business-cyclists, Post-Keynesians, Strategic Policy Adepts. Krugman also makes an apt distinction between serious economists and the policy entrepreneurs who abuse economics for schemes of their own.

The discussion by Galbraith (1998) is also very useful to understand the history of economic schools in the last decades. I discuss this book in the final chapters.

There also is ample reason to be humble about econometric testing of theories or identifying regularities (see Hendry (1995)), and then we haven’t started yet on the quality of national statistical data.

If we regard the role of economic theory itself, then we cannot overlook the error that economists made with respect to Arrow’s Theorem in the theory of Social Choice.

First of all, there has been a stagnation in theory development:

“Tullock sees public choice as a subject in which there was a burst of interest from the 1950s to the 1970s, but which has now ‘died out’ (p39). The cause of death was the set of unremittingly negative conclusions that issued from the analysis of the Condorcet and Arrow paradoxes.” Sugden (1999).

Secondly, it turns out that economists and Arrow himself gave a wrong interpretation to the mathematics. Below we will present a novel analysis with respect to the Arrow problem, and show that economists have run astray indeed. This gives another reason to be humble.

But, our discussion also provides clarity that social choice can be based on reasonable and morally attractive axioms. And thus there is a logical basis for a Court too.

Evaluating in general:

· Looking at this circus, it would be wrong to be only entertained. The proper point to see - the real upshot of Krugman’s books - is that the current government structure has little protection against this circus, the fads and fashions, the David Stockmans: and that this protection would be larger with a well selected Court. Note that the word ‘court’ has been chosen judicially: the job of this body is to make a judicious choice, a wise selection of all competing theories and approaches.

· It is useful to realise that the academia basically write for the journals, i.e. each other, and do not necessarily have the focus of analysing or predicting the national economy. Van Bergeijk c.s. (1997) point to these different focusses and the ‘dangers’ thereof. The academic job also is to generate and test new ideas, not only the implementation of accepted theory.

· Another aspect of the distinction between the academia and practical policy advice is that only the first have the luxury of saying that they ‘don’t know it’. In policy advice this luxury basically lacks, and a decision has to be supported with the best information available. Much academic criticism on economic policy advice is overdone, since it does not take this condition into account.

· Also, economics has come far, and many economic models show similarities. So there is a body of ‘existing economics’ or ‘accepted theory’ and a rather firm scientific base. Let me indicate as such: the textbooks of Dornbusch & Fischer (1994), Mankiw (1992), Blanchard & Fischer (1989), Mueller (1989), research like Bruno & Sachs (1985), Layard, Nickell & Jackman (1991), Phelps (1994), and the practical work such as of the Dutch Central Planning Bureau (1990) (in which I participated) and Gelauff (1992). As Montesquieu for his Trias Politica referred to the existing example of England, we can point to Holland, where the Dutch Central Planning Bureau has earned itself a strong position, even to the extent that political parties have their programmes evaluated before elections. One can be severely critical of that CPB, precisely since it is no real Economic Supreme Court, but the current achievement is there, and is an argument for ‘promotion’.

If we regard the arguments for a court again, in the light of this evaluation of the record of economics itself, then:

· The issue is not quite the difference between unfinished science and finished science. Even if economics were to be like engineering with some finished science - like Keynes’s famous dentistry, where it would be easy to switch from one economist to another - then still there are always decisions to be made. How to interprete the data ? Is factor X now crucial or not ? Even if a science is finished, then its application to reality still is an art, and there are differences in the artists. One should realise that choices are made nowadays too, albeit hidden and not in the open, and with less scientific scrutiny as is advisable. Currently we have the President and Parliament deciding what will be the ‘information’ on which policy is based: and only too often they select that kind of presentation that suit their goals rather than the truth. The only suggestion here is to make procedures such that the result better serves democracy.

· It is important to see that we are dealing with a natural monopoly here. When the government has to establish its budget and thereby wants to rely on science, then there has to be an instance at which it is decided what the current state of science is. Even if one would ‘privatise’ forecasting, and have universities compete in bids for the contract, then there still is the decision which university to take for this year. By definition there is a monopolistic situation for that decision maker at that moment.You cannot compete that away. My analysis and advice is to embed that authority in the Constitution, and provide warrants that the critical decisions are taken in scientific manner.

· Thus crucially: If the government on the one hand would desire to use the results of scientific advice for its budget process, and on the other hand would not opt for an Economic Supreme Court, then its definitions would be logically inconsistent, and it would thereby tend to create a cause for dishonesty and improper manoeuvreing and thereby corrupt its processes.

· We should realise that also law is no ‘finished business’. Our ancestors have opted for an independent judiciary, even though there is no unanimity about formulations and interpretations. But precisely since there is no unanimity, we need an institute to make a decision - a court.

· It will also be useful here to recall one of the key aspects of being a scientist: namely the responsibility to make up one’s own mind. The scientist is in this respect as a judge. He or she has to balance all pro’s and contra’s, to review theories and facts, to replay all opinions of the colleagues, and then make a decision as to what he or she believes is the right thing to think. For example, to let one’s opinion to be swayed by the opinions of others is unscientific. Now, in the light of the enormous complexity of an economy, and the additional complexity of human made theories about the economy, many academics have the liberty to choose not to ‘believe’ anything - except the logical consistency of the paper that they read or write. But in policy advice, this luxury, as said, is lacking, and much more scrutiny of what one really believes, in terms of probable effects and such, is required.

9. Economics ‘as usual’ and its inadequacy

Economists can be aware of the problems posed here; but then they tend to look for solutions within the given framework of the Trias Politica:

“There may be a communication problem. Using the words of Cairncross, again: ‘Policymakers as a rule are slightly deaf: there is too much noise’. In other words, there is a need to raise the ‘signal-to-noise’ ratio. One cannot overemphasize the importance of the packaging — the simplicity and saleability of ideas and the need to pursue these in clear and non-technical language using simple diagrams, etc. Moreover, often the more important contributions of economic advisers are in the clarification of the most basic and simple (simple only for us, professionals) concepts (...)” Bruno (1990:276)

The suggestion to my fellow economists is contrary: Thinking within the framework of the Trias Politica rather is a waste of time. It is like working from within astrology to arrive at astronomy.

Above discussion is at the constitutional level. It is about the Trias Politica, the Great Depression and Stagflation, wars, and a suggestion of a constitutional amendment. Alternatively, there also is ‘economics as usual’, about prices and wages, growth and such. Part of the analysis can be presented in terms of ‘economics as usual’ - and then of course much of the political drama is lost. Part of the ‘usual’ argument can be indicated graphically.

Figure 1: Isoquants of national income

Figure 1 shows how national income is produced. Capital and labour combine in a production function and give national income. Capital is aggregated in dollars, labour in personyears.

Let labour supply be LS and the unemployment rate be u. In the unemployment regime 0 only LS (1 - u) work, producing a national income of Y0 in wages and profits. The slope of the tangent gives the price ratio of wages and rents. In regime 1 LS work, producing Y1. The rise of national income from regime 0 to 1 is the increase in efficiency from going from the lower to the higher isoquant. The graph clarifies about the improvement in efficiency that: (a) more people work, (b) total income is higher, (c) average wage costs are lower, indicating lower pressure on prices, (d) hence, when there is unemployment, then there is a possible improvement, that benefits some while it needn’t hurt others.

The story of course doesn’t stop with Figure 1, and is a bit more difficult. Some points need to be developed - just indicative, not extensive:

1. We have to show that (current) unemployment is inefficient indeed, and that it is not caused by technology or globalisation or labour market inflexibility (which would cause it to be a form of efficient unemployment).

2. Wages may fall on average, but the story for each individual is different. We have to deal with heterogeneous labour. And we have to develop the impact on inflation.

3. An econometric problem is that observations are based on observations of LS (1 - u), i.e. on the inefficient area, so that extrapolations towards the true efficiency frontier are difficult, especially when labour is heterogenous.

4. Policy makers tend to see the decision process as a clash of preferences. When a tax reduction is proposed, to tackle unemployment, then this is translated in their minds into terms of the (re-) distribution of income - and then it is quickly opposed. So we have to deal with this source of misunderstanding too.

5. Though above uses a Bergson-Samuelson social welfare function, many economists are hesitant about that approach and refer to Arrow’s theorem. This matter then needs clarification too.

Indeed, I might present much of the argument along these ‘economics as usual’ lines.

But doing that makes part of the problem go away. We no longer see the dead of the two World Wars, the hungry of the Great Depression, the ruined lives of the Great Stagflation. We no longer see the devastation in Russia and many of the Eastern European Countries in the first decade after the Fall of the Berlin Wall. Closing our eyes to these issues, would be closing our eyes to the evidence for the need for an Economic Supreme Court.

The critical observation is: If economics would not confront the serious problems of mankind, it would lose it relevance to democratic policy making, and would rather become disinformation and a veil for anti-democratic policy making. It would become an accomplice in economic policy stagnation.

10. Four empirical cases

If economics is a science, then it must regard facts as sacred.

Many economists don’t quite understand this. When they see some unpleasant facts, they run, and start studying something else. Or they live in the corridors of power, and - like politicians - massage the facts, and make those fit the mold of the times. But running from a scary fact shows only a partial understanding of their importance. The proper attitude is to stare at the facts till they don’t go away and till they aren’t scary anymore, and then adjust theory to fit them.

Sometimes it is said that ‘facts’ don’t say much, but that it is the theory that makes them tick. People have lived for ages with the ‘facts’ that the moon is 2D round and shows stages of illumination, but it took them almost as long to accept 3D roundness of heavenly bodies as a theory. Admittedly, it is hard to impossible to pinpoint a ‘fact’ without also invoking theoretical concepts. But it would be wrong to switch to the view that ‘everything is theory’. Facts do exist, they can bite, and economists can be scared by them.

It is scary to economists that economic disaster can be related to the role of economics and economists.

At a crucial moment in his life J.M. Keynes was what we nowadays would be calling a ‘whistleblower’. As a civil servant and senior Treasury representative he served at the Versailles negotiations after the First World War. At a certain moment he resigned, and wrote The Economic Consequences of the Peace (1919). Many people thought that he should have kept silent given his position as (ex-) civil servant, and perhaps this played a role in his never becoming a full professor. I don’t have the intention to resolve this issue. But a valid question is: Would it not have been better if we had had Economic Supreme Courts at that time, that because of their scientific agenda would have put Keynes’s analysis up for discussion, that would have given him more protection, and that would have forced the other branches to answer to some questions ?

Another example is Keynes’s General Theory in 1936. Note that Hicks’s simplification of IS-LM was available in 1937. Then the same questions.

The General Theory itself contains the famous lines: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” (p383) He continues: “(…) there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.” Perhaps Keynes would have supported the idea of an Economic Supreme Court that keeps its knowledge up to date.

A third example is Jan Tinbergen’s 1936 model of the Netherlands (vide Barten (1988), with p48 highly amusing). The same questions.

The fourth example involves my own person at the Dutch Central Planning Bureau (CPB) around 1989-1991. This book already wins the argument without mentioning my own experience, but it would not be correct not to mention it. This book presents an analysis that has been suppressed by that bureau with abuse of power - see also my biographical appendix. Then the same questions.

Again, as above, there must be a warning about stagnation. My question “Would it not have been better if we had had Economic Supreme Courts at that time ?” is, admittedly, quite rhetoric, and may tend to sweep away deeper questions. It may suggest ideal Courts that always remain impartial and always come to the rescue. But also a Court can get stuck on misconceptions. Keynes and Tinbergen illustrate the point themselves by the famous criticism of Keynes (1939) of Tinbergen’s method. Two of the leading economists of their times did not agree ! Indeed, this is a powerful argument to make the concept of a Court doubtful. (And they did not disagree on policy - more public works - but rather on methodology.)

Interestingly, Frank Sulloway’s (1996) “Born to rebel” argues, roughly put, that first-borns tend to be more conservative and that later-borns are more open to new scientific findings. Van den Berg (2004) calls this finding into question. But an Economic Supreme Court packed with conservatives could be a recipe for stagnation anyway.

To be sure: my question of ‘would it not have been better if…’ is not intended to be rhetoric, and I grant that a Court at times will be slow to take up a challenge.

There however is a proper analogy: In the same way, occasionally, a fireman is caught causing fires himself. But this does not cause us to abolish the whole fire-department. As said, the appendix contains an example constitutional amendment that tries to find the middle ground, something that is workable and a huge improvement compared to the current situation.

11. The moral imperative

The modern economist entertains a sharp distinction between science and values. This indeed is a proper attitude, and also a crucial instance of the division of labour. It is up to Parliament and the President to set the course and make the value judgements - and once the ship’s course has been set, economists will build the ship, rig the sails and do whatever necessary to get there.

It is interesting to observe however that economists regularly express values. It is well-known that Marshall and Tinbergen were drawn to the subject out of a desire to understand the causes of poverty and ‘do’ something about it. Less well known may be this quote of Pigou:

“I would add one word for any student beginning economic study who may be discouraged by the severity of the effort which the study, as he will find it exemplified here, seems to require of him. The complicated analyses which economists endeavour to carry through are not mere gymnastic. They are instruments for the bettering of human life. The misery and squalor that surround us, the injurious luxury of some wealthy families, the terrible uncertainty overshadowing many families of the poor---these are evils too plain to be ignored. By the knowledge that our science seeks it is possible that they may be restrained. Out of darkness light! To search for it is the task, to find it perhaps the prize, which the “dismal science of Political Economy” offers to those who face its discipline.” --- A. C. Pigou

Keynes wrote the General Theory not only motivated by the beauty of economic theory itself but also against the backdrop of the Great Depression and the threat of communism and facism, and war. He even presented the GT somewhat in the fashion of ‘either you accept my theory or there will be a world revolution’:

“The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated - and, in my opinion, inevitably associated - with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.” - GT:381

What do we make of these value judgements ? Do these economists cross the line ? Do they wander in the perk reserved for politics ?

The answer is no. They only emphasise that society may be well willing to do something decent about unemployment and poverty, if only people had the knowledge. If the knowledge is lacking, then society faces a tough choice, and people in power will tend to look after themselves first. But with the knowledge, the situation is entirely different, and even those in power will be quite ready to help create the new prosperity. By doing so, they may also become popular, and gain or retain power. Note that it is not obvious or self-evident that the powerful will allow such change, but they might be persuaded to it.

Of course, in a sense, it could be considered a political act, when one provides crucial knowledge that changes a situation. But properly seen, this is just the definition of a scientist: to provide knowledge. Scientists can be knowledge (power) brokers - see also Throgmorton (1991). If one does not like this role of scientists, then throw out Montesquieu too.

In the same manner the economist can, with his or her knowledge, elucidate the moral problems of society. People may not be aware of certain choices that they implicitly make, and they will be grateful - though not necessarily happy at the first instance when responsibility dawns on them - when these choices are pointed out. The economist then again is only helpful in clarification. Though of course it is often wise to only try to clarify matters if one can predict that this will cause a change - otherwise much discussion and sweat will have been for nothing.

But clearly, the economist has to be protected by the Constitution to be able to perform his or her task of clarification, since new or seemingly contrary ideas always run the risk of misunderstanding and disproportional reaction.

My analysis in 1990 was, vide Colignatus (1990a), and the first edition of this book in 2000 stated:

“In my analysis the moral imperative for the Western nations since the Fall of the Berlin Wall is to help the Russian and Eastern European peoples to recover from the brutal communist oppression that they have suffered. The best way to help is to allow trade. But the West is afraid for cheap products, and thus its own unemployment. And hence there are barriers to trade again. But the true cause of unemployment is not external, but internal to the West, internal in our system of economic policy making. It is the West’s own stupidity that causes hurt to others.”

The second edition of this book in 2005 witnesses the Enlargement of the European Union on May 1 2004. This is a great step in the right direction. There are still obstacles, however, if not internally to the EU then externally to the other nations.

The argument thus has not changed fundamentally.

Hence, the moral imperative for Western nations is to reconsider the Trias Politica structure of economic policy making.