The Subordination of Economic Theory to Society

At Project Syndicate, Schlomo Ben-Ami writes:

Europe, however, has always found it difficult to come to terms with an over-confident, let alone arrogant, Germany. The current political turmoil in Europe shows that, regardless of how sensible Chancellor Angela Merkel’s austerity prescriptions for debt-ridden peripheral Europe might be in the abstract, they resemble a German Diktat. The concern for many is not just Europe’s historic “German problem,” but also that Germany could end up exporting to the rest of Europe the same ghosts of radical politics and violent nationalism that its economic success has transcended at home.

Once the crisis became a sad daily reality for millions of unemployed – particularly for what appears to be a lost generation of young, jobless Europeans – EU institutions also became a target of popular rage. Their inadequacies – embodied in a cumbersome system of governance, and in endless, inconclusive summitry – and their lack of democratic legitimacy are being repudiated by millions of voters throughout the continent.

Europe’s experience has shown that the subordination of society to economic theories is politically untenable. Social vulnerability and frustration at the political system’s failure to provide solutions are the grounds upon which radical movements have always emerged to offer facile solutions.

If "economic theories" is taken to mean the theories of economists, the "subordination of society to economic theories" is not the problem in Europe right now.

The euro project was driven by politicians and businessmen - not economists - from the outset.  In terms of economic theory, giving up autonomous monetary policy is highly problematic, especially in the absence of fiscal union and when labor mobility is limited. 

Moreover, according to economic theory, the "austerity prescriptions" are anything but "sensible."   Economic theory says that these policies are pro-cyclical (i.e., exacerbate the current economic slump) and that the adjustment of economic imbalances through "internal devaluation" is extremely painful.

The underlying motives for the push for austerity in Europe are largely political.  I cannot claim to have any insight about domestic politics in Germany, but the last several years in the United States have demonstrated that interventions grounded in basic economic ideas - counter-cyclical fiscal policy, expansionary monetary policy, and "lender of last resort" financial interventions - can be deeply unpopular.  Even though these policies can deliver what appears to be a (nearly) "free lunch," they are profoundly unappealing to the instinct and intuition of voters.  What the voters ("society") seem to want are economic policies that reward virtue and punish profligacy (last year, Stephen Gordon nicely observed a parallel between German attitudes and the US "Tea Party").

Economists and our theories are far from perfect, but the problem in Europe is not economic theories, or at least it isn't the economic theories of economists.  Europe would be doing much better right now if it was subordinated to economic theory (not the same thing as "technocrats").   The problem is that voters have their own economic theories, grounded in their perceptions of fairness and virtue, and these stand in the way of resolving the crisis.  That is, Ben-Ami has it exactly backward: what is underlying the European crisis is the subordination of economic theories to society.

Update:  Empirical evidence, tweeted by the Economist's Greg Ip:

Apparently many voters mistrust IS-LM. YouGov Economist poll: How stimulate econ? 47%=>gov't infrastructure spending; 46%=> reduce deficit.

And related thoughts in Paul Krugman's blog.