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Archive for June 10th, 2009

From the 2009 Reith Lectures:

We live in a time of financial crisis and economic hardship – everybody knows that – but we also live in a time of great hope for moral and civic renewal…Whatever reforms may emerge, one thing is clear: the better kind of politics we need is a politics oriented less to the pursuit of individual self-interest and more to the pursuit of the common good. That at least is the case I shall try to make in these lectures.  A new politics of the common good isn’t only about finding more scrupulous politicians. It also requires a more demanding idea of what it means to be a citizen, and it requires a more robust public discourse – one that engages more directly with moral and even spiritual questions.

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We’re living with the economic fallout of the financial crisis and we’re struggling to make sense of it. One way of understanding what’s happened is to see that we’re at the end of an era, an era of market triumphalism. The last three decades were a heady, reckless time of market mania and deregulation. We had the free market fundamentalism of the Reagan-Thatcher years and then we had the market friendly Neo-Liberalism of the Clinton and Blair years, which moderated but also consolidated the faith that markets are the primary mechanism for achieving the public good. Today that faith is in doubt. Market triumphalism has given way to a new market scepticism. Almost everybody agrees that we need to improve regulation, but this moment is about more than devising new regulations. It’s also a time, or so it seems to me, to rethink the role of markets in achieving the public good.

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Robert Skidlesky has an opinion piece in the Financial Times (h/t Mark Thoma) in which he injects the insight of Keynes and the notion of intellectual battles into current debates. Skidelsky is an important scholar of Keynes, and wrote an award-winning three-volume biography about his life and work.

Skidlesky begins by distinguishing economics from the natural sciences:

In the social sciences, the situation is different. There have been famous battles galore, but no decisive victories. Indeed, it is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault.That economics is not a natural science is clear from the inconclusive engagements that have punctuated its own history.

A hundred years ago the classical theory reigned supreme…

Then along came the Great Depression of 1929-32 and John Maynard Keynes. Keynes “proved” that markets had no automatic tendency to full employment…

For 30 years or so Keynesianism ruled the roost of economics – and economic policy. Harvard was queen, Chicago was nowhere. But Chicago was merely licking its wounds. In the 1960s it counter-attacked. The new assault was led by Milton Friedman and followed up by a galaxy of clever young disciples…

No policymaker understood the maths, but they got the message: markets were good, governments bad.

He then contextualizes a current debate, between Niall Ferguson and Paul Krugman, in these intellectual battles. While ultimately siding with Krugman, I think he makes an extremely important point:

In this particular debate, I am on Prof Krugman’s side, but I do not agree that Prof Ferguson’s position represents a retreat to a phlogiston state of economics. This is to take economics to be like a natural science, which Keynes never believed it was, because he thought its subject matter was much too variable over time.Keynes’s view was that we need different economic models at different times. The beauty of his General Theory of Employment, Interest and Money was that it was general enough to accommodate a variety of models applicable to different conditions. Markets could behave in ways described by the classical and New Classical theories, but they need not. So it was important to take precautions against bad behaviour. Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.

Judgment is something often overlooked as extremely important in economics and in finance. This morning, I listened to the This American Life podcast from last week, which looked at the regulatory failures leading up to the current crisis from both the government and rating agency points of view. When talking with people from the ratings agencies in particular, it was clear that there was an utter refusal to exercise judgment. The equations were the equations. So what if the data might seem logically unapplicable? The future will reflect the past, etc.

So, the question of the day is, given all we now know about the causes of this economic crisis, what sort of judgment will be applied, both in academia and in the policy world? What factors will people in power choose to ignore? Sadly, I think the wage-stagnation/class-based argument, which has been well-outlined by Richard Wolff, will probably be ignored.

Is there a new Keynes for this generation, who will restore “good judgment” to the dominant economic paradigm? Perhaps Keynes will be the new Keynes. I think these are important open questions as the discipline’s introspection continues.

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