I can’t recall where I read this, but someone in one of the many interesting things written about the global financial crisis suggested that “Keynes” (of whom we’ve heard more lately than we’ve heard for a long time) might be a useful heuristic to understand what’s been happening rather than a real source of inspiration for policy responses or analyses. With all the calls for a new Bretton Woods, emanating from Gordon Brown (and Kevin Rudd), what appears to have been overlooked is that Keynes’ proposals at Bretton Woods itself were substantially modified to ensure the effective independence of the US currency from the financial architecture it put in place – something that’s explained quite deftly here. So, even at the height of “Keynesianism”, we never really had the rule-bound constraints on capitalist behaviour which the man himself had wanted to see. Similarly, there’s no great novelty in pump priming as a tool of macro-economic management and it’s better understood as a pragmatic mode of state intervention, which has been adopted as a tactic of governance, rather than as a paradigm shift in economic practice. Again, there are significant differences between Keynes’ own ideas and the “neo-Keynesian synthesis”.
However, I think we can now advance a few hypotheses, however tentative, about what’s occurring – in terms of both political economy and the sociology of knowledge.
The first point I wanted to make is that Bernard Keane is probably right about this:
Government is back, and small government types, libertarians, deregulationists, will have to cop it sweet.
Some aspects of the causation of the global financial crisis have in fact been accurately identified by liberal economists, but the harnessing of them to an increasingly desparate ideological noise machine has diminished their force, and distorted such truth as they have. Here, it’s worth having a good read of Dani Rodrik’s analysis of the causes of the crisis [via The Global Sociology Blog]. As Rodrik suggests, they are multiple and complex. That complexity should give pause to anyone who wants to cherry pick causal factors for a grand narrative, but it also suggests that “free markets rule and evil regulation/government/lefties are at fault” is exposed as a ludicrous claim.
Further, it implies that the dogma associated with market neo-liberalism has to give way to reality, and lies exposed as an ideological rather than a scientific discourse. Here, Joseph Stiglitz is spot on:
This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith’s conclusions do not hold when there is imperfect information – and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.
No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership – the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.
One of the main reasons why economic theory – in its purist liberal incarnation – has been discarded so quickly as failing to offer any useful policy prescriptions at a time of unprecedented crisis is that it’s part of the problem, and therefore can’t provide the solution.
What in fact we’re seeing is that there are no “natural” or “perfect” markets, and if any can be found lying around the shop, like the credit derivatives swap market with $62 trillion at stake, they’re the vortex of the madness that has engulfed the system’s various “rationalities”. We need to start thinking much more rigorously about the role of states in the creation of the conditions of possibility for these events, and the economic field as a complex set of vectors and forces. I’ll come back to the role of the state in a subsequent post, but I think we need to underline as a starting point in both understanding and diagnosing the global financial crisis the need to put the “political” back into “political economy”.
Mark,
As I have said elsewhere one of the major errors you have made above is to assume that government has somehow gone away in the first place. It hasn’t. A cursory look at the mounds of regulations will show that – if you want a “for instance”, pick up the 400 pages of the latest version of the Basel II accord and turn to Pillar 2. The powers the regulators grant themselves there are vast. Sure, some of the blunter instruments are no longer in common use, but they still exist and can be used.
In the later section you argue that because we are in a hole, then the solution cannot be “purist” libertarianism. Surely, if the market is as heavily regulated as the financial ones it could be just as simple to argue that the faults are regulatory and therefore the regulatory problems are just going to make them worse, as they did in 1930. “Purist” regulation therefore cannot be the solution either.
Longer term the question should be to try to avoid these in the first place – and here libertarianism may provide a good answer. As to whether it is the correct one we may never get a chance to know.
It comes down to this I reckon – Rudd was voted in to implement change away from Ratty’s free market neo-liberal, privatising, private public partnership miasma and he didn’t want to do it. Instead he’s implemented heaps of enquiries asan excuse to do nothing to upset the capitalist equilibrium. But sudenly, when it becomes urgently necessary to act swiftly and without consultation to save Capitalism from itself, he finally acts urgently and quickly.
Mind you, I’m not going to knock back the cash and will do my part to stimulate the economy, Australian or American, it doesn’t matter. While I trust him heaps more than I’d ever trust Ratty, I’m still not sure about the guy.
Just wanted to point to a very interesting and well-written essay on this history of Bretton Woods and where to from here from a (democratic) American perspective by Devilstower at Dailykos
I’m not strong enough on economic history to know if it’s completely accurate, but I found it a coherent narrative linking the squandering of American goodwill to the real loss of economic power it will cost the USA.
Andrew Reynolds wrote:
Trees falling in forests ring any bells Andrew?
Part of the problem isn’t the regulation, it’s the slack attitudes of regulators who had a mind to let the market have it’s way as part of some bizarre moral crusade. The rules are useless if nobody wants to enforce them, and the market participants knew it. We can safely assume libertarians will hold onto the idea that regulation is the font of all evil like a figleaf over their genitals, given the bile that has been directed at “undeserving” sub-prime borrowers (particularly people of colour).
I do wonder to what degree you can usefully measure the degree of regulation and state intervention by the number of pages that make it up. After all, a completely state-controlled command-economy probably wouldn’t need very many pages of regulation at all.
There has to be some more useful sort of metric – perhaps how often companies are fined for breaching regulations?
“Part of the problem isn’t the regulation, it’s the slack attitudes of regulators who had a mind to let the market have it’s way ..”
Part of the problem isn’t the regulation, its that slack attitides of regulators are an inevitable part of any boom, both as cause and effect. Its not just businessmen who exhibit irrational exuberance – it’s the whole society, including government.
I think that booms and busts are absolutely inevitable in capitalism – Austrians and Marxists alike are right that its the nature of the beast though they both often draw really stupid policy conclusions from that. While you can’t have a party without getting a hangover that’s not a sufficient reason to avoid parties, still less to refrain from Beroccas the next day.
From memory, Adam Smith actually explicitly cited finance as an industry where regulation was desirable. A man far more nuanced and intelligent than his loudest advocates give him credit for.
I move that we discontinue the phrase “Free Market”, or even “The market” since it implies a false dichotomy. As universal and natural as market behaiviour may be, any one of the myriad markets we have relies on some extent on government or another non market entity for its creation. From the most basics (like contract enforcement and property rights) to the more elaborate like the ASX or emissions trading. So much of the time, a free market ends up being no market, which is probably why government has become more important to humanity over the past 300 years of capitalisms’ rapid growth.
I couldn’t agree more. No doubt there is some propensity to “truck and barter”, as Adam Smith put it, but outside very small scale and largely rural settings in our past, there are very few markets which arise without state action or action by another organised actor. If you look at the economic history of Europe and the rise of capitalism, “fairs”, etc, were very much creatures of the interaction of geopolitics and corporate strategies by particular locality bound economic actors.
The Bretton Woods system was designed to regulate the relationships between different currencies.
Some of the above discussion, especially AR’s contribution, has taken a wild swing at all regulation, regardless of whether or not this regulation was part of the Bretton Woods agreement.
Far be it from me to deny folks the opportunity to give their favourite whipping boys another whacking, so long as it is done relevantly, or alternatively, in private.
The collapse of the Bretton Woods agreement, and indeed it was a collapse, resulted eventually in a free, global, borderless and continuous negotiation of the relative values of currencies by market transaction.
I’m struggling to understand how the current financial schemozzle has anything to do with the post-Bretton Woods arrangements of variable exchange rates, unless it is asserted that by some magic the Bretton Woods system would have prevented capital from pouring into the US to fund its various and sundry asset bubbles. And I don’t see how that argument can be sustained.
However, for better or for worse, so far as domestic arrangements are concerned, Keynes still has dominates over Friedman and whole battalions of Austrians.
This apparent contradiction has persisted for almost 40 years, longer than the Bretton Woods agreement. Go figure.
While we’re at it let’s get rid of the euphemistic ‘free trade’. In fact if the last Doha round of trade talks earlier this year had not had such a dismal outcome one wonders how ‘the market’ credit crisis might have panned out. It’s beyond me and perhaps the intervening few months would not have produced any real results.
The first dishonoured credit note on a shipload of Indian cotton to the US might have raised a few eyebrows?
Hey Mark, this recession is the best thing ever for the environment and ending the war and stopping silly ‘libertarian’ economic nonsense so…why don’t we have them more often?
On indulgence…
I believe this summit its surely going to need an offset for any foolish big moves toward nanny-state regulations and/or too-big state sector spending led stimulus packets.
Some balance as an offset for both the left and right smaller government /anti-state folks. ( Thats us right? )
Here’s my short ambit claims pail-list – yr milage may vary
More direct democracy and transparency and accountability in this consensus process. As much as poss online.
Sunset clauses for everything – due diligence – responsible review
A Tobin tax targeted to directly assist the global poor, esp wopersyns – robbing from the rich and giving to the poor never looked so good.
Agreements on more open-borders – no more new Berlin-walls
Agriculture – less gerrymanders favoring rural electorates in the West and North and more direct assistance for the Eastern and the Southern primary producers.
A loose world federation EU style ( ie No army) and a convenient common currency – either the Yuan or the Euro, or some meld. More hawala!
A stronger world federation empowered direct-action effort to limit nuclear weapons below ‘doomsday’ levels – that’s 3-4 hundred that if used would lead to a nuclear winter. Trust but verify
A couple more ideas for the summit – ending the war-on-some-drugs and establish the death penalty for corruption and insurance fraud over 100k. This summit is a great opportunity when you think about it.
With regard to regulators this morning I received an email I subscribe to .It outlines an unfortunately common situation – the regulators are responsible for regulating themselves.
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The company is Citic Pacific , the problem is exposure to the $Aussie but the tale told in the link is disturbing for those advocating better regulation enforcement .
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http://webb-site.com/articles/citicbomb.htm
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The real twist in the tale is the apparent substitution of fall guys into the roles of finance directors and the poor work of the company’s auditor. I don’t know the marxist or austrian or keynsian attitude to corruption but it surprises me that it isn’t being dealt with more openly at present.
Adam Smith may have used the “invisible hand” analogy but he was no libertarian:
The Wealth of Nations, vol 1, book 1, ch 12
Mark – I couldn’t agree more. No doubt there is some propensity to “truck and barter”, as Adam Smith put it, but outside very small scale and largely rural settings in our past, there are very few markets which arise without state action or action by another organised actor. If you look at the economic history of Europe and the rise of capitalism,
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I tend to talk about open markets more than free ones. It appears that the so-called laissez-faire eras were actually underpinned by fairly draconian legislation themselves. So the question becomes not should we regulate but what. An economist writing about the emergence of the commercial corporation, I forget who, suggested that Adam Smith’s views on the interactions of various small merchants would probably be less illustrative of these organizations than an examination of such as Alexander the Great.
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This phenomena prologues my argument that often those s’posedly advocating ‘free markets’ are in fact doing no such thing.
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Take, for example, the Blair Government’s corporatism involving secret meetings with Wal-Mart which result in the destruction of rural English marketplaces in furtherance of a superimposed monopoly all in the name of a ‘free market’. Where before lively competition, now one store/one employer. That is not a market.
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Likewise consider the Rumsfeld/Bush enthusiasm for private sector contracts in rebuilding Iraq. These were awarded in a non-competetive environment to firms suspiciously connected to Republican and/or Fundamentalist Christian networks. Astounding as this is what’s more so is that a. the firms did not have to fulfill their contracts to receive remuneration and b. said remuneration was tied to how much public money they spent!!!
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In other words firms were awarded contracts on the basis of nepotistic ties, success in their task was optional and the more public money they spent the more they got paid. I won’t mention the absurdly lax accounting procedures or the political interference with those who tried to stop this pork run.
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That is not a market.
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Markets are good. More choice at cheaper prices etc. But for some reason when politicians and others talk of markets what they mean is something quite different.
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This is not something that either side of the House can wash its hands of. In Australia, in Britain, in America: conservatives and progressives are both doing it. This results in cosy little deals like the outsourcing of what used to be public transport in Melbourne. No price signal, no choice for consumers, no government responsibility: result – shithouse product, higher prices. The worst of both worlds.
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It seems to be the new ideological creed amongst parliamentarians anyway. It’s based on an ancient one: The Secret Order of the Bloated Stuffed Face.
MikeM,
Like may, you are selectively quoting him. Try reading even the rest of that page and you will find his true position on this. He (correctly IMHO) identifies regulation as a major facilitator of these arrangements. Nothing has changed.
Go on, you can do it. Read on.
Mike M – Yeah that’s highly selective Smith’s line of argument is that altho’ this happens it should not be encouraged.
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The Right evoke this to fight the unions, they tend to forget it sometimes when dealing with multinational corporations, the medical association etc.
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And Tony Blair thinks that’s ideology. He’s pragmatic. He’s pragmatically going about the business of getting his family a mansion in Monaco and a Lear Jet to get there in.
“Smith’s line of argument is that altho’ this happens it should not be encouraged.”
Not quite. It’s although this happens it can’t be stopped. And MikeM, my copy of Wealth of Nations doesn’t have a Chapter 12 for Book 1, but I can tell you that the very next line is:
“it also suggests that “free markets rule and evil regulation/government/lefties are at fault” is exposed as a ludicrous claim. ”
And vice versa – something that is not emphasised on this blog.
“But for over a quarter of a century, we have known that Smith’s conclusions do not hold when there is imperfect information”
I am astonished that someone of Stiglitz’s intellect and stature could make such a strange claim. The mathematical convenience of perfect information was never considered fundamental.
To quote Lars Werin, presenting a Nobel prize to Stigler:
“The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being”
Again I am dismayed. Smith (and other liberal economists, and libertarians) never claimed all pursuit of self-interest would inevitably lead to societal well-being, only that it would do so in aggregate and on average. Talk about putting up a strawman!
“has brought our economy to the brink of the abyss.”
What abyss? A deep and prolonged recession, even a depression? Yeah, we’ve never had those before. Never recovered from those before to scale new heights.
Failed banks and bankrupted businesses and high unemployment are not fun. But they are in no way the end of civilisation as we know it.
Agreed, fatfingers. It’s sad to see a person of Stiglitz’ intellect turn into just another straw-man maker and media whore. Imperfect information is a given, which is why neoliberals very rarely get worked up about cost-efficient regulation that is aimed at achieving market transparency. A bit more neoliberal-style transparency in OTC derivatives wouldn’t go astray (too cheeky?).
BBB
According to the primer on Adam Smith published by the CIS recently, Smith only uses the “invisible hand” analogy twice in his output. The first time, he suggests that the consumption of the rich provides jobs for the poor; the second, he is making a comment on trade barriers.
Also, even though Smith wasn’t as dogmatic as contemporary “libertarians”, there are some counter-quotes which perhaps better express the thrust of his ideas:
etc.
In other words, suffice to say that if he was no libertarian, he was no anarchist or social democrat either.
I’d suggest reading The Wealth of Nations rather than some summary put out by the CIS if you want an interpretation not coloured by ideological bias!
Ooooh, can I pull out my copy of Moral Sentiments and bring up more counter and counter counter quotes?
Reading Smith is like reading a dialogue with himself. It’s far more interesting and informative than a polemic or manifesto. He was really looking at the world around it and trying to understand how it was working and what worked better than other things than flat out advocacy. I’d love to see what he’d think with another 200 years of human history to add to his discussion.
And I wonder how many people have been taken by the notion of the Wealth of Nations as manifesto and bought a copy only to find that inbetween the choice quotes they had read before there was a mass of qualifiers, “frequently”s, “often”s, “can”s and caveats, and with a sigh returned to highlighting passages of Atlas Shrugged.
Heh!
Possibly quite a few. I’ll have to reread old Adam. Years ago I taught a seminar where we read through primary sources in political economy, as it were – Smith, Ricardo, Malthus, Marx, Keynes, Kalecki, Hayek, Friedman, Robinson. It was really good fun and I’d always recommend going back to the texts themselves because they often say a lot more than one would expect from their ideological canonisations.
Although I think I might put Skidelsky’s account of Keynes at Bretton Woods first on my end of semester reading list.
Good post – the sociology of knowledge in this mess is the invisible pachyderm lurking in the corner.
I made the same point as Stiglitz on LP a week or so ago (probably capitalism I or II) about the role of information in this “crisis”, but at the time it sank without trace. The lack of information in the evolution of derivatives is a much more important driver of what is going on than the the ideological landscape that describes the political economy. Mark emphasises that point above.
My other point is about the invisible hand which is nothing more than the self-organising component of complex adaptive systems. Markets and the broader economy are complex adaptive systems. There is nothing moral or ethical about the invisible hand, it just is. And if economics was studied as a scholarly discipline rather than a theological one, the emphasis would be on understanding how and why those self-organising components work. Markets may fail (which essentially means hitting a large non-linear shift seen as harmful) due to many causes – but they will fail without information.
The understanding of how complex adaptive systems work is the work of such groups as the Santa Fe Institute and has spread into mainstream scholarship, but not much further. It is not part of the public discourse and it should be. Smith’s original insight into the economy is fascinating, but he was interested in moral philosophy and saw God’s role in the economy as central. We now know that there is a clear division between phenomena that just are, and how we value the outcomes of events arising out of such phenomena. This is a central tenet of risk, for instance. Value is critical, but it is not intrinsic to the working of the system.
All of the clever buggers with their quants seemed to forget that when you hit a threshold, the old set of rules no longer operate in the way they have. Same mistake made by Black-Scholes and their acolytes twenty years ago.
It will be great when the enlightenment spreads as far as the political economy (though given the penchant for creationism and other pre-enlightenment fads amongst so-called modern peoples I’m not holdin’ my breath).
Otherwise, for those who think that shorting stocks and bonds will provide something of lasting value to the world – tie them in bonds!! Put them in stocks!! Off with their heads!!
Look ye laddies. Adam Smith wasnae a doctrinairre thinker at all. He was a practical Scawtsmun. He just reckoned that ye had to live in civilization and stop throwing rocks at each other’s heads ye might’s well get it right. He also liked to video people in their bedrooms. Every Scottish person does it.
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I’m still waiting for us to get it right.