Reading Martin Wolf and the other commentators over at the Financial
Times one can not but be impressed by scale of ideological revaluation
now taking place with regards to the efficiency of the market economy.
For example, in
his article
Keynes offers us the best way to think about the
financial crisis Wolf writes that we have learned three critical
lessons:
(1) The first lesson, which was taken forward by Minsky, is that we
should not take the pretensions of financiers seriously. “A sound
banker, alas, is not one who foresees danger and avoids it, but one who,
when he is ruined, is ruined in a conventional way along with his
fellows, so that no one can really blame him.” Not for him, then, was
the notion of “efficient markets”.
(2) The second lesson is that the economy cannot be analysed in the same
way as an individual business. For an individual company it now makes
sense to cut costs, but if the world does so simultaneously it will
merely shrink demand. [What is optimal for the individual is not optimal
for the world at large]
(3) The third and most important lesson is that one should not treat the
economy as a morality tale. In the 1930s, two opposing ideological
visions were on offer: the Austrian; and the socialist. The Austrians –
Ludwig von Mises and Friedrich von Hayek – argued that a purging of the
excesses of the 1920s was required. Socialists argued that socialism
needed to replace failed capitalism, outright. These views were grounded
in alternative secular religions: the former in the view that individual
self-seeking behaviour guaranteed a stable economic order; the latter in
the idea that the identical motivation could lead only to exploitation,
instability and crisis.
I can rewrite these points as follows:
(1) The hypothesis of rational expectations and efficient markets
is far weaker that we had imagined. A famous example
of poor quality pricing occurs in the private market for second hand
cars as a result of information asymmetry. If I sell you my old car I
probably know far more about its value that you do, yet I will not
truthfully pass that information onto you, because capitalism is
motivated only by the maximization of personal
gain, so rational capitalists have no morality, all goodness must be
forced upon them by regulations/contracts/self-interest. What sort of regulation can
improve pricing in this example? The seller feedback ratings on the
auction site eBay.com help a little.
(2) The 'invisible hand' optimality hypothesis is far weaker that we had
imagined. The invisible hand is a metaphor coined by the economist Adam
Smith. Smith argued that, in a free market, an individual pursuing his
own self-interest tends to also promote the good of his community as a
whole through a principle that he called “the invisible hand”. He argued
that each individual maximizing revenue for himself maximizes the total
revenue of society as a whole, as this is identical with the sum total
of individual revenues. Mathematically this argument is non-sense -
think about chess - good chess is not about optimizing the outcome of
individual pieces.
The failing of rational expectations and invisible hand in the market
for derivatives was largely responsible for the credit crisis. The banks knew
many of the complex products they were selling
were inappropriate. Smart commentators such as Warren Buffet described credit
derivatives as weapons of mass destruction long before the crisis began.
Regulators in many countries including China banned them. Even
potentially useful
derivatives have a cost which end users rarely understand, banks like to make 20%
returns on capital, they take huge profit margins which erode the
benefits of derivatives. Again Warren Buffet understood this, and he consequently
encouraged his companies to avoid all derivatives. Essentially the
banks did not publish all pertinent data on their products to their
clients, nor did they take all reasonable steps to ensure their clients
were behaving rationally, so the self-interest of the banks did not promote the
good of the community.
(3) The erroneous assumption of rationality and invisible hand justified
a politically attractive ideologically laissez-faire approach to
economic science. Economists
began treating these principles as articles of faith, and turned a blind
eye to empirical and pragmatic criticism. In doing so they violated the
most important Keynesian lesson, economics is not a morality play, it
must be treated as an applied science, its theories must be justified by
statistical studies. Keynes also said economics is a complex system, a
messy subject which necessitates a degree of imprecision (famous quote:
"It is better to be roughly right than precisely wrong"), and complex
systems defy dogma.
Of course, the problems of laissez-faire were well know long before the credit
crisis. Both the founding fathers of right wing economics, namely Adam Smith and
Friedrich Hayek, talked
about the madness of stretching laissez-faire dogma too far. We stopped
calculating and became bozos who started applying our economic instincts to the
canvas without measure and harmony and perfectionism. Sometimes the bozo is
slavish, by which I mean very ideologically rigid, sometimes drunken, by which I
mean someone who is wavering back and forth, sometimes illiberal, by which I
mean unable to detach from self interest.
Socialism & Capitalism as a balance of power between workers and bosses
Martin Wolf's article talks about the two opposing ideological visions which dominate political debate,
namely socialism & capitalism, and he says we are making a mistake by
turning everything into a morality play instead of thinking about life more
practically. But how do we actually define the morality play everyone calls "socialism" and "capitalism"?
Reading between the lines Wolf seems to suggest a definition involving "individual
self-seeking" on the right hand side, but let's follow Adam Smith's original idea in
the Wealth Of Nations, which was so memorably portrayed in Fritz Lang's 1927
film Metropolis, and say that:
Socialism and
capitalism grew up out of the relationship between the workers and the bosses,
the socialists typically think the problems of the world are caused by greed in the
bosses, and the capitalists typically think the problems of the world are caused by
feckless workers. Therefore when people argue whether or not we need more
socialism or more capitalism in the world, they are arguing about the balance of
power between the workers and bosses. When the relationship looses its measured
harmony economic crises and political revolutions occur.
Wise men might complain this definition
is hopelessly shallow and even totally upside down, but I think it's good enough
for this article. So let's begin by putting the theory into practice with an
analysis of the last big cyclical change in modern history, namely the
transition from the Post Keynesian Consensus to current Capitalistic era
pioneered by Margaret Thatcher and Ronal Regan in the early 1980s.
I like to date the Post Keynesian Consensus as beginning in 1946 with the
nationalization of the Bank Of England, and ending in 1981 with the
privatization of British Aerospace and Cable & Wireless. In 1957 the newly
elected British Prime Minister Harold Macmillan famously said "people have never
had it so good". Certainly those first twelve years of the Post Keynesian
Consensus were very much a golden era of economic growth and quality of life
improvements, and not just in the UK but indeed right across the Western World.
When British Prime Minister Harold Wilson made his famous 1964 speech saying
"the Britain that is going to be forged in the white heat of this
[technological] revolution will be no place for restrictive practices or for
outdated measures on either side of industry" he was fighting a political battle
to restore the sort of technocratic spirit associated with the earlier years,
and which had grown out of the pioneering scientific spirit and communal
idealism of the Second World War. Unfortunately it was battle he didn't win.
By the early 1970s the Post Keynesian Consensus began seriously unravelling with
oil price shocks and inflation and industrial unrest and competition with Japan.
The energy crisis had it's roots in short term thinking, the inflation crisis in
uncontrolled government spending, and industrial unrest in the general loss of
social cohesion and anarchistic spirit of the times. By 1976 the state owned
enterprises that had pioneered growth in the 1950s were loosing money and the
British government was in such dire financial straits it needed an IMF program.
The hard working post war spirit had given way to the sort of workplace culture
we associate with the modern UK Post Office, eg strict 9-5 working hours with tea breaks, closed shop practices
etc. Also strategic reforms to the economic model were blocked. Think, for
example, about the coal
miners. Globalization, particularly Japanese competition, had made UK coal a totally inefficient
way to power the economy, but the workers weren't
prepared to let the coal mines close, they wanted inefficient state owned
enterprises to keep going no matter what.
In the 1980s Margaret Thatcher responded to these 1970s problems by
shrinking the state, privatizing state owned enterprises, leaving as much as
possible to the market. Realise that, in a sense, the workers are the communal
one and the bosses are the individual many, so like the old divide and conquer
strategy her actions vastly weakened the left by diluting the power of both trade unions and elected politicians to interfere in the economy. In other words, Thatcher's revolution was like a landside that
dramatically shifted the balance of power away from the workers back to the
bosses. As working conditions tightened up and inefficient industries closed, the
economy started picking up speed and the UK went on gaining in strength, at
least on paper, up until 2006/2007.
The financial crisis and the balance of power
Our balance of power argument reminds me of a story I heard about seals that
swim in the sea. Apparently all the seals we see lying on beachs are females and
cubs, adult male seals don't leave the water. Each beach is controlled by a
single adult male, and he spends his entire time swimming around making love to
the females and fighting off any males who come close. He is so engrossed in
this great work that he doesn't even eat, and as a result he gradually looses
his strength, and one day another male seal who has been living all alone in the
ocean will defeat him and take over the beach. At that point the cycle starts
again, the seal that has won control of the beach stops eating, and the seal
that has lost control swims out to the ocean and starts eating again, building
back his strength until he can find another beach to conquer.
In the same sort of way we can imagine history as pendulum that swings back and
forth, or perhaps a tug of war between two teams, and whichever side wins starts
off well but gradually deteriorates, opening the way for another power shift.
The example we gave seems to describe this very scenario, during the Post
Keynesian Consensus the workers were in ascendancy, and from 1946 to 1957 they
were led by brilliant white hot scientists, but it gradually went downhill
starting with softie drinkers in the 1960s, finally culminating with complete
ideological zombies such as Neil Kinnock and Arthur Scargill. At that point the
tough guy Margaret Thatcher came along and chased them all a way and hoisted the
bosses flag over the castle. For a while we all rowed for Britain like troopers,
but as soon as things started getting comfortable softies and drinkers took over
the show and gradually ran it all back into the ground, and now we are like the
Princess in the Tower praying for a workers White Knight to came and rescue us
from the unworthy bosses who seduced us with magic spells and now keep us
prisoner behind thick walls.
Yet history is a bit more complicated that this, and to understand that think
about something Tony Blair said in his biography:
"I profoundly disagree with the statist response to
the economic crisis... [The financial crisis has] led progressive politicians,
on the left especially, to assert that politics is undergoing a radical
shift of direction towards a more interventionist statist position...
the end of an era that began over thirty years ago with the
Thatcher/Regan economic and political philosophy... [I reject this
and] funnily enough, the public has got this more than many politicians
and commentators, which is why a great lurch leftwards has not
materialised. The public understands completely the difference between
the state being forced to intervene to stabilize the market, and the
government back in fashion as a major actor in the general economy. The
role of the government is to stabilize and then get out of the way as
quickly as is economically sensible. Ultimately the recovery will be led
not by governments but by industry, business and the creativity,
ingenuity and enterprise of people. If the measures you take in
responding to the crisis diminish their incentives, curb their
entrepreneurship, make them feel unsure about the climate in which they
are working, then recovery becomes uncertain... What should strengthen
this belief is that the new economies now rising up in the marketplace
are doing so precisely by following more open economic policies, and
faltering when they don't. China is opening up, and thrives as it does
so... It would be odd if we moved in the opposite direction. And
foolish."
What that quote brings home to us is that even though Tony Blair was on the side
of the workers not the bosses, the way in which he tried to help the workers was
very different from the post war technocratic technologists who rebuilt Britain
after the war. Tony Blair didn't question economic liberalism, he believed the
economy should be left alone and the profits simply milked for social projects,
in other words he found a way to make the two sides one. It's very important to
understand this point:
Imagine a debate between an elite Catholic and a down to earth Puritan, you
would think the two positions are antithetical and must constantly be at war
with one another, but in fact they can and do combine regularly. Think, for
example, about Andy Warhol, do you see he sort of managed to be both elitist and
populist at the same time? Philosophical opposites can mix and produce a third,
likewise opposites can both go out of fashion and leave the way for a third
power to take over.
Understand that this is the situation we are in today. The crisis is not just about greedy bosses triumphing
over lazy
workers, or lazy workers triumphing over greedy bosses, in a sense it is about both at the same time. For example,
Club Med is famous for overpaid rigid labour markets, do you see this is a
problem on the left hand side? For example, America is famous for companies like
Microsoft earning monopoly profits selling rubbishy products and avoiding taxes
with offshore structures, do you see this is a problem on the right hand side?
For over a decade the golden rule of politics has been "find the centre ground"
and "be all things to all men", the two have become in a sense one, and now the
one is cracking apart just as it did in the mid 1930s. In the 1930s the power
moved to the extremes, and the extremes started looking like a one, so the
Fascists and Communists were hard to tell apart. This is what the birth of a new
paradigm looks like, and if you think about it carefully the Fascists and
Communists were twins, the first romantics and the second utilitarians, but the
baby was deranged and had to be put down. In fact, if you think about it two
sets of twin births took place during the carnage of the 30s and 40s, one was to
an extent the enlightened absolutism of the Post Keynesian Consensus, and the
other the tyranny of Fascism/Communism.
Of course nobody watching modern China would be surprised by the idea that it's
not about left or right but rather something entirely new. On the one hand the
Chinese forcibly move 1.4 million ordinary people out of their homes to build
the worlds largest hydroelectric plant, and on the other hand the financial
system is dominated by state owned banks that run returns on capital and
executive compensation schemes that Western shareholders and CEOs wouldn't get
out of bed for. The first is a sort of anti-socialist flogging of the workers,
and the second a sort of anti-capitalist fleecing of the bosses.
Why is it so confusing? The problem is that the crowd analyses the crisis by
juggling in their mind words such as "socialism" and "capitalism"
but without anyone
really knowing what these words are supposed to mean. They are in fact nebulous
and constantly evolving psychological profiles, and philosophy is the art of
identifying them and juggling with them. But it's not really an art that people
in general need to learn, because the real hands on experts don't think in these
kinds of terms, because they are pragmatically solving problems. For example,
the coal mines needed to close back in the 1970s simply because they were
inefficient, not because of abstract philosophical arguments about the balance
of power between bosses and workers.
So philosophy is a dangerous art that encourages us to ignore Keynes'
advice and turn economics into a morality play. What then is philosophy for?
It's for teaching and debating ethics and self development. I don't want to say
that philosophy is for political debate, because that will turn everyone into
circus loving hippies instead of experts.
Let's give an example of the way in which philosophy can help us learn about
ethics and self development. Martin Wolf mentioned self interest in his article.
What do the 1970s socialists and the 00s capitalists have in common? They are
both wallowing in self interest right? The trade unionists destroyed the 1970s
economy by insisting on ossified working conditions and outmoded industries such
as coal mining- killing the goose that lays their golden egg. The capitalists
destroyed the 00s economy by selling everyone junk financial products and
gambling greedily- killing the goose that lays their golden egg.
What comes next? If a society faces up to its flaws and looses its ignorance an
enlightened new paradigm is born, if it fails another monster springs up. Either
way everything we knew disappears, but in the first case the mood has the
positive energy of Indiana Jones in the 1981 film "Raiders of the Lost Ark", and
in the second case the mood has the negative energy of the scared faced Nazis
he was competing against.