Friday, October 10, 2008
Of all the desperate measures being undertaken by all and sundry the most important may be the restoration in global policy making of John Maynard Keynes. If you don't know which one he is among the dismal scientists in the above you need not read this particular blog. If you remain however curious click on the image.
Samuel Brittan who dominated the British chattering classes view of economics for decades, writing in today's FT page 13 includes a personal defence against of you who thought he preferred Milton Friedman over Keynes saying that he has been accused in the past of "trying to dethrone Keynes," but "not so"; he only railed against Keynesians when they ignored inflation (code of course for Monetarist Austrian and Chicago School precepts, though I can't recall Keynesians being that casual about prices; merely recognising that inflation had necessary and complex, not simple money demand-supply, causes and may at times be beneficial). Brittan's Jacobin conversion coincides with his successor as doyen of economic journalism Martin Wolf's rediscovery of Wynne Godley, Francis Cripps et al. who as Keynes' successors led Cambridge University's applied economics when it was the world's leading school alongside Harvard until the mid-'80s when applied macro-economics was dethroned by the oddly-termed New Keynesianism as a kind of Monetarist fiscal stance married into MBA-school micro-economics that never could see the wood for the trees or relate stocks to flows in the global economy.
There was a joke in my emails this week, "can you hear the Austrian school cackling because they always said printing money won't cure a crisis?" Well, that's all old history for now. My neighbour, our Chancellor, caterpiller-browed Alistair Darling, who I'm politically fond of even if he is thick as thieves with our PM who has several times ignored my timely advice, writing also on page 13, begins his article with a Keynes quote "the difficulty lies not so much in developing new ideas as escaping from the old ones!" before going on to say this is a global problem requiring a global solution, which is what he'll be calling for at the G7. Elsewhere there is some disappointment by Gillian Tett that EU governments have been incompetent at agreeing a common approach; implication being that weakens the ECB and is a filip to nascent beggar-my-neighbour nationalism! Brittan began with an even longer quote from Keynes that includes the memorable question "Suppose we were to stop spending our incomes altogether and were to save the lot. Why, everyone would be out of work. And before long we would have no incomes to spend..." Brittan's article is titled somewhat Mary Shelley'ish "Keynes, though should'st be living..." before going on to extol the importance of banks' transmission mechanism role and for this we need more rate cuts and even a temporary cut in indirect taxes, and even hints that full nationalisation of the banks may be necessary (but only temporarily)!?
Some would say that Keynesian economic policy ideas have their time and place and should not be applied at all times everywhere. I'm not sure. I am sure this is true about macro-economists in general. They are important now and may remain so for a few years until recovery is assured and everyone decides they can again ignore those gloomsters.
When I was last educating a bunch of senior bankers about securitisation at one bank, about Basel II Pillar II at another bank, and about economic scenario forecasting at a third, or discussing risk capital management and economic capital models at a fourth, they all admitted or confessed that one of their main board's greatest fears is of economists taking over the running of the banks! I would riposte by saying better them than the mathematicians. Now as banks face being run by civil servants and capital ratio obsessed regulators ordering them to return to traditional banking, perhaps they may turn to empirical macro-econmomists (by definition Keynesians) who can speak the language of each of these "stake-holders" (back to the literary metaphors; Bram Stoker this time)