Skidelsky on Kenyes and Capitalism’s Crisis

There is a thought-provoking cover piece in the current issue of Prospect by Keynes biographer Robert Skidelsky on where we go from here. A snippet:

The enquiry must start with economics. If the case for the deregulated market system is intellectually sound, it will be very hard to change. Free- marketeers claim, contrary to Soros, that the crisis is the fault of governments. US money was kept too cheap for too long after the technology bubble burst in 2000 and the attacks of 11th September 2001. The market was temporarily fooled by the government. This is a shaky defence, to say the least: if the market is so easily fooled, it cannot be very efficient.

One can also argue that the problem is not with the market system, but the fact that markets are too few and inflexible. This seems to be the view of Yale economist Robert J Shiller. He likens the financial system to an early aircraft. Just because it is prone to crash doesn’t mean we should stop trying to perfect it. Shiller claims that new derivative products will soon be able to insure homeowners against the risk of house prices going down. To my mind, this is an example of trying to cure a state of inebriation by having another whiskey. There are two things wrong with it. First, if financial innovation is, in fact, the route to greater market efficiency, the financial system would have been getting more stable in the last 25 years of explosive financial engineering. Instead it has become more volatile. Second, the assumption that, given enough innovation, uncertainty can be reduced to risk, is just wrong. There will never be sufficient knowledge to enable contracts to be made to cover all future contingencies.

Read the whole thing.

Originally published at Paul Kedrosky’s blog and reproduced here with the author’s permission.

2 Responses to "Skidelsky on Kenyes and Capitalism’s Crisis"

  1. assman   December 26, 2008 at 11:27 pm

    “If the case for the deregulated market system is intellectually sound, it will be very hard to change”I think Robert gets it backward. The burden of proof has never been on the free-marketers. After all they propose to do nothing! The burden of proof is on the supporters of regulation. And it is insufficient to just show that markets are inefficient. I grant this. You must show that governments can improve upon markets. Nobody has shown this.

  2. Anonymous   December 31, 2008 at 2:21 am

    The question is not that governments can improve upon a ‘do nothing’ agenda. The crux of the do nothing agenda is that the markets self-regulate because they are efficient: there is enough information available (signalling via the price mechanism) for investors to make rational decisions.Several things argue against this. One, this crisis was born from within the system. There was no exogenous shock to the system. Clearly there was not enough information available for investors to make rational decisions regarding the market. Transparency was not part of the process. This runs counter to one of the pillars of efficient markets. Second, the size of the Madoff should make one pause. This was a direct result of the ‘hands off as the market regulates’ line of thinking. It is possible for individuals or a small collection of individuals to systematically over a significant period of time manipulate and mislead the market. Again, according to the free market hypothesis, this should not be possible. There were individuals who questioned the Madoff returns, but the market as a whole did not. The markets were not efficient.The markets exist because the legal structure supports them. In addition, there is a cultural aspect as well. Greenspan eloquently pointed out that trust is a cornerstone of trade.I do not believe that anyone is advocating a European style of socialism as was practised in Europe until the mid 90’s. Rather, there does exist a clear role for government in the market place. Just what is that role is what is being debated.Personally, I would rather trust Keynes who made millions several times actually working in the market place. As Theodore Roosevelt said many years ago, “…the man who really counts in the world is the doer, not the mere critic—the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.” Keynes did a good job in his analysis. His thoughts were misinterpreted and gave rise to the Neoconservative interpretations. Basically, a strawman was created to be knocked down and replaced with a theory that could not move the world out of the Depression of the early 30’s and the later recession of the mid 30’s.If the ‘hands off’ thinking could not resolve the issue then, why should we expect it to do so now?