I got Robert Skidelsky’s new book, “The Return of the Master” at the weekend. It is, of course, about Keynes.
Skidelsky’s opinions are robust, and rightly so:
For twenty years or so, mainstream economics has taught that markets ‘clear’ continuously. The big idea was that if wages and prices are completely flexible, resources will be filly employed. any shock to the system will result in instantaneous adjustment of wages and prices to the new situation.
Admittedly, this system-wide responsiveness depended on economic agents having perfect information about the future. This is manifestly absurd. Nevertheless, most mainstream economists believed that economic actors possess enough information to lend their theorizing a sufficient does of reality.
This so-called "’efficient market theory’ should have been blown sky high by last autumn’s financial breakdown. But I doubt that it has been. Seventy years ago, John Maynard Keynes pointed out its fallacy. When shocks to systems occur, agents do not know what will happen next. In the face of uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin.
All right-wing bloggers here please take note.
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is it possible to discuss economics if you start from the premises that people are neither rational nor their actions are predictible/intelligible?
Billy
How strange
Are you asking is it possible to discuss economics in the real world?
Or are you saying its only possible to discuss economics in abstract?
The reality is, of course, people are not rational and their behaviour is not predictable
If economics cannot handle that what use has it?
Richard
That piece in The Guardian was amusing when it came out in July. Amusing for it betrays Skidelsky’s complete ignorance of just about anything that’s been said in economics since about 1975.
Nobody, but nobody, thinks adjustments are instantaneous. (There’s even the Austrian school which points out that recessions are by their definition the period of adjustment.)
The man’s got stuck in the past.
“In the face of uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin.”
That may be true for a short period of time but as we have seen with the FTSE rising nearly 50% in 6 months, people start positioning themselves pretty quickly. Look at Goldman Sachs figures: they didn’t need the mist to clear before being able to tell which way was up.
The “efficient market theory” has never been believed by anyone I know: the only market theory that matters is whether you can sell something for more than you paid for it and making sure that if there is an idiot in the room, it isn’t you.
The truth is that the depression/recession is pretty much dealt with and that is testament to the robustness of the financial system. Looks like it will be business as usual for another decade. Good news for those who place a value on enterprise, bad news for the socialists who want the state to control every aspect of life.
Tim
You’re wrong, as ever
That’s what economics still says
You just try to hide it
And fail
Richard
My problem is not with Keynes, he as much as anyone was prepared to look again at matters at time moved on, and the structure of his thinking was highly complex. My problems are with interpreters with other agenda’s and politicians who picked up bits they liked and claimed Keynes for their own. What is said to be “Keynes” is often way adrift of his thought. Moreover he was very careful with his data, something that many others are not.
“Admittedly, this system-wide responsiveness depended on economic agents having perfect information about the future.”
This is where Skidelski is wrong, and by implication you are wrong. The Efficient Market Hypothesis, and it is only a hypothesis not a law, is that the market, reflecting the sum total of differing opinions of asset values will provide a more reliable opinion than the views of any individual, and that includes politicians.
Nobody (who knows what they are talking about)has ever claimed that the market is 100% efficient or that information is perfect), but Chicago school economists would argue that markets are efficient in the same way that steam turbine manufacturers would argue that their engines are efficient.
Richard, “you’re wrong” doesn’t exactly move the debate forward that much.
That markets don’t “immediately” clear was a central tenet of Keynes’ work. Given that there are still many economists who are Keynesians it cannot be said that “economics” speaks with one voice on this.
“Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates.”
I agree that Wikipedia is not always the most accurate of sources but that looks about right to me.
Tim
You can state this stuff ad infinitum
You may use this space to do so if you wish. I have no problem with that
But your grasp on the real world is as weak as your grasp of some very unrealistic economics is strong and your politics are ethically dubious
So I won’t be bothering to engage. It would waste my time, take us no further forward, and out there in the real world there are things to do
Richard
How can anyone with any grasp of the real world still believe the neoliberal dogma that markets are perfect self-correcting mechanisms, require no regulation, and are made up of individuals who always behave rationally?
The truth is that the “superior” private sector has been rescued by the public sector from the consequences of the greed and incompetence of the banks, who came close to inducing a colossal depression similiar to or worse than the 1930’s.
But apparently the Right can’t see this. I think for many right wingers their belief in the “free market” is essentially a substitute for religion, and therefore immune to rational criticism. So private = good, public = bad, and so on.
Sotd
Well said
R
Whew, “The truth is that the depression/recession is pretty much dealt with”. This person’s pseudonym is well deserved. I’d go with Gillian Tett’s representation of the state of the nation: the shorthand for ‘bank’.
The rich believe in free markets nto because they are misled or becuse it is like a religion, because it makes them richer. Perfectly logical – for rational economic man.
And is the chaos a problem? In times of economic upheaval, wealth is concentrated. Concurrently, working conditions are stressed in a downward path, especially when slyly created legal structures ensure an effectively unlimited supply of labour; workers lose all defences, in this turmoil, as is happening.
The failure to acknowledge these realities, by those purporting to be advocating useful alternatives, is a major roadblock.
So lets stop innocently arguing about whether ‘free market’ works, and come to terms with the fact that it is working perfectly for those who benefit from it and, until we recognise this and do something about it, also effectively hold the reins.
We need a different question – like, what matters? if it is the common good that matters, then do free markets serve the common good?
Turner has come close. The very deep philosophical difference between what he has said and the position of Darling/Nu Laba/big business needs much more attention.
And BTW – so does your ‘right wing’ categorising Richard.