I don't always agree with Will Hutton, but in his column today in the Observer he said this:
Great news. All three party leaders are now talking about responsible capitalism. But we need much more than invocations to John Lewis (Nick Clegg), a boost to the Co-operative movement (David Cameron) or a redress against predatory pricing (Ed Miliband) — welcome though these words are.
Central should be the question of how capitalism deals with unknowable risk; this gets to the heart of why the system is so seriously malfunctioning. The Conservative, free-market view is that capitalism can deal with unknowable risk all by itself and that rewards will always be proportional to risks. But if this is not true, as even David Cameron began to recognise in last week's speech, though he quailed before the full logic of his new position, then everything changes.
And he's bang on: this is absolutely right. The fundamental difference between neoclassical (and so neoliberal economics) and even neo-Keynesianism economics and what Keynes actually wrote is that Keynes was perhaps the first economist to truly realise that we have no idea what is going to happen in the future.
Now I know that might sound crass to a non-economist but as I put it in The Courageous State:
To summarise briefly: the difference between the risk which is assumed to underpin all future behaviour in neoclassical economics (including it must be stressed, neo-Keynesian economics) and the uncertainty that is assumed to exist around all future behaviour in truly Keynesian economics is that in neoclassical economics it is assumed that all future possibilities are known. Keynes said that that is wrong: the future is uncertain and we simply cannot predict what might happen.
Nassim Nicholas Taleb captured the essence of what Keynes argued in his now famous ‘Black Swan Theory'.[i] His metaphor is a powerful one: the existence of a black swan was simply unknown and unimagined in Europe until its discovery. Then, something previously unimaginable was known to be possible. This is uncertainty explained: uncertainty is about the unknown that we know must exist, although of course we do not know what it is. All we can say is that because the unknown is possible we cannot predict the future probabilistically, and yet all neoclassical economics assumes that we can. Clearly the consequence is enormous for economics.
[T]here are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns — there are things we do not know we don't know.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Well said Richard.
There’s the famous Mark Twain quote used by Al Gore in “An Incovenient Truth” which equally applies to acolytes of Neo-Liberal economics:
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”
…and lo the credit crunch, poor growth, widening inequality and rampant unemployment was the outcome.
Another assumption in neoliberal economics is that there are no limits, for example, resources are for all intents and purposes unlimited.
In the real world of limits an exponential rise, such as that in the derivatives market before 2008, cannot go on for ever. So the banks “falling over” was not unpredictable, it was certain; even if the timing, magnitude and consequences of the event could not be reliably known.
The thing that strikes me is that pursuing private interest does not always promote the public order, as the theory says. At the moment many companies are not investing because the prospects of a good return in the future are low. They are playing a game of ‘After you, Claude’. If most of then do that, there will be no expansion. In trying to protect themselves they actually make the situation worse (or fail to improve it). The remedy is toxic.
Equally the bond markets are upping interest rates on their loans to states and this makes it more likely that currencies will fail and most will lose out. (there are some who will make money for the 1%)
I wonder if much of the capital NOT being invested, is being used instead to lend to the governments. ( I think the un-invested money is what Keynes called a liquidity trap-but i might be wrong).
I also suppose most of the economists in positions of influence started their careers as the noe-liberal thesis really came on stream-and what we grow up with we think is normal-and there is no alternative. I don’t see they have any answer if the only way -as we are told-is to cut the deficit, as growth will stall and debt will increase. The only way to grow is for the state to spend but to do they have to increase the deficit-which they ‘can’t’ do.Again the remedy is toxic. The answer of the politicians seem to be brave talk to encourage more business activity. Or more tax cuts, except that increases the deficit. I am not convinced!
We need an increase in purchasing power and investment without debt. Plus collecting the
avoided taxes. Could this be the state creating money which it releases into circulation-money not borrowed by the banks? I don’t know for sure, I’m only a semi-retired mental health worker, not an economist.
All you say makes a lot of sense….
There’s something else, apart from Keynes’ insight, which the neoclassicals have discarded. As Martin Wolf queries a couple of years ago, ‘why were resources expunged from neoclassical economics?’ The conflation of land with capital has led to equally bad policies.
Cameron and all neoliberals (including far too many LibDems and Labour supporters) live in a world of known knowns and known unknowns, but what they entirely forget is the unknown unknowns
I’m assuming that you’d treat Austrian school economists as “neoliberals”, so I’m a bit perplexed by this. Ludwig von Mises and Keynes are two of my favourite economists when it comes to understanding probability theory – both of them criticised it on the grounds that it only covers risk as opposed to uncertainty. The concept is often referred to as “Knightian uncertainty” after Frank Knight’s work. Indeed Austrian economists use this as the foundation of their theory of entrepreneurship – think about the work of Ludwig Lachmann, George Shackle, and more recently Peter Klein and Nicolai Foss.
It’s a shame you continue to conflate neoliberalism with neoclassicism. To be clear, you are right to critique the neoclassical treatment of uncertainty. You just seem oblivious to the fact that this is one area of economic theory where the Keynesians and the free market fundamentalists are actually very close.
Well thankfully we’ve never had neoliberalism – and never will – so practical neoliberals (oxymoron I know) have embraced neoclassicism as next best thing
Your form of neoliberalism (and theb fact almost none of you can agree on what it is always reminds me of the old arguments between the far left) is only for fantasists