I don't always agree with Will Hutton, but in his column today in the Observer he said this:<\/p>\n
Great news. All three party leaders are now talking about responsible capitalism. But we need much more than invocations to\u00a0John Lewis (Nick Clegg<\/a>), a boost to the\u00a0Co-operative movement (David Cameron<\/a>) or a redress against\u00a0predatory pricing (Ed Miliband<\/a>) \u2014 welcome though these words are.<\/p>\n
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.<\/p><\/blockquote>\n
And he's bang on: this is absolutely right. The fundamental difference between neoclassical (and so neoliberal\u00a0economics) and even neo-Keynesianism\u00a0economics\u00a0and what Keynes actually wrote is that Keynes was perhaps the first economist to truly\u00a0realise\u00a0that we have no idea what is going to happen in the future.<\/p>\n
Now I know that might sound crass to a non-economist but as I put it in The Courageous State:<\/p>\n
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.<\/p>\n
Nassim Nicholas Taleb<\/a>\u00a0captured the essence of what Keynes argued in his now famous \u2018Black Swan Theory\u2019.[i]<\/a> His metaphor is a powerful one: the existence of a black swan was simply unknown and unimagined in Europe until its discovery.\u00a0 Then, something previously unimaginable was known to be possible.\u00a0 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.\u00a0 Clearly the consequence is enormous for economics.<\/p><\/blockquote>\n
Or if you really insist on it, in perhaps his only moment of real insight, as Donald Rumsfeld put it<\/a>:<\/div>\n\n[T]here are known knowns; there are things we know we know.
\nWe also know there are known unknowns; that is to say we know there are some things we do not know.
\nBut there are also unknown unknowns \u2014 there are things we do not know we don't know.<\/div>\n<\/blockquote>\nCameron and all neoliberals (including\u00a0far too many LibDems and Labour\u00a0supporters) live in a world of known knowns and known unknowns, but what they entirely\u00a0forget\u00a0is the\u00a0unknown\u00a0unknowns. And yet we had one in 2008: the world's banks fell\u00a0over. And there are other such unknowns, not all as big, but all of them suggesting that relying on the\u00a0market\u00a0is\u00a0simply\u00a0wrong. Markets might pretend that they know the\u00a0future\u00a0and so make decisions on the basis of fancy spreadsheets predicting\u00a0future\u00a0cash flows: frankly, they're just deluding themselves.\u00a0Indeed, in most cases \u00a0businesses may well be more in the dark than\u00a0politicians, who tend to have a bigger world view, about what might be\u00a0happening\u00a0that shapes the outcome of the events they seek to predict\u00a0that\u00a0impact investment returns.<\/div>\n<\/div>\nAnd yet it's this myth that\u00a0business\u00a0knows and that government\u00a0doesn't that is the sole support for the claim inherent in neoliberalism\u00a0that markets work and\u00a0government\u00a0interference is bad news. Both ideas are wrong, but the first idea is patently obviously so: it is a literal claim that neoliberalism is right\u00a0because\u00a0all business people are\u00a0clairvoyant. To believe that is madness - and yes, that's the appropriate description for neoliberal and neoclassical\u00a0economists\u00a0who base their claims on it. \u00a0On the other hand the claim that all\u00a0government\u00a0interference is bad news is just obviously wrong as it's a lie; a lie those same\u00a0economists\u00a0peddle, so\u00a0doubling\u00a0their crimes against humanity.<\/div>\n<\/div>\nThe reality is that\u00a0government\u00a0- as we have seen - has vastly better capacity to manage uncertainty than business. And yet we deny that by\u00a0insisting that\u00a0solutions must be in the private sector when very often the exact oppositie is what is needed.<\/div>\n<\/div>\nUnless we change this fundamental error in the\u00a0narrative\u00a0about business Cameron and his cronies will continue to reep the reward of this neoliberal \u00a0falsehood they have spread - the consequnce of which is that the upside is theirs to enjoy and the downside is the state's to bear. It is this falsehood that business is exploiting. And until Labour and others say that this is the biggest lie in history we're in trouble.<\/div>\n<\/div>\nKeynes rumbled this.<\/div>\n<\/div>\nThat was his biggest contribution in very many ways to economics.<\/div>\n<\/div>\nToo many, even most (about 99%, I suspect) of economists have forgotten this.<\/div>\n<\/div>\nNow we need to reclaim the truth and let business work as best it can - recognising its limits - and its\u00a0obligations\u00a0to the state that always and forever underpins its risks.<\/div>\n