Panglossian finance

Disagreement among practitioners of the dismal science

As David Blanchflower argued in his first economics column for the NS, the crash of autumn 2008 wasn't just a failure of banking practice -- it was an intellectual failure, too. The collapse of Lehman Brothers just over a year ago wasn't just an indictment of hubris and greed on Wall Street; it was also "a body blow to those economists around the world who had designed worthless mathematical models, based on unrealistic assumptions that they then used to convince themselves that a recession of this kind could never happen again".

Blanchflower's magisterial dismissal of "useless economic models" echoed something the Nobel Prize-winning economist and New York Times columnist Paul Krugman had a written a couple of weeks earlier. Under the title "How Did Economists Get It So Wrong", Krugman chastised economists for "mistaking beauty for truth" -- for allowing themselves, that is, to be seduced by abstract mathematical models and an "idealised vision of an economy in which rational individuals interact in perfect markets". The only problem is that perfect markets have never existed and never will exist -- pace what Krugman nicely calls "Panglossian finance" -- and the sooner economists "learn to live with messiness", the better.

That's a very Keynesian view, of course. As Peter Clarke shows in his book Keynes: the 20th Century's Most Influential Economist (reviewed in the NS by Andrew Gamble), a recognition of the pervasiveness of uncertainty was a very important part of Keynes's vision. Keynes wrote that the "fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of the classical political economy". In other words, the market doesn't always get it right; in fact, very often it gets it catastrophically wrong.

Compelling stuff -- but some of Krugman's fellow economists have objected to being handed such low marks, among them John H Cochrane of the University of Chicago, who returned fire in an article entitled "How Did Paul Krugman Get It So Wrong?". Cochrane boils Krugman's piece down to the thesis that (in Krugman's own words) "Keynesian economics remains the best framework we have". He then charges Krugman with making a number of incompatible arguments.

For instance, in Cochrane's view, it is only because Krugman caricatures the so-called "efficient markets hypothesis" that his call for an economics that "recognises flaws and frictions" and "incorporates alternative assumptions about behaviour" has any force at all. Cochrane is caustic about this:

I say, "Hello, Paul, where have you been for the last 30 years?" Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott's 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviours, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Further, according to Cochrane, "Krugman argues that 'a more or less Keynesian view is the only plausible game in town', and 'Keynesian economics remains the best framework we have for making sense of recessions and depressions'. One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book." Ouch! Cochrane goes on: "A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn't mean that you could have known the same thing by just reading Keynes once more."

Cochrane is taking it for granted here that economics is a science, in the way that physics is -- that's the point of the gibe about Einstein, Newton and Aristotle. And I think that may be where the disagreement between Krugman and Cochrane is most profound. For, as Krugman surely knows, Keynes regarded economics as being a moral as much as a mathematical science. This is one of the central insights of Robert Skidelsky's recent book about Keynes, also discussed in the review by Andrew Gamble mentioned above: "One of the greatest defects of economics today is that it has become a branch of applied mathematics. [But] Keynes thought of economics as part of the human discourse."

Jonathan Derbyshire is Managing Editor of Prospect. He was formerly Culture Editor of the New Statesman.

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Paul Auster's 4 3 2 1 is by turns rewarding and maddening – just like life

Auster’s epic new novel of immigration, politics and consciousness is rich but imperfect.

It’s a cliché, or a joke: the immigrant who arrives in the New World from the Old Country, to be greeted by an official who promptly renames him, mishearing the strange tongue that the arrival speaks. Paul Auster’s new novel begins: “According to family legend, Ferguson’s grandfather departed on foot from his native city of Minsk with one hundred rubles sewn into the lining of his jacket, travelled west to Hamburg through Warsaw and Berlin, and then booked passage on a ship called the Empress of China, which crossed the Atlantic in rough winter storms and sailed into New York Harbor on the first day of the twentieth century.”

Ferguson’s grandfather is called Isaac Reznikoff. Another Russian Jew advises him that it will be wiser to give his name as “Rockefeller” to the official. “You can’t go wrong with that.” But when it is his turn, “the weary immigrant blurted out in Yiddish, Ikh hob fargessen (I’ve forgotten)! And so it was that Isaac Reznikoff began his new life in America as Ichabod Ferguson.”

A joke or a fable: the way that so many stories begin in America, the stories of those who sailed past the Statue of Liberty and the words inscribed on its base, words to welcome the tired, the poor, those masses yearning to breathe free. And so Auster, in his first novel in seven years, presents the reader with an Everyman, Ferguson-who-is-not-Ferguson, not the man who stepped off the Empress of China but his grandson, Archibald Isaac Ferguson, the cranky protagonist and hero of this tale.

Ichabod begat Stanley and Stanley begat Archie, who was born, like his creator, in Newark, New Jersey, in 1947. This nearly 900-page epic is a Bildungsroman, though it would be more accurate to call it a Bildungs-Bildungs-Bildungs-Bildungsroman, because Archie’s story is told not once but four times. There are that many versions of the protagonist: in each version, his life takes a different turn, and so everything that follows is altered.

Auster is something of a prophet in exile in his own land. His brand of existentialist postmodernism – in which characters with the author’s name might appear, in which texts loop back on themselves to question the act of writing, in which the music of chance can be heard loud and clear – has sometimes found greater favour in Europe than it has in his native United States. For example, City of Glass, the 1985 meta-detective novel that forms part of The New York Trilogy, will be adapted for the stage here this year.

But City of Glass, like all of Auster’s previous books, is a slender novel. The New York Trilogy as a whole comes in at just over 300 pages. Where much of Auster’s work is elliptical, 4 3 2 1 can be overwhelming, but that is precisely the point. The author creates a vast portrait of the turbulent mid-20th century by giving his protagonist this series of lives. The book is divided into sections that clearly mark which Ferguson we are getting: 1.1, 1.2, 1.3 or 1.4.

Yet there is nothing supernatural about this journey lived and relived, as there was in Kate Atkinson’s Life After Life. The only magic involved is the magic of the novelist’s imagination, which allows both writer and reader to juggle realities as if they were balls in the air.

However, it is not as if one Ferguson is midshipman and another a circus performer, or one a loudmouth and another shy and retiring. The strength of this novel is that Ferguson remains himself while events shift around him, changing the course of his life. Ferguson’s father dies, or Ferguson’s father lives but divorces his mother, Rose. What happens then? Rose is a talented photographer; does she continue her work when Stanley prospers and they move to the suburbs, or does she take up golf and bridge? Ferguson is a good student, always a writer: does he go to Princeton or Columbia? What’s the difference between translating poetry in a Paris attic and working as a journalist for the Rochester Times-Union?

At its best, 4 3 2 1 is a full immersion in Ferguson’s consciousness, which, perhaps, is a consciousness not too far removed from Auster’s. His protagonist’s youth is wonderfully, vividly conveyed. Even if you don’t care about baseball, you’ll come to care about it because Ferguson does. The details of the young Ferguson’s life are carefully and lovingly created: the powder-blue Pontiac that his mother drives, the pot roast and cheese blintzes served at the Claremont Diner in Montclair, New Jersey – and  the floorboards in an old house that creak when two young lovers make their way between their separate rooms in the middle of the night. Auster builds a world of heartfelt, lived-in detail.

But this is a novel of politics, too. Ferguson is a young man during the tumult of the late 1960s, when dozens were killed and hundreds injured during riots in Newark in 1967; when students at Columbia occupied the campus in protest over the war in Vietnam; when young men such as Ferguson could be drafted to fight in that war.

It is in this last third of the novel that the book flags a little, as lists of events tumble on to the page: one paragraph contains the My Lai massacre, the killing of the Black Panther Fred Hampton and the Rolling Stones concert at Altamont. At times, history lessons threaten to overwhelm the narrative, and Ferguson’s story/stories lose the texture and particularity that have made them so compelling. And its ending is abrupt, a tying-up of loose ends that fragments on the final page.

But then lives – real lives – have strange, abrupt endings, too. This is a rich, imperfect book, often rewarding, occasionally maddening. Again, like life, or at least if we’re lucky.

4 3 2 1 by Paul Auster is published by Faber & Faber (880pp, £20)

Erica Wagner is a New Statesman contributing writer and a judge of the 2014 Man Booker Prize. A former literary editor of the Times, her books include Ariel's Gift: Ted Hughes, Sylvia Plath and the Story of “Birthday Letters” and Seizure.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era