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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The Sad Part Was: this story collection puts the real Bangkok on display

Thai author Prabda Yoon descends into the voices and minds of a small cast of characters.

In Bangkok’s budding literary scene, Prabda Yoon sits at the centre. Born in 1973, he’s the scion of a well-known family (his father Suthichai Sae-Yoon is the co-founder of the Nation newspaper) and is known in Thailand as not only an enfant terrible of letters but as an illustrator, screen-writer and director (his first film, Motel Mist, was shown at European festivals in 2016).

His reputation rests mainly on a collection of short stories published in 2000 entitled in Thai Kwam Na Ja Pen, roughly translated as Probability, and it is from this early collection that most of the stories now collected in The Sad Part Was are derived. Translated with cool elegance by Mui Poopoksakul, they are among the first modern Thai stories to be published in the UK.

As Poopoksakul points out in her afterword, she and Yoon are the products of similar backgrounds and epochs: upper-middle class children of Bangkok who came to consciousness in the late Eighties and Nineties. Often foreign-educated, fluent in English and conversant in global pop culture and media – Yoon did a stint at Parsons in New York after prep school at the Cambridge School of Weston – this new generation of Thai writers and artists were born into a society changing so fast that they had to virtually invent a new language to transcribe it.

In The Sad Part Was, the result is stories that one could glibly label as “post-modern” but which, in reality, perfectly match the qualities of the megacity where they are set. Bangkok is infamously mired in lurid contradiction, but it’s also a city of subtle and distorted moods that journalism and film have hitherto mostly failed to capture. The whimsical and playful surfaces of these stories have to be read against the high-octane anxieties and surreal dislocations of what was, until recently, one of the fastest-growing cities in the world.

Yoon uses the short form of the ten-page story to descend into the voices and minds of a small cast of characters: a schoolgirl and a beautiful female teacher who form a platonic lesbian infatuation while riding a daily bus in “Miss Space”; a couple making love during a thunderstorm whose activities are interrupted by the dismantling of two giant letters, which fall onto their roof in “Something in the Air”; a young man who meets a mysterious older man in Lumpini Park called Ei Ploang, who forces him to consider the intertwined nature of good and evil. In “Snow for Mother”, a mother waits for her little boy to grow up so that she can take him to Alaska to experience the real snow, which he never knew as a little boy in the tropics.

In “The Sharp Sleeper”, a man named Natee obsesses over losing his shirt buttons and is led into a strange reverie on the nature of dreams and the competing qualities of red and yellow pyjama shirts (Thailand’s political culture is riven by two parties popularly known as Red and Yellow Shirts). The commentary slips into effortless sarcasm:

Natee has proudly worn the red pyjama shirt several times since then, and his dream personality hasn’t altered at all. On the contrary, the shirt has encouraged him to become a man of conviction in his waking life. As to what those convictions were supposed to be, Natee wasn’t quite sure. But it was safe to say that a night shirt so principled wouldn’t drop a button so easily.

Since these stories were written, Bangkok’s political schizophrenia has lost its former air of apathy and innocence, but Yoon’s tone is quietly prescient about the eruption of violent irrationality a few years later. It’s a reminder how precious the subtlety of fiction is when set against the shrill certitudes of activism and reportage.

My favorite story here is “Something in the Air”. Its dialogues are written with hilariously archaic, bureaucratic formality, while delving into the disorientation of sexual and romantic hopes in the present century. After the couple’s love-making is interrupted, the young man suggests insolently to the woman that they resume in the open air, exposed to the furious elements. She agrees. They then notice that a dead body is lying on the roof nearby, crushed by the giant letters.

While waiting for the police to arrive, the woman sits quietly and describes her future, a happily married future in which her current lover will play no part whatsoever. He listens in melancholy astonishment until the couple are called to give their testimonies about the dead man. The officers then suspect that the couple themselves have done something scandalous – and so, stung by shame, the woman considers breaking off the relationship and setting in motion her own prophesy.

The Sad Part Was is unique in the contemporary literature of Bangkok – it doesn’t feature bar girls, white men, gangsters or scenes redolent of The Hangover Part II. Instead it reveals, sotto voce, the Thai voices that are swept up in their own city’s wild confusion and energy, and it does so obliquely, by a technique of partial revelation always susceptible to tenderness.

Lawrence Osborne is a British novelist living in Bangkok. His next book, “Beautiful Animals”, will be published by Hogarth in August

The Sad Part Was
Prabda Yoon
Tilted Axis Press, 192pp, £8.99

This article first appeared in the 20 July 2017 issue of the New Statesman, The new world disorder