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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Track changes: a history of the railways

Simon Bradley's new book takes us from the train carriage to station signposts, walking the line between nostalgic reminiscence and hard evidence.

In his classic travel book The Great Railway Bazaar, Paul Theroux wrote that “the trains in any country contain the essential paraphernalia of the culture”. Of nowhere is this truer than the first railway nation. So much of Britain is what Simon Bradley calls “railway-haunted territory” – its landscape either directly transformed by the bridges, tunnels, cuttings and marshalling yards or indirectly touched by the social revolution wrought by the train. The train compartment is a micro-society that has brought the classes together to gawp at and dissect each other. “I can watch a dirty middle-aged tradesman in a railway-carriage for hours,” wrote Rupert Brooke in 1910, “and love every dirty greasy sulky wrinkle in his weak chin and every button on his spotted unclean waistcoat.” From the romance of steam to the curled corners of the British Rail sandwich, the railways have stirred the national imagination. So a single-volume social history of the scale and ambition of Bradley’s feels overdue.

The book is arranged spatially rather than chronologically. It begins in the railway carriage, the “mobile enclosure in which millions of people enjoyed or endured billions of hours”, and then takes us along the permanent way and its hinterland, ending on the platforms and concourses of the great railway stations. The non-linearity makes for some slightly awkward transitions (“so now we must move out of the compartment for a time . . .”), but it does allow Bradley to show how, on the railways, the present is always colliding with the past. Victorian carriages, divided into single compartments, survived on electrified commuter lines into the 1960s; W H Auden’s Night Mail was still “crossing the border” into the 1980s; the slam-door carriages and wide-window vistas of the InterCity 125 add a 1970s retro-chic to the present fleet.

Bradley was a schoolboy trainspotter, and he retains something of the spotter’s meticulousness and completism (or perhaps he has acquired this as a joint editor of the Pevsner Architectural Guides). For arcane knowledge, alight here: we learn about the varieties of upholstered leather used to cover seats, the different types of lavatory (early prototypes exposed the user to a
hurricane-force draught from below), the many iterations of platform tickets and the minutiae of buffet-car menus. “A straw in the wind,” he writes drily of the slow decline of the Pullman trains, “was the abandonment of croutons with the soup course.”

While Bradley does not always succeed in separating the telling details from the mere details, his book is still generously stuffed with the former. He tells us how the steam that hisses so evocatively from the halted train in Edward Thomas’s poem “Adlestrop” was produced; how the diddly-dum, fourfold beat of a moving train comes from the way 20th-century track was welded together, unlike today’s continuously welded rails, which have done away with this lovely music for ever; and how the graffitied railway carriage of the 1970s owed less to a broken society than it did to the new technologies of aerosol paint and the marker pen.

Bradley’s book picks up full steam whenever he evokes the sensual experience of travelling by train in the days before it became like being on an airliner: “the sour smell of wet cigarette ash” on a rainy winter’s day, “the tobacco-tainted condensation on single-glazed carriage windows” and the “mysterious creaks, squeaks and groans” of the sleeper train, with its promise of magical translation, separated by unconsciousness, to another place.

It is harder to gauge Bradley’s politics: he does not have the crusading interest in political economy of that other great railway writer, Christian Wolmar. Skating over privatisation in a few pages, he passes up the chance to explore the railways as a case study in the tussle between free-market economics and subsidised, fixed-capital industry. Yet even as a boy he “sensed the integrity and purpose of the railway”, and he seems kindly disposed to the last days of British Rail and resistant to the mythology of national decline with which they became indelibly linked. He retains a particular affection for the high-speed trains of the ­pre-Thatcherite era, their aesthetic appeal and technical excellence forged out of an ideal marriage of state intervention and commercial nous.

Like most of us, Bradley is not enamoured of the Virgin Pendolino, with its parsimonious window-to-wall ratio and its failure to accommodate the inexorable rise of the rigid-wheeled suitcase. And he wryly notes the monetising of the everyday which leaves even the space on station signs up for sale. Clapham Junction is now “Home of James Pendleton Estate Agents, a passion for excellence” and Cambridge “Home of Anglia Ruskin University” – although I’ve always assumed that this is not “unintentionally comic”, as he says, but a rather clever joke.

But Bradley is too even-tempered to give way to bloviating about the good old days. He walks a nice line between nostalgic reminiscence and hard evidence. He is sanguine, for instance, about the conversion of stations from messy and multifunctional social spaces, with clattering trolleys, porters and waiting rooms, into a generic retail opportunity. As he points out, the railways were always a commercial proposition and never set out to be romantic or atmospheric – and besides, “cappuccino and croissants smell better than diesel fumes”.

The Railways: Nation, Network and People by Simon Bradley is published by Profile Books (645pp, £25)

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war