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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Drama without sensation: A Separation is an unsettling novel of distances

In Katie Kitamura’s novel, it is the distance between the narrator’s two selves that causes her most discomfort.

In a 2013 interview with Guernica, the online magazine, the novelist Katie Kitamura discussed how publishing’s “deeply patronising attitude” towards female readers results in overtly feminine book covers, featuring, for instance, women in bathing suits. “That’s not the kind of book cover that makes me want to buy a book,” she said.

The cover of Kitamura’s latest novel, A Separation, does, surprisingly, feature a woman in a bathing suit. But there is something quietly unsettling about this picture: the woman, who has her back to us, is awkwardly cropped out of frame from the elbows up, and she is sitting at the edge of an oddly shaped pool. Most of the cover is solid turquoise – a bright wash of negative space.

Kitamura’s unnamed narrator is a poised literary translator. As the novel opens in London, we learn that she is married to Christopher (a charming, haphazard non-author) but, in secret, they have been living separately for the past six months. When she receives a telephone call from Christopher’s mother, Isabella, informing her that he has seemingly gone missing in Greece, she doesn’t let on about her disintegrating marriage but boards a plane to look for him.

Much of the rest of the novel takes place in Greece: at a “very pleasant” hotel, in “perfect weather”, the pool “heated to a very comfortable temperature”. The area has recently experienced a string of devastating fires, leaving patches of scorched earth. The location has an almost eerie surface stillness that jars with the mystery at its heart. In this way, Kitamura (an art critic as well as novelist) creates a setting somehow reminiscent of David Hockney’s A Bigger Splash, Christopher’s sudden disappearance leaving behind no visible ripples.

The narrator, too, has a glassy composure at odds with the tumultuous events. On deciding to end her marriage formally, she shows neither despair nor relief, but anxiety about the etiquette. “I assumed – I had no prior experience to go on – that asking for a divorce was always discomfiting,” she says with typical understatement, “but I could not believe it was always this awkward.” Of her feelings for her new partner, Yvan, she notes that they seem more like “administration rather than passion”, and then offers a moderated gloss of Hamlet, “You cannot say you did it out of love, since at your age romantic passions have grown weak, and the heart obeys reason.

Her emotional separation from the trauma of her circumstances allows the narrator to examine the facts of her husband’s disappearance. She knows Christopher was unfaithful and she immediately identifies the hotel receptionist as the object of his attentions. We never see the narrator professionally translating, but the novel is concerned with her attempts to read the deeper meanings behind the remarks and behaviour of those around her. She finds it easy to imagine unseen contexts to conversations: an argument between Christopher’s parents, an embrace between her taxi driver and the hotel receptionist. As she writes, “Imagination, after all, costs nothing.”

Her propensity for projection is such that some things remain lost in translation. Even the most minute interactions can be misread. When Christopher’s mother comments that the two women’s love for her son connects them, “she was looking over my shoulder, as if watching someone approach . . . she was staring at nothing”. The novel occupies this imaginative negative space: the gap between what people think and how they appear.

Ultimately, it is the distance between the narrator’s two selves that causes her most discomfort. How long will she allow others to read her as the concerned, loving wife? Should she admit she wants to find Christopher in order to request that they separate officially? As her search continues she notes, “There was a small but definite wedge pushing between the person I was and the person I was purporting to be.”

There is a suspenseful and menacing tone to Kitamura’s prose that might trick a reader into thinking, at first, they are in the territory of thrillers such as Gone Girl and The Girl on the Train. Both these novels, like A Separation, have narrators who defy readers’ attempts to fathom their emotional depths and to deal with questions of how well you know anyone – even your own partner. But this is a work free of sensation, or even resolution. As the narrator notes, in the shock of an event it is natural to look for a more dramatic narrative. “But in the end,” she says, “this is only chasing shadows. The real culpability is not to be found in the dark or with a stranger, but in ourselves.”

A Separation by Katie Kitamura is published by Clerkenwell Press (231pp, £12.99)

Anna Leszkiewicz is a pop culture writer at the New Statesman.

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution