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.

Show Hide image

Peculiar Ground by Lucy Hughes-Hallett asks how we shape history and how much is beyond our control

In Wychwood, a great house in Oxfordshire, the wealthy build walls around themselves to keep out ugliness, poverty, political change. Or at least they try to. 

The great cutting heads of the Crossrail tunnel-boring machines were engines of the future drilling into the past. The whole railway project entailed a crawl back into history as archaeologists worked hand in hand with engineers, preserving – as far as possible – the ancient treasures they discovered along the way. One of the most striking finds, relics of which are now on display at the Museum of London Docklands, was a batch of skeletons, unearthed near Liverpool Street Station, in which the bacteria responsible for the Great Plague of 1665 were identified for the first time. Past and present are never truly separable.

Lucy Hughes-Hallett’s ambitious first novel ends in 1665 in the aftermath of that plague, and it, too, dances between past and present, history and modernity. Like those skeletons buried for centuries beneath Bishopsgate, it is rooted in the ground. The eponymous “peculiar ground” is Wychwood, a great house in Oxfordshire, a place where the wealthy can build walls around themselves to keep out ugliness, poverty, political change. Or at least that is what they believe they can do; it doesn’t spoil the intricacies of this novel to say that, in the end, they will not succeed.

It is a timely idea. No doubt Hughes-Hallett was working on her novel long before a certain presidential candidate announced that he would build a great wall, but this present-day undiplomatic reality can never be far from the reader’s mind, and nor will the questions of Britain’s connection to or breakage with our European neighbours. Hughes-Hallett’s last book, a biography of Gabriele d’Annunzio, “the John the Baptist of fascism”, won a slew of awards when it was published four years ago and demonstrated the author’s skill in weaving together the forces of culture and politics.

Peculiar Ground does not confine itself to a single wall. Like Tom Stoppard’s classic play Arcadia, it sets up a communication between centuries in the grounds at Wychwood. In the 17th century, John Norris is a landscape-maker, transforming natural countryside into artifice on behalf of the Earl of Woldingham, who has returned home from the depredations of the English Civil War. In the 20th century a new cast of characters inhabits Wychwood, but there are powerful resonances of the past in this place, not least because those who look after the estate – foresters, gardeners, overseers – appear to be essentially the same people. It is a kind of manifestation of what has been called the Stone Tape theory, after a 1972 television play by Nigel Kneale in which places carry an ineradicable echo of their history, causing ghostly lives to manifest themselves through the years.

But the new story in Peculiar Ground broadens, heading over to Germany as it is divided between East and West in 1961, and again as that division falls away in 1989. Characters’ lives cannot be divorced from their historical context. The English breakage of the civil war echoes through Europe’s fractures during the Cold War. The novel asks how much human actors shape history and how much is beyond their control.

At times these larger questions can overwhelm the narrative. As the book progresses we dance between a succession of many voices, and there are moments when their individual stories are less compelling than the political or historical situations that surround them. But perhaps that is the point. Nell, the daughter of the land agent who manages Wychwood in the 20th century, grows up to work in prison reform and ­observes those who live in confinement. “An enclosed community is toxic,” she says. “It festers. It stagnates. The wrong people thrive there. The sort of people who actually like being walled in.”

The inhabitants of this peculiar ground cannot see what is coming. The novel’s modern chapters end before the 21st century, but the future is foreshadowed in the person of Selim Malik, who finds himself hiding out at Wychwood in 1989 after he becomes involved in the publication of an unnamed author’s notorious book. “The story you’re all so worked up about is over,” he says to a journalist writing about the supposed end of the Cold War. “The story I’m part of is the one you need to think about.”

A little heavy handed, maybe – but we know Selim is right. No doubt, however, Wychwood will endure. The landscape of this novel – its grounds and waters and walls – is magically and movingly evoked, and remains in the imagination long after the reader passes beyond its gates. 

Erica Wagner’s “Chief Engineer: the Man Who Built the Brooklyn Bridge” is published by Bloomsbury

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 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

0800 7318496