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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Netflix's Ozark is overstuffed – not to mention tonally weird

Could the channel use a hit? Every time my subscription leaves my bank account, I think again that it could.

The main reason why Ozark, the new Netflix series, feels so underpowered has to do with its star, Jason Bateman (who also directs): a good actor who badly wants for charisma, he simply can’t carry it alone. Watching the first few episodes, I kept thinking of Jon Hamm in Mad Men and (a better example here) Bryan Cranston in Breaking Bad, both of whom played, as does Bateman, characters around which the plots of their respective series turned. When they were on screen, which was often, it was all but impossible to tear your eyes from them; when they were off it, you felt like you were only biding your time until they returned. But when Bateman disappears from view, you hardly notice. In fact, it feels like a plus: at least now you might get to see a bit more of the deft and adorable Laura Linney.

In Ozark, Bateman is Marty, an outwardly square guy whose big secret is that he is a money launderer for the second biggest drugs cartel in Mexico. When the series opens, he and his wife Wendy (Linney) and their two children are living in Chicago, where he nominally works as a financial advisor.

By the end of the first episode, however, they’re on their way to the Lake of the Ozarks in rural Missouri. Marty’s partner, Bruce, has been on the fiddle, and the cartel, having summarily executed him, now wants Marty both to pay back the cash, and to establish a few new businesses in which future income may be cleaned far from the prying eyes of the law enforcement agencies. If this sounds derivative, it is. We’re in the realm of Breaking Bad, only where that show gave us out-of-control Bunsen burners and flesh-eating chemicals, this one is more preoccupied with percentages and margins.

Where’s the friction? Well, not only is the FBI on Marty’s tail, his wife has been cheating on him, with the result that their marriage is now just another of his business arrangements. The locals (think Trump supporters with beards as big as pine trees) have proved thus far to be on the unfriendly side, and having paid off their debts, the only house Marty can afford has a cliché – sorry, crotchety old guy – living in the basement. On paper, admittedly, this all sounds moderately promising. But hilarity does not ensue. As dull as the Lake of the Ozarks when the tourist season is over, not even Linney can make Bill Dubuque’s dialogue come alive. Her character should be traumatised: before they left Chicago, the cartel, for reasons I do not completely understand, pushed her podgy lover – splat! – off his balcony. Instead, she’s fussing about the crotchety old guy’s sexism.

Ozark is overstuffed and tonally weird, so I won’t be binge-watching this one. This completes rather a bad run for me and Netflix; after the lame new series of House of Cards and the egregious Gypsy, this is the third of its shows on the trot to bore me rigid. Could the channel use a hit? Every time my subscription leaves my bank account, I think again that it could.

And now to The Sweet Makers: A Tudor Treat (19 July, 8pm), in which we hear the sound of the “living history” barrel being scraped so loudly, those attending the meeting at which it was commissioned must surely have worn ear defenders. Basically, this is a series in which four confectioners “go back in time” to discover how their forebears used sugar (first, the Tudors; next week, the Georgians).

What it means in practice is lots of Generation Game-style faffing with candied roses and coriander comfits by people in long skirts and silly hats – a hey-nonny-nonny fiesta of pointlessness that is itself a sugar coating for those nasty things called facts (ie a bit of tokenism about slavery and our ancestors’ trouble with their teeth).

Resident expert, food historian Dr Annie Gray, strained to give the proceedings urgency, sternly reminding the confectioners that the sugar house they’d spent hours building did not yet have a roof. But who cared if it didn’t? Destined to be eaten by fake Tudor guests at a fake Tudor banquet, it wasn’t as if anyone was going to lose their head for it – not even, alas, at Broadcasting House. 

Rachel Cooke trained as a reporter on The Sunday Times. She is now a writer at The Observer. In the 2006 British Press Awards, she was named Interviewer of the Year.

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

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