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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Why did Britain's first road atlas take you to Aberystwyth?

Alan Ereira's new The Nine Lives of John Ogilby tells the story of a remarkable book – and its remarkable creator.

John Ogilby was a talented dancer with a bright future. Performing at White Hall Palace in February 1619, the 18-year-old leapt higher than ever to impress the watching James I and his queen. But then, crashing to the floor with a torn ligament, Ogilby never danced again. It was one of many misfortunes he overcame in a remarkable life. He went on to become a theatrical impresario, the deputy master of the revels in Ireland, a poet, a translator and a publisher of ancient classics. He even organised the public celebration of Charles II’s coronation. He was also an accomplished soldier, sailor and spy, as Alan Ereira reveals in this entertaining account of his “lives” and times.

It was a remarkable collection of lives for a man born in Scotland in 1600 and raised in poverty, the illegitimate son of an aristocrat. Yet Ogilby’s greatest achievement was to put Britain on the map when he was appointed “His Majesty’s Cosmographer and Geographick Printer” in 1674. His Britannia is the first detailed road atlas ever made. It opens with a map of England and Wales showing, he wrote, “all the principal roads actually measured and delineated”. It contains a hundred or so beautifully engraved plans of roads as winding ribbons sliced into sections. Rivers, forests, villages and bridges are included as landmarks.

Embracing the new science of measurement and experiment championed by the Royal Society, Ogilby’s surveyors used a wheel with a circumference of 16ft 6in and a handle that allowed it to be pushed along, as well as a clock face that recorded journey distances. With no universally agreed length of a mile, Ogilby chose 1,760 yards. Britannia led to the accurate measurement of almost 27,000 miles of tracks, paths and roads, though only about 7,500 are depicted in the atlas at one inch to the mile.

Britannia was published in September 1675. There were few who could afford it, at £5 (roughly £750 in today’s money), and it was too heavy to carry. Instead, travellers found their way around the country by following printed itineraries, with lists of the towns to pass through on any particular journey.

Britannia is not, as Ereira explains, an atlas of commercially useful roads of the day. The first journey is an odd one, from London to Aberystwyth, then a town of fewer than 100 houses and a ruined castle. Some of the roads chosen were no longer in use, while important routes such as those to Liverpool and Sheffield were left out.

But the choice of roads in Britannia begins to make sense as being those necessary for the royal mastery of the kingdom. The London to Aberystwyth road led to mines nearby. In the days of Charles I those mines contained lead and silver that helped the king pay his soldiers during the civil war. Britannia was a handbook, Ereira explains, for a conspiracy leading to a new kingdom under a Catholic king.

Ever since the start of the Reformation, Europe had been rumbling towards a religious war. When it came on the mainland it lasted 30 years and left millions dead. The subsequent Peace of Westphalia led to a new map of Europe, one of countries and defined frontiers instead of feudal territories with unclear borders and independent cities. England was not included in the peace but shared in its vision of separate sovereignty. This led to different results in different places. In France, the king became an all-powerful despot; in England it was the ruler who lost power as parliament emerged triumphant.

In 1670 Charles I’s son Charles II decided to throw off the restraints he had accepted as the price of his restored monarchy. He wanted to be the absolute master in his land. To achieve this, he entered into a secret treaty with the French king Louis XIV. Charles needed money, an army, allies to execute his plan, and detailed knowledge of the kingdom; Louis was willing to bankroll the venture as long as Charles converted to Catholicism. Britannia was a vital part of Charles’s strategy to assert military control: he would use it to help land and deploy the 6,000 French troops that Louis had promised him to assist his forces. The pact remained a well-kept secret for nearly a century, even though it soon fell apart when the French and British got bogged down in a war with the Dutch.

No matter. Ogilby died in September 1676 and in 1681 Charles II dissolved parliament for the last time during his reign. “Britannia provided an extraordinary grasp over the business and administration of the 399 communities that it identified in England and Wales, and the crown took a grip on them all,” Ereira writes.

In this way, the atlas played a significant part in enabling the king’s revenue to grow by one-third within a few years. No longer needing financial help from Louis, Charles ruled by divine right, exercising absolute power until his death in 1685. The lesson of Britannia was that whoever controls the map controls the world.

Manjit Kumar is the author of “Quantum: Einstein, Bohr and the Great Debate about the Nature of Reality” (Icon)

This article first appeared in the 12 January 2017 issue of the New Statesman, Putin's revenge