Public CompanyV V: Keynes - The Master returns
Unlike the Chicago economists under Milton Friedman who argued that the unrestricted operation of private enterprise—seen as the most efficient form of economic organisation—was essential for economic development and that prices should be determined purely by market forces and inflation controlled by means of controlling money supply, Keynes, the most influential macroeconomist of the 20th century, had argued in his classic work, The General Theory of Employment, Interest and Money, that there is uncertainty in the world—uncertainty that cannot be reduced to statistical probabilities and has come to be described as “unknown unknowns.” This irreducible uncertainty, he said, lay behind panics and bouts and the instability of market economics that we see around us today. Robert Skidelsky, in his three-volume study of Keynes (1994), reminded us that the master had warned us against relying on econometric models of his own theories:
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“One has to be constantly on guard against treating the model as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, on the mistaken calculations on the part of the apple as to how far it was from the center of the earth.”
To make the three-volume study more accessible to a wider audience because Keynesianism is experiencing a revival at this time of financial crisis, Skidelsky has provided a condensed version, Keynes: The Return of the Master (Penguin India distributor; Special Price: Rs 550) that should interest anyone who has been affected by the global crisis—and that includes a great many even here.
First things first: Who’s to blame for the current crisis? As usually happens after a crash, the search for scapegoats has been intense, and many contenders have emerged. Wall Street swindlers; predatory lenders who sold loans to people who didn’t have the capacity to pay back; the Securities and Exchange Commission (which is supposed to be a watchdog); Alan Greenspan, the Treasury Secretary who kept interest rates too low; speculators who spread negative rumours; “experts” who gave wrong advice in the sense they lost all ideas of common sense. How could you take huge loans when you didn’t have the capacity to return them within a reasonable time? Or were they thinking of Keynes who famously said you needn’t think of the long term because in the long term we will all be dead?
All these explanations have some truth in them. But of all these, it seems it was Greenspan’s very low interest rates for far too long that was the single biggest cause of the housing bubble: people borrowed at ridiculously low rates, hung on to the properties which appreciated 15-fold and then hoped to make a killing by selling it off. The current buzz was that property always appreciates; its value never drops. But it did and buyers didn’t come because they couldn’t raise the money; they could only do so by selling their properties but which had few buyers because it was a tight money market now. More introspective buyers would add that there were other explanations: people got greedy, they heard what they wanted to hear instead of keeping their ears and eyes open on all the foreclosures around them.
But most bubbles are more than a product of bad faith, or incompetence or being made a sucker of by the broker; the interaction of human psychology with a market economy practically ensures that bubbles will form. To that extent bubbles are perfectly rational. After all, a capitalist society operates under the presumption that adults are rational, self-determining individuals who can make sensible choices between competing goods and maximise their chances of happiness. But this is a bizarre assumption because in reality we are desperately open to being swayed in unhelpful directions by a mere glimpse of a picture. In real life it is extremely hard to hold on to a sense of our own needs when our desires (to make a quick buck) are continually inflamed.
All this still doesn’t answer the question: how the world got into this mess? Probably because the answer will be different in every case and we may need to delve into history to make sense of the financial chaos. But Keynes’ core insight that Skidelsky brings out in a clear and simple language without the paraphernalia of heavy-duty scholarship is that the world is a complicated place that cannot be reduced to a set of equations. The only certainty is a total uncertainty as the Jewish proverb puts it, “If you wish God to smile, tell him your plans.”