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February 13, 2009
Robert Skidelsky starts his Where Do We Go From Here at Prospect with this:
Any great failure should force us to rethink. The present economic crisis is a great failure of the market system....It originated in the US, the heart of the world's financial system and the source of much of its financial innovation. That is why the crisis is global, and is indeed a crisis of globalisation. There were three kinds of failure. The first...was institutional: banks mutated from utilities into casinos. However, they did so because they, their regulators and the policymakers sitting on top of the regulators all succumbed to something called the "efficient market hypothesis": the view that financial markets could not consistently mis-price assets and therefore needed little regulation. So the second failure was intellectual....But the crisis also represents a moral failure: that of a system built on debt. At the heart of the moral failure is the worship of growth for its own sake, rather than as a way to achieve the "good life." As a result, economic efficiency — the means to growth — has been given absolute priority in our thinking and policy. The only moral compass we now have is the thin and degraded notion of economic welfare. This moral lacuna explains uncritical acceptance of globalisation and financial innovation. Leverage is a duty because it "levers" faster growth.
He says that the situation we are in now thus puts into question the speed and direction of progress. Will there be a pause for thought, or will we continue much as before after a cascade of minor adjustments? The answer lies in the intellectual and moral sphere. Is economics capable of rethinking its core principles? What institutions, policies and rules are needed to make markets "well behaved"? Do we have the moral resources to challenge the dominance of money without reverting to the selfish nationalisms of the 1930s?
His own view is that the main source of instability lies in the financial markets themselves, that it is a question of making make a market economy well-behaved, and that:
the French social democratic slogan of the mid-1990s—"market economy yes, market society no"—encapsulates the idea that limits should be placed on the power of the market to shape social life according to its own logic. The battleground will be about the role of the nation-state in the globalising economy of the future, for the nation-state is the main repository and guardian of the values and traditions threatened by the disruptive power of the global market. A paradox of globalisation—which was supposed to see a withering of the nation-state—is that it has led to a revival of nationalism.
Consequently, Some rowing back of financial globalisation and cross-border financial institutions is required to rebalance market and state. This process is underway, as national regulators take a tighter grip over the financial institutions they are bailing out. Regulators are increasingly sceptical of banks that depend excessively on wholesale funding. Without this, there will be a natural tendency for banks to shrink back within their own frontiers.
Skidelsky goes deeper than national regulation as he reconnects economics with ethics--the importance of general wellbeing as an alternative to the mania for economic growth:
The crisis has rightly led to a revival of interest in Keynes. But he was a moralist as well as an economist. He believed that material wellbeing is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society. He reunited economics with ethics by taking us back to the primary question: what is wealth for? The good life was one to be lived in harmony with nature and our fellows. Yet "we destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend." Not everything should be sacrificed for efficiency.
Therein lies the beginning of a debate.
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