Blind Gods

Recently, the BBC published as a podcast (available at http://www.bbc.co.uk/podcasts/series/analysis/all) a debate held at the London School of Economics, a venerable institution which doesn't appear to have succeeded in improving our management of the economy. The topic of the debate: "Keynes vs Hayek", the eternal controversy between the advocates of government intervention and those who feel market forces should be allowed to run without constraint.

I am not an economist. Perhaps that is why the debate -- listen to it, if you must -- disappointed me so much. Not because it was too high-brow and hard to follow. No, because it was definitely low-brow, and at times even childish. The sad reality, or so it appears, is that economists don't even agree on the basic facts, which makes any debate on their interpretation rather futile. Each side seems locked in a worldview of its own, with observations of reality conveniently rearranged such as to support their favorite theory. No wonder that the economy has gone into a spin.

Of course, not all of the disagreement is on economic facts and theory. A lot of it, appears, is about the level of wisdom that can be expected from governments. Keynesians argue that in times of crisis governments should spend money to stimulate the economy, and if they cannot think of a smart way in which to spend money, they should spend anyway. The followers of Hayek fiercely object that government cannot be trusted not to act stupidly, and that even the best plans are inferior to the self-stabilising efficiency of market forces. Or, the staunchest followers of Keynes operate from the assumptions that humans are smarter than the market even if they are are acting stupidly; while the tribe of Hayek operate from the assumption that the marker is smarter than humans even if the latter act intelligently. 

A case can be made for the long-term achievements of impersonal, persistent forces: Biological evolution has produced systems of wonderful complexity and balance, by the fundamentally simple mechanism of filtering random variations for their contribution to survival and reproductive success. One can imagine that economic markets could achieve something similar by testing companies for their survival. The criticism of government intervention, as formulated by the free market thinkers, is that intervention so often serves to keep threatened species, failed business, alive. Yet it seems unfair to describe this generation of free-market thinkers as economic Darwinists. Unfair to Darwin, that is.  

Because there is a tendency to attribute to the market forces a lot more than the ability to drive the actors in it to the optimum fitness by the simple means of eliminating those who are not fit. Market forces are supposedly able to avoid crises, to get us out of the boom-bust cycle, and to make life better for everyone: The "invisible hand" of Adam Smith is thought to provides the market forces with intelligence, foresight, even benevolence. No serious biologist would make such a claim for the forces of biological evolution. Evolution is a powerful force, but it is exclusively and ruthlessly interested in the here and now, on what is beneficial on this very moment. It doesn't care about the future. 

(Of course, those who do make such are a claim are the proponents of "intelligent design" who wish to see the invisible hand of God at work in evolution: Perhaps it is no coincidence that radical free-market economics and creationist belief reside at the side end of the political spectrum in the USA.)

There is a natural human tendency to believe in foresight. If there is a landscape of mountains, hills, valleys and chasms, and there is a force that supposedly drives us towards the highest peak, then it is tempting to image that forces as some kind of mountain guide, who plots the best route upwards for us. That is not how biology works, and probably not how the market works. We are somewhere in the landscape, but we are blindfolded, crawling on hands and feet, and just trying to climb in the direction of the steepest slope. Its perfectly possible that there is a deep chasm at the end of that slope: We are in the invisible hands of a guide who doesn't care.

There is every reason to doubt the wisdom of politicians. But looking for wisdom where there isn't any, is probably not the best possible solution.

Sua Emittenza

As I write this, the writing is on the wall for Silvio Berlusconi, prime minister of Italy and of the most contested politicians in the extremely fractuous political history of his country. An ignominious end is coming to a surprisingly long career: Most of us would have expected it to end a lot earlier.

In history, making parallels is dangerous. But it is nevertheless tempting to refer back to the fall of that other flamboyant, womanizing, rethorical Italian leader, Benito Mussolini. The Duce had ruled Italy for 21 years, four years more than the Cavaliere, and like him he had relied a lot on the power of the media. And in 1943 as in 2011, the end came when the leadership had lost any and all credibility. In 1943 the crisis was military, while in 2011 it is financial, but the same feeling persists that the country has come to a dead end and only a change of leadership offers some hope.

And here is the worrying bit. In 1943, Mussolini was voted down by the Fascist Grand Council and dismissed by the king: This was not a revolution, hardly even a coup d'etat, and those in power after the fall of the Duce were the same people who had been his followers before his fall. While they aimed to change policies, indeed to change sides in the war, they were fundamentally unable to change the course of events. Is 2011 really that different? If the long career if "Sua Emittenza" indicates anything, it is that he could not be removed by his enemies, not by the political opposition, and not by judges investigating his many dubious activities. Berlusconi's fall, like Mussolini's, is arranged by his (former) friends, to protect their own survival in the circles of power.

There are of course other, less controversial examples. Margaret Thatcher was similarly forced to resign as prime minister by the inner circle of her own party, and so was, in more recent memory, Tony Blair. What these examples have in common is the inability of the successors to break with the past. They could have said, with Mark Anthony, that they had come to bury Caesar, not to praise him. But they could not really lay the ghosts of their predecessors to rest, nor achieve intellectual freedom from the climate in which they made their own careers. The results have been lacklustre.

And lacklustre solutions are the plague of Europe. Everybody agrees that something must be done, but nobody has the courage to advocate a sufficiently radical solution. Perhaps no monetary and financial crisis has had such political impact since the last days of Louis XVI, not coincidentally a monarch who also faced large debts, large deficits, and an inability to borrow more. Louis XVI appointed and fired a series of prime ministers in his attempts to find a way out, but he was (fatally) unable to reconcile himself to a change in the system. And his problem, as historians have pointed out, was not the magnitude of France's debt, but the lack of trust in its ability to service it, because the French government was systemically weak. Contemporary Britain owed even more, but investors remained confident in its ability to pay interest.

Nobody should want another French revolution. But the lessons of 1798 still apply: Changing the officials won't help much, even if they are incompetent. To rescue the financial system, it must be given a wider and stronger basis. The Europe of 2011 is much like the France of 1798, a patchwork of regional entities with their own systems of privileges and taxation. The time for this is past. As the revolutionaries put it, "the republic is one and indivisible." Or as a British luminary formulated it, we must all hang together, because if not we will certainly hang separately.